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