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I'd like to welcome Mike abito and he is
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a professor of business economics and
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public policy here at Wharton and he's
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going to talk to us about the clean
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power plan which is a signature
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accomplishment I think the Obama
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administration administration would say
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and it's designed to limit these carbon
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dioxide emissions from fossil fuel
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plants such as oil fired fired
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coal-fired natural gas-fired and doing
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that by setting a price for those
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emissions and I think one of the big
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questions is how do you actually do that
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do you do that from a federal level or
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state level and there's lots of rules
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and all that that affect this but the
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question is are they efficient and and
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how much trouble does it cause it the
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producers and then ultimately the
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consumers who would from it would be
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reflected in prices so would you please
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talk about and he's written a paper on
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this of course that this is all based on
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and could you give us a summary of what
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your research is found okay first of all
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thanks for inviting me to talk about
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this paper so basically in this project
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what we look at is the clean power plan
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which is the landmark policy that for
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the dress off of the Obama
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administration to address co2 emissions
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and here in this project were zeroing in
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on this issue of although the clean
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power plan is a federal based based on
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the federal level law such as clean air
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act implementation of the clean power
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plan rule is actually at the state level
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so this fact that you know you have
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different jurisdictions coming up with
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different rules or coming up with
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different ways to implement the policy
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may actually create the inefficiencies
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are supposed to being able to you know
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coordinate everyone at the federal level
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so this is really what we're studying in
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this paper and what what were some of
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the conclusions what did you find as you
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looked into so what's interesting here
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is that with emissions so we're looking
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at the emissions coming from as you said
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coal fire power
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and so we focus on pjm the Pennsylvania
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New Jersey Maryland inter connection
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which is basically a grid that this that
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covers or a wholesale market that covers
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13 states and so firms who own elect our
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plans they produce across these 13
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states and then the electricity that
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they produce they sell it in a single
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market p.m. and then they get a single
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price and what we recognize is that
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although co2 emissions may be regulated
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at the state level so let's focus on PG
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am so there let's say there's a co2
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permit market for each state so there
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are 13 markets they can trade among each
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other that really sounds like a very
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inefficient scenario but when a firm who
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owns plants the same Pennsylvania and
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Delaware is thinking about you know
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where should I produce okay they're
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gonna think they're going to look at the
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co2 price in Pennsylvania and compare it
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with the co2 price in Delaware and
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somehow decide okay where should I
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produce based on d co co 2 prices so
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even though seemingly these are
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disconnected markets the fact that you
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know affirms who participate in the
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single market for electricity has to
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make decisions that they can to account
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the distribution of prices across states
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somehow implicitly coordinates these
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separate markets such that as we found
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in the research that we did such that it
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actually alleviates or mitigate some of
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the inefficiencies of these separate
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markets so a power company regardless of
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what state they reside in and what the
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rules are of that state can easily being
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part of this grid you're describing
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produce that electricity in one of the
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other states that's part of that exact
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race Zoe yeah and so it doesn't to
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them they're sort of indifferent to the
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regulation except an extent that they're
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going to produce it where it's the least
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cost exactly so suppose you have two
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plants producing christx exactly the
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same costs exactly the same the only
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difference is that co2 price in
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Pennsylvania is more expensive than or
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attire and in Delaware that of core
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I'm going to move my production to
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Delaware the problem with that is you're
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pretty much limited with how much you
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can reallocate out but because you know
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the reason why probably prices in
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Pennsylvania is more expensive is
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because a lot of production is being
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made in Pennsylvania so you have big
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plans in Pennsylvania as opposed to
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small plants in Delaware so it's like I
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can't really move majority of my output
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from Pennsylvania into Delaware because
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it's cheaper in Delaware so here what we
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identifies the main mechanism in the
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paper is actually investment and the
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fact that investment is the main
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mechanism has consequences in terms of
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you know what's going to happen to
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electricity prices you know because of
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how we design the policy mm-hmm and so
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so was this all to answer the question
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that we have these new rules they're
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they're imposing there there it's a big
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change it's a big restriction on
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companies and then maybe it was thought
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that it's cause evening even more
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ripples and problems because now it's
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got to go from the federal level to the
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state level and it's complicated and
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that's just churning up all this
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inefficiency you're talking about so it
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was the purpose of the paper to show
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that well in fact the way that the
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market is set up kind of bypasses all of
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us in a way it's it kind of has that
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message so I guess we're coming from the
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premise that having states coordinate
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and have a single market and agree on
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and have a concession consensus of how
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to design a single markets this
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difficult proposition I mean you could
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think about it with a bigger picture
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like imagine you know you wanna we're
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all hoping for a global co2 market right
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but you know in order to have that you
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have to have china the u.s. each of
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these countries actually agree on the
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details of this might take a while even
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forever what the point of the paper is
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that okay wait a minute we don't need to
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really aim for that you know we can
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actually the fact that you know somehow
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we're talking about co2 emissions but
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it's coming from certain activities are
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known as these activities are
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coordinated across these different ended
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Avengers are big enough coverage then
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yeah we can actually do something so I
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so that's interesting so it's it's kind
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of
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a hopeful message exactly that you can
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actually you can actually apply some
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restrictions that will help keep carbon
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out of the atmosphere and you you you
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don't need to have it coordinated
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international even across the u.s. and
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these these regions are already set up
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on grids that cooperate and coordinate
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because when one plant has a sudden
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demand and can't meet it they were
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there's a way that they can draw on from
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an area that's not using them so
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although in the project we're focusing
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on the peach averages ppm just so we
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Pennsylvania New Jersey Maryland right
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which is William the market the covers
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oh yes although we're focusing on that
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there are a bunch of regional markets in
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the US as you said they're actually
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still somehow internet interconnected
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yet and as we talk about building
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infrastructure which is something that
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both presidential candidates talked
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about and that we have a new president
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who presumably might file through and
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that some of that could be on the
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electrical grid which would be in
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different regions could be could more
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easily connect to each other and that
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would create an even greater level of
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efficiency is that we don't address that
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in the project but it's one of the
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things that is a part of what we plan to
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look at in the future okay so that's the
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kind of thing to look at in the future
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yet so what what surprised you when you
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started looking at this did you come to
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the conclusion that you thought you
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would or did or so we kind of the basic
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economics is is there we kind of
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understood the basic economics but what
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how far cuz so specifically we're
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looking at we or our primary focus was
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on electricity prices under state by
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state which is you know having separate
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markets versus regional we're over PGM
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there's a single market we were our hope
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we understood the economics but you know
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once you go into the data it might tell
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you something something else so we were
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hoping that you know at least these are
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very either the electricity prices under
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the state by state and region are very
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close in fact that's actually we found
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right what surprised us a lot is that
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um profits are actually end up to be
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better in the state by state as opposed
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to regional case and that was really in
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a way surprising to us and it's only
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recently that we actually understood
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what was happening what could you
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explain that right yeah because it's
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kind of counterintuitive in the sense
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that you know with the state by state it
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seems that the laws are more stringent
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yeah right as opposed to the regional
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case and the reason why you actually end
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up with higher profits with state by
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state is that I mean it I mean this is
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not a general thing but it just so
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happens that you know given how much it
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costs to invest what is your portfolio
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of plans and what kind of investments
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you can make the fact that you know
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widow with your current portfolio of
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plants you're barely making any money
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okay that's what we mean by you know
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basically the price that you're getting
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in the market is almost exactly equal to
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your cost okay and these plants once you
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introduce the cpp the cost is going to
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go up but demand for electricity is what
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you call at least in the short term is
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very inelastic in the sense that people
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are willing to pay you know almost any
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amount just to get that specific amount
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of electricity right so what's going to
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happen is that when costs go up prices
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are going to go up into the same
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proportion and people are willing to pay
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for that but that creates a very strong
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incentive to invest okay so once you
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invest and the fact that you're
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investing in technologies that are
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cleaner and actually more efficient that
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means that you know when you compare the
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existing plants cost versus the new
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investment the gap is like this but then
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because of stringent laws this is
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actually going to go up so the reward
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from investing is actually much higher
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so is that to say that that these
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increased regulations actually provide
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an incentive to modernize exactly so I
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mean I there at the end of the day at
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some point in time all of these coal
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plants are going to get retired
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before they're gonna verdes or not
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there's a number what to see I'm a
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stringent CPP or a state-by-state CPP
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does is it basically make it faster okay
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it's gonna give a really strong say it's
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up to retire exactly plan and in here
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the underlying assumption in our models
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is that firms are profit maximizing
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we're not coercing them to invest we're
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not forcing them to invest it's just
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that the reward from investing is
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actually much higher with the stricter
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law yeah and when you're producing
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electricity it's not like there's a
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thousand different markets you can go to
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your wired into your location exact
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you're not going overseas dated I'm
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going to Mars yours yeah you can't even
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store it makes ambulance once you
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produce it has to go oh that may change
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right we do well the batteries and so
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okay um so you said you you gave us one
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example of something you'll be looking
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at next what else will you be looking at
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so actually what's interesting is that
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so I I work with a bunch of co-authors
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um Oh in this paper um and I basically
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didn't sleep this morning i was watching
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the lecture then the moment that we got
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the results of election by my co-author
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email like what's gonna happen to the
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CPP IRA so a little bit of background so
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CPP right now although it was the clean
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power plan although it was the final
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rule was put in the in the Federal
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Register last year around August around
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October 2015 in February 2016 the
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Supreme Court actually put a stay on it
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so right now the the weather this clean
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power plan will actually push truth
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depends on several things one is who won
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the presidency right and which we know
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already by now and so what's gonna
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happen to the composition of the three
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Supreme Court what's going to happen to
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the EPA so one of my co-authors was
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pretty worried about okay what's gonna
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happen to the project because if there's
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no CPP then you know why are we talking
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about this but I think our project the
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fact that we're focusing on this
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separate markets different jurisdictions
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are supposed to you're a coordinated
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a way to regulate the emissions actually
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says something about this environment
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where we don't have CPP so that's
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something that our current project has
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something to say about but we need to do
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more research so what do I mean
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specifically so suppose there's no CPP
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suppose the EPA gets abolished okay
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there's no CVP there's nothing but
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individual states actually can act and
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decide to regulate themselves okay as
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long as you know what if Pennsylvania
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and Delaware individually decide to
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regulate themselves they might not be
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able to coordinate because they don't
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have this umbrella of the clean power
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plan but they can do you know by
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themselves these kinds of initiatives
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and we would be interested at these in
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future research we would like to see you
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know whether this kind of investment and
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reallocation has the same works in the
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same way in these kinds of environments
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so you know when something that the
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words looking at it for the next few
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once all right well good luck with that
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maybe we'll he'll be back to talk about
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I get some results thank you for thank
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you
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you
