Teaching Carbon Regulation in the High School Classroom

Originally appears in the Summer 2009 issue

The Earth’s climate is warming, and across the world governments are taking action to regulate carbon dioxide emissions. In the United States, President Obama has identified climate change as “one of the greatest challenges of our generation.” Prime Minister Harper of Canada, while taking a cautious approach to climate change legislation, has indicated a strong interest in joining with the Obama administration on crafting a global solution.

But how will we tackle the issue of climate change on a global scale? Possible solutions range from passing laws, to “geoengineering” a cooler Earth, to storing carbon dioxide deep underground. Currently, there are two primary mechanisms being considered to reduce CO₂ emissions: a “cap-and-trade” system and a carbon tax. But how do these systems work? What are their economic impacts? And how do you teach them in the high school classroom?

This article presents a classroom activity in which teams of students play the roles of utility companies who must reduce CO₂ emissions at their coal-burning power plants under different regulatory regimes: traditional “command-and-control” legislation, a carbon tax program, and a “cap-and-trade” system. By actually having to “operate” a power plant under these programs, students learn how they work and the advantages and benefits of each system.

Proposed carbon-regulation systems

Carbon Tax: A carbon tax is perhaps the simplest system for reducing carbon dioxide emissions. A tax is placed upon the burning of coal, oil and natural gas, in an amount proportional to the carbon content of the fuel. The tax could be imposed at any point in the life cycle of the fuel, from the time the fuel is extracted from the earth to the time when it is burned. Carbon taxes have been enacted in certain European countries in the 1990s, and British Columbia proposed a carbon tax in 2008. While the carbon tax is a simple system to administer, it carries the stigma of being yet another tax and may be difficult for some politicians to support without destroying their careers.

Cap and Trade: An alternative to a carbon tax is a cap-and-trade system. The primary advantage of the cap-and-trade system is that it uses a market-based approach, which allows polluters to decide what they feel will be the most efficient way to reduce pollution. The disadvantage of a cap-and-trade system is that it requires a carbon market to be established, replete with brokers and a carbon exchange to facilitate the flow of information and the trading of carbon credits. In addition, the government must decide at the outset who owns, and therefore is entitled to payment for, the right to pollute: should the existing carbon emitters be capped at current levels without charge, or should they have to pay? And if they do have to pay, who gets the money?

Regardless of the details of the cap-and-trade program, it begins with the government’s setting an overall cap on emissions. Plants that can achieve excess reductions earn pollution “credits” they can sell to plants that cannot efficiently reduce emissions. This allows reductions to be achieved at the lowest possible cost. The United States Environmental Protection Agency (USEPA) implemented a successful cap-and-trade system in the 1990s to reduce sulfur dioxide emissions and acid rain in the United States. The EPA Acid Rain program is often cited as evidence that cap and trade is more effective and efficient than other means of pollution control.

Today, cap and trade seems to be the favored mechanism to reduce CO₂ and fight climate change. In 2005 the European Union initiated the first large-scale system of CO₂ regulation by means of cap and trade. In the United States, ten northeastern and mid-Atlantic states formed the Regional Greenhouse Gas Initiative to reduce CO₂ through a cap-and-trade system, and seven western states and four Canadian provinces have formed the Western Climate Initiative to develop a regional cap-and-trade system to reduce CO₂.

Command and Control: Both cap-and-trade regulation and carbon taxation differ from traditional “command-and-control” regulation. In command and control, the government specifies the mechanism all polluters must use to reduce emissions. For example, a government might require a specific type of scrubber to be installed at every power plant. The problem with this approach is that the scrubber might not be cost-effective at every plant, and plant operators are forced to conform to a one-size-fits-all approach.

The simulation

This simulation is designed to model command-and-control regulation, cap-and-trade regulation and carbon taxation. Teams of students play the role of utility companies who must reduce CO₂ emissions at their coal-burning power plants. One team plays the role of Carbon Broker, to facilitate trading among the companies under cap-and-trade and collect taxes under the carbon tax system. The teacher plays the role of the North American Greenhouse Gas Initiative (NAGGI), a hypothetical US-Canada partnership created to jointly regulate CO₂ in the future. The simulation takes place in three rounds, the first simulating command and control, the second simulating a carbon tax, and the third simulating cap and trade.

Prior to conducting the simulation, the teacher may want to introduce the students to the concepts of carbon taxation and command-and-control and cap-and-trade regulation. The following are useful resources for this introduction:

USEPA Cap-and-Trade information: <http://www.epa.gov/airmarkt/cap-trade/index.html>

Environmental Defense Fund video “How Cap and Trade Works”: <www.youtube.com/watch?v=EKT_ac4LPkU>

Materials: CO₂ Emissions Reductions Worksheets, CO₂ Offset Contracts, “Tech Specs” handouts for each power plant. Download here. 

Setup: The simulation runs best with six teams of two to five students playing the roles of the six power companies. Each team should be provided with the Tech Specs for their plant and a CO₂ Emissions Reduction Worksheet.

One group of about two students should play the role of the Carbon Brokers/Tax Collectors. It is best to choose outgoing, energetic students for this role, as they are tasked with facilitating trading among the teams during the cap-and-trade simulation. The Carbon Brokers should be provided with about ten copies of the Emissions Offset Contract.

The teacher should explain to the students that while the US and Canada do not currently have an international agreement on regulating CO₂, this simulation assumes that they have jointly created the North American Greenhouse Gas Initiative (“NAGGI”) to combat climate change. The teacher plays the role of NAGGI in the simulation. The teacher should also explain that for the purposes of the simulation the exchange rate for Canadian and US dollars is assumed to be one to one, but that in reality the utilities and traders would have to consider shifting exchange rates on a regular basis.

The simulation itself can be run in 40 to 60 minutes, depending on the grade level of the students and the amount of time devoted to discussion. Rounds 1 (command and control) and 2 (carbon tax) generally proceed in about 5 to 10 minutes each, as students begin to grasp the concepts and their roles. Approximately 20 to 30 minutes should be devoted to Round 3 (cap and trade).

Round 1: Command and Control

In Round 1, the teacher, playing the role of NAGGI, implements command-and-control regulation by ordering each company to reduce emissions at its plant by installing a High-Tech Smokestack Scrubber (“HTSS”). The teacher should explain that according to NAGGI scientists and engineers, HTSS is expected to cost approximately $50 million at each plant and reduce CO₂ emissions 25 percent. Keep in mind that the technology and prices presented in this simulation are hypothetical, but reflect the real dilemma that every plant is different and that a one-size-fits-all approach is not always efficient. Each company should refer to its Tech Specs to determine the cost of HTSS at its plant and the amount of CO₂ reductions achieved. Once these figures have been calculated, students can complete the first part of the CO₂ Reductions Worksheet.

The students playing the role of Carbon Brokers/Tax Collectors should tally up the costs and CO₂ reductions at each plant and report to the class the total CO₂ reductions achieved and total cost.

The students will observe that HTSS is not always as effective as predicted, and sometimes costs significantly more than expected. At the same time, command and control is simple to administer and provides certainty to industry. Furthermore, command-and-control can be a highly effective means of regulating pollution from similar sources, such as removing sulfur from diesel fuel. For coal-burning power plants, which are not of uniform age or design, however, command and control would likely not be an efficient means of regulation. The teacher should use this opportunity to discuss the advantages and disadvantages of command-and-control regulation.

Round 2 – Carbon Tax

At the start of Round 2 the class should start over again, assuming each plant emits 10 million tons of CO₂ per year. Do not begin with the levels achieved after Round 1.

In Round 2, the teacher, again playing the role of the NAGGI, implements a carbon tax of $20 per ton of carbon dioxide. At the beginning of the round, the teacher announces that each company will have to pay the government $20 for every ton of CO₂ emitted at its plant. At this point, the teacher should give each company an opportunity to decide upon the most effective strategy — whether simply to pay the tax on its current emissions of 10 million tons per year or to implement upgrades at its plant to reduce CO₂ emissions. Each team should refer to its Tech Specs to determine the cost of upgrades and the CO₂ reductions achieved, and complete the second part of the CO₂ Reductions Worksheet.

After each plant has completed part two of the CO₂ Reductions Worksheet, the students playing the role of Tax Collectors should tally up the costs of upgrades, CO₂ reductions achieved and taxes paid at each plant, and report the totals to the class.

Round 3: Cap and Trade

At the start of Round 2 the class should start over again, assuming each plant emits 10 million tons of CO₂ per year. Do not begin with the levels achieved after Round 1.

In Round 2, NAGGI announces that a cap-and-trade system will be used in the US and Canada to reduce CO₂ emissions. The teacher should explain that cap and trade works as follows:

• Each company must achieve a 25 percent reduction in CO₂ emissions.
• Each company should refer to its Tech Specs to determine the different emissions reductions strategies available for its plant.
• Each company may devise its own strategy to achieve the 25 percent reduction.

Most important, in Round 2, under cap-and-trade regulation, companies may earn credits or purchase offsets on the Carbon Trading Exchange:

• If a plant achieves CO₂ reductions in excess of 25 percent, it earns a credit for the amount of the excess reductions.
• Companies can sell the credits they earn to other companies. Companies who purchase credits may use them to offset emissions at their plant and reach the 25 percent goal.
• All buying and selling of credits must go through the Carbon Brokers and be documented with a CO₂ Offset Contract. The price paid for credits is determined solely by the companies and the Carbon Brokers.

Example: Plant X emits 10 million tons per year (mty). To achieve a 25 percent reduction, Plant X must lower its emissions to 7.5 mty. If Plant X reduces emissions to 6.5 mty, it earns a credit of 1.0 mty. The company can then sell that credit on the Carbon Trading Exchange, and the purchaser can offset 1 mty from its emissions.

During Round 2, each company should complete the second part of the CO₂ Reductions Worksheet listing technological CO₂ reductions, purchase and sale of credits, and final accounting. The students playing the role of Carbon Brokers should tally up the costs and CO₂ reductions at each plant, and report to the class the total CO₂ reductions achieved and total cost.

Variations on the cap-and-trade simulation

To introduce advanced concepts and make the simulation more realistic, the teacher (in the role of the government) may allow offsets to be created and purchased for forestation, energy conservation or renewable energy technology. For example, you may allow a company to offset one million tons per year by paying $50 million to the Carbon Brokers for a reforestation project, financing a wind farm or buying compact fluorescent light bulbs. This approach could serve as a springboard into the related subjects of alternative energy and conservation. While alternative energy is still comparatively expensive compared to coal-fired electricity, the teacher could present additional material to illustrate that energy conservation is by far the most efficient way to reduce CO₂ emissions.

Other variations could include providing each team with a budget that limits the amount they may spend in Round 2. The teacher could instill competition between teams by offering rewards to teams that achieve the greatest efficiencies in terms of CO₂ reductions per dollar. Competition could also be encouraged between classes by offering rewards to the class that achieves the greatest overall efficiency in terms of CO₂ reductions per dollar.

Closure

The students should compare the cost and effectiveness of a carbon tax, cap-and-trade regulation and command-and-control regulation. Which one would yield the greatest CO₂ emissions? Which one would cost the least? Which one would likely provide the most efficient means of CO₂ reduction; that is the greatest CO₂ reduction per dollar? Why?

Closure activities could take the form of a discussion, an in-class written reaction to the exercise, or a more formal written reflection. Current news reports regarding US and Canadian efforts to implement CO₂ regulation are useful in stimulating class discussion and emphasizing the real-world significance of this simulation. News reports are also useful to emphasize the political compromises that will be inevitable in any continental or world-wide solution to climate change. Key questions for students to consider include the following:

Practical considerations: Which method is easiest to implement? Which method is most effective? Students should see that a carbon tax is simple, while a cap-and-trade system is complex. Why then, is cap and trade favored by so many? Students should gain an understanding of the advantages of the “free market” approach offered by cap and trade.

Environmental: What are the advantages to the environment of each system? the disadvantages? Students should observe that command and control, while very useful for some forms of pollution, is not an effective means to regulate diverse sources of emissions, such as coal-burning power plants. From an environmental perspective, in both the carbon tax and cap-and-trade systems the government can decide how much to reduce CO₂ emissions by how it sets the initial tax rate (in the tax system) or the “cap” (in the cap-and-trade system). Once the target is set, the carbon tax offers the advantage of simplicity, while the cap-and-trade system offers the advantage of efficiency — using the market to find the cheapest way to reduce emissions.

Economic: What are the economic advantages of each system? the disadvantages? Students should observe that command and control is inflexible, and therefore would not be an efficient mechanism to regulate coal-burning power plants of different ages, sizes, and with different equipment, which is why it is not being considered as an option for carbon regulation. Between a cap-and-trade system and a carbon tax, however, various pros and cons should become apparent. First, the carbon tax is simple to administer, while cap and trade is complex. Both systems provide flexibility for operators to choose the method of compliance. With a carbon tax, a polluter can decide simply to pay the tax or to reduce its taxes by reducing CO₂ emissions. In cap and trade, a polluter can comply through reducing its own emissions or by obtaining credits. In addition, cap and trade allows for compliance by creating carbon-free energy such as wind, solar and nuclear, or even carbon-negative projects such as forestation.

Political: What are the political advantages of each system? the disadvantages? These questions should be considered from various points of view. Polluters are generally hostile to command-and-control regulation because of its cost and inflexibility. Some polluters might favor cap and trade, especially those who may stand to make a profit from selling credits. The environmental community may also support cap and trade, especially if they have an opportunity to participate and drive up the cost of pollution or to demand carbon-free energy. A carbon tax may be favored by industry for its certainty and simplicity. However, the carbon tax carries the stigma of being labelled a “tax,” so implementing it may be political suicide for some politicians.

Resources:

USEPA Cap-and-Trade information: <www.epa.gov/captrade/>

Environment Canada — Taking action on Climate Change

Carbon Tax Center.

USEPA Clean Air Mercury Rule.

USEPA Acid Rain Program: <www.epa.gov/acidrain/>

Northeast Regional Greenhouse Gas Initiative: <www.rggi.org>

Western Climate Initiative: <www.westernclimateinitiative.org/>

European Union carbon cap-and-trade system: <http://ec.europa.eu/environment/climat/emission/>

Environmental Defense video: <www.youtube.com/watch?v=EKT_ac4LPkU>

Obama Energy Plan: <www.barackobama.com/pdf/factsheet_energy_speech_080308.pdf>

Carbon Monitoring for Action (CARMA) is a massive database containing information on the carbon emissions of over 50,000 power plants and 4,000 power companies worldwide.

US Energy Information Administration maintains a database of all US commercial electricity generating units: <www.eia.doe.gov/cneaf/electricity/page/capacity/existingunits2006.xls>

Bruce Taterka teaches IB Environmental Systems and AP Environmental Science at Mendham High School in Mendham, New Jersey. He lives at the Schiff Nature Preserve in Mendham.