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President Obama and Congress have expressed interest in establishing a clean energy standard (CES), and RFF experts have researched its potential economic impacts, but creating movement in Congress has been difficult. Can policymakers find ways to reduce costs for companies while increasing environmental benefits—and put a CES policy on a fast track to passage?
A CES would reduce greenhouse gas emissions by establishing a set of goals—such as the president’s goal of generating 80 percent of electricity from clean energy sources by 2035. Utilities meet these goals by using clean energy and purchasing clean energy credits, both of which displace less clean generation. To reduce compliance costs and provide price certainty, previous renewable electricity standards (RES) at the state level have included an alternative compliance payment (ACP), capping costs by allowing utilities to pay a fee to the government instead of complying with the standard. But, this also undermines the environmental and energy goals by not requiring clean energy deployment and pollution reduction.
In a new Issue Brief, we outline two new alternative compliance mechanisms that flip those disadvantages on their heads. These mechanisms can achieve the same cost control and price certainty for utilities as traditional ACPs while accomplishing environmental goals significantly beyond what is achieved under a CES without an ACP.
The first option—the flexible compliance mechanism—would give utilities more latitude to decide how to meet the goals of the CES. Utilities could deploy clean energy or purchase clean energy credits, as under a traditional CES, or demonstrate that they reduced emissions through other means—by an amount equivalent to or greater than what they would have achieved with clean energy deployment alone. For example, a utility could invest in efficiency improvements, forest conservation, reforestation, low-carbon agriculture, or other measures that reduce emissions or sequester carbon.
The second option—the exchange mechanism—would enable utilities to make a fixed payment at a fixed price instead of deploying clean energy or purchasing clean energy credits, similar to a traditional ACP. Under the exchange mechanism, however, utilities would make payments to a new, independent exchange instead of to the government. The exchange would then purchase emissions reductions starting with those at the lowest cost and work its way up. In doing so, the exchange would achieve the maximum amounts of emissions reductions at the lowest cost while expanding demand for private-sector goods and services.
According to our research, using either mechanism could reduce emissions by around 450 million metric tons of carbon dioxide over the first 10 years relative to a CES with a traditional ACP, and by over 260 million metric tons relative to a CES with no ACP. Either option could also achieve the same electricity price reductions as a traditional ACP, specifically a nationwide average of approximately $0.90 per megawatt hour (MWh) over the first 10 years relative to a CES with no ACP. By allowing utilities the freedom to reduce emissions at least cost, these new alternative compliance mechanisms could result in dramatically greater reductions of greenhouse gas emissions than a CES with no ACP and deliver the cost reductions created by a traditional ACP.