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Leackage from Sub-national Climate Initiatives: The Case of California

By Justin Caron, Sebastian Rausch and Niven Winchester

Abstract federal policies to curb greenhouse gas emissions in the U.S. stagnating, California has taken action on its own. We estimate the impact of California’s cap-and-trade program on the leakage of emissions to other regions using a calibrated general equilibrium model. Sub-national policies can lead to high leakage rates as state economies are generally closely connected to other economies, including integration of electricity markets. Measures that will prevent leakage from California’s cap-and-trade program include requiring permits to be surrendered for emissions embodied in imported electricity and legislation banning “resource shuffling”. Under a cap-and-trade policy without measures to reduce leakage, the price of emission permits is $12 per ton of CO2 and emissions in other regions increase by 46% of the reduction in emissions in California. When imported electricity is included in the program and resource shuffling is banned, the carbon price is $65, there is negative leakage to regions exporting electricity to California, positive leakage to other regions and the overall leakage rate is 2%. We conclude that although there is potential for large increases in emissions elsewhere due to California’s cap-and-trade policy, enforcement of requirements for imported electricity will be effective at curtailing leakage.The Joint Program on the Science and Policy of Global Change is funded by the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-FG02- 93ER61677, DE-FG02-08ER64597, and DE-SC0003906; the U.S. Department of Energy, National Renewable Energy Laboratory under grant XEU-0-9920-01; the U.S. Environmental Protection Agency under grants XA-83344601-0, XA-83240101, PI-83412601-0, and RD- 83427901-0; the U.S. National Science Foundation under grants SES-0825915, EFRI-0835414, BCS-0410344, ATM-0329759, DMS-0426845, and AGS-0944121; the U.S. National Aeronautics and Space Administration under grants NNX07AI49G, NNX08AY59A, NNX06AC30A, NNX09AK26G, NNX08AL73G, NNX09AI26G, NNG04GJ80G, NNG04GP30G, and NNA06CN09A; the U.S. National Oceanic and Atmospheric Administration under grant NA070AR4310050; the U.S. Federal Aviation Administration under grants 06-C-NE-MIT and 09-C-NE-MIT; the U.S. Department of Transportation under grant DTRT57-10-C-10015; the U.S. Department of Agriculture under grant 58-0111-9-001; the Electric Power Research Institute under grant EP-P32616/C15124; and a consortium of 40 industrial and foundation sponsors (for the complete list see

Publisher: MIT Joint Program on the Science and Policy of Global Change
Year: 2012
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Provided by: DSpace@MIT
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