On Wednesday, the House Appropriations Subcommittee on Interior, Environment, and Related Agencies voted to cut the budget of the Environmental Protection Agency (EPA) by 34 percent. This would “prohibit the administration from spending on greenhouse gas rules for power plants,” despite a presidential memo directing the agency to do just that.
New research by RFF’s Dallas Burtraw and Matt Woerman reviews a key approach outlined by the president: using flexible approaches for regulating power plants, possibly through the Clean Air Act. They note that this approach gives states a leading role in the implementation of the regulation (subject to EPA approval), and recommend the EPA “evaluate a portfolio of stringency criteria to evaluate plans that introduce flexible approaches in different ways.” The authors also propose various metrics that the EPA should consider.
Interior Fracking Regulations
Also on Wednesday, the House Natural Resources Committee voted to block the Department of the Interior’s proposed rules regulating hydraulic fracturing (fracking) on federal lands. Committee Chairman Doc Hastings (R-WA) was quoted saying that “duplicative, costly, and burdensome federal regulations are unnecessary and would hinder American energy production.”
In a blog post for Common Resources, RFF’s Nathan Richardson and Alan Krupnick write that similar arguments “miss the mark.” They explain that “the federal government’s rights are identical to those of any landowner” and that “the federal government . . . frequently require(s) users of those lands . . . to follow rules that go beyond general state regulations.”
Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy. Check out this week’s highlights below:
Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?
Carbon taxes have recently become a major source of discussion in the Washington, DC policy community. Supporters contend that they offer an efficient way to simultaneously create incentives to emit less carbon dioxide and reduce the budget deficit. Should such a carbon tax be enacted, it will in all likelihood be accompanied by measures to ensure that the U.S. industries that would be most heavily affected… — via Climate Advisors, et. al.
Rapid Accumulation of Committed Sea-level Rise from Global Warming
Measurements tell us that global average sea level is currently rising by about 1 inch per decade. But in an invisible shadow process, our long-term sea level rise commitment or “lock-in” — the sea level rise we don’t see now, but which carbon emissions and warming have locked in for later years — is growing 10 times faster, and this growth rate is accelerating. — via Proceedings of the National Academy of Sciences
Study: Methane Migration in Groundwater Influenced by Topography and Geology, Not by Fracking Activity
…a research paper produced by the National Ground Water Association suggests this widespread image may be a mirage. The paper, published in the May/June issue of the journal Groundwater, details the results of a study of 1,701 water quality analyses from drinking water wells in northeastern Pennsylvania. — via Evaluation of Methane Sources in Groundwater in Northeastern Pennsylvania
BC’s Carbon Tax Shift After Five Years: An Environmental (and Economic) Success Story
British Columbia’s (BC) introduction of a revenue-neutral carbon tax shift in 2008 was controversial. This analysis compares changes in fuel consumption, greenhouse gas emissions and GDP between BC and the rest of Canada. It finds that in the four years since the tax was introduced, BC’s per capita consumption of fuels subject to the tax has declined by 19% compared to the rest of Canada. At the same time, its economy has kept pace… — via Sustainable Prosperity
International Energy Outlook 2013
World energy consumption will increase by 56% over the next 3 decades, driven by surging demand in developing countries, the US Energy Information Administration forecasts in its International Energy Outlook 2013 (IEO 2013), released July 25. In its outlook, EIA said it expects the world’s real gross domestic product to rise by 3.6%/year through 2040… — via US Department of Energy, EIA
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This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.
Why should sub-national climate policies exist? In the case of California’s Global Warming Solutions Act (AB 32), the answer flows directly from the very nature of the problem — global climate change, the ultimate global commons problem.
The Standard Theory
Greenhouse gases (GHGs) uniformly mix in the atmosphere. Therefore, any jurisdiction taking action — whether a nation, a state, or a city — will incur the costs of its actions, but the benefits of its actions (reduced risk of climate change damages) will be distributed globally. Hence, for virtually any jurisdiction, the benefits it reaps from its climate‑policy actions will be less than the cost it incurs. This is despite the fact that the global benefits of action may well be greater — possibly much greater — than global costs.
This presents a classic free-rider problem, in which it is in the interest of each jurisdiction to wait for others to take action, and benefit from their actions (that is, free-ride). This is the fundamental reason why the highest levels of effective government should be involved, that is, sovereign states (nations). And this is why international, if not global, cooperation is essential. [See the extensive work in this area of the Harvard Project on Climate Agreements.]
Despite this fundamental reality, there can still be a valuable role for sub-national climate policies, as I wrote about in an essay at this blog in 2010 (which drew, in part, on work I did with Professor Lawrence Goulder of Stanford University). This is particularly true when appropriate national policies fail to materialize. The failure of the U.S. Senate to pass companion legislation to the Waxman-Markey bill, passed by the U.S. House of Representatives in June, 2009, highlighted the absence of a national, economy-wide carbon pricing policy.
Recently, another argument has arisen for the importance of California’s climate policy, namely its potential precedent and lessons for other jurisdictions around the world, including other states, provinces, countries, and regions.
Effects of Fracking on Drinking Water
Last week the House Committee on Science, Space, and Technology Subcommittees on Environment and Energy held a joint hearing to review the Environmental Protection Agency’s research into the effects of hydraulic fracturing (fracking) on drinking water. It was reported that House Republicans “slammed . . . EPA attempts to link hydraulic fracturing to water pollution” outside the scope of the study.
Despite a recent Department of Energy study showing no such drinking water contamination, research by RFF experts has found that there does exist a “disconnect between the views of experts . . . and the views of the public regarding impacts on wells and aquifers.” They noted that in general, the public is concerned about possible contamination of groundwater, and this perception could be negatively impacting the prices of homes that are dependent on well water.
In this series of blog posts, RFF researchers Virginia D. McConnell and Joshua Linn take a look at the current state of the electric vehicles (EVs) and the effect of current and future policies on the market. Click to read the first, second, third, and fourth installments.
It is clear from our earlier blog that electric vehicles (EVs) are still expensive, that the EV subsidies are large, and that sales are strongly influenced by them. But are there good economic arguments for such subsidies? Standard economic policy analysis holds that where there are “market failures,” government policy can indeed improve social welfare.
Two market failures are most relevant for EVs: greenhouse gases (GHGs) and spillovers (we leave aside market failures relevant to all vehicles such as traffic congestion and accidents). Regarding the first: there are external costs of owning and using vehicles of all types that are not accounted for in vehicle and fuel markets. GHG emissions from gasoline use and carbon-based electricity production contribute to climate change and its associated damages. Gasoline and electricity policies have not historically accounted for such damages.
In effect, the policy decision has been made to address this externality and reduce GHG emissions through increasingly strict CAFE rules, which will cause vehicles to become more fuel efficient and emit fewer GHGs over time. An alternative policy for addressing this market failure is to increase gasoline taxes, which most economists would prefer, but which has proven to be less politically popular.
The CAFE standards set binding GHG limits that must be met regardless of the number of electric vehicles that are sold. Subsidies to EVs change the makeup of the fleet but—if power sector emissions were properly credited—would not affect the average emissions rate of new vehicles sold (more EVs, but less fuel economy improvements from other vehicles). But, because of the preferred treatment for EVs discussed in the last blog, subsidies to EVs could result in higher GHG emissions from new passenger vehicles. Just how much depends on electricity sector policy. If there were a binding cap on electricity sector GHG emissions, EV subsidies would result in more EVs on the road and the associated higher electricity use, but overall electricity sector emissions actually would not increase. Although regional GHG caps exist, the US as a whole does not have such a policy. Instead, there are many local, state, and federal policies promoting renewables. And EPA is preparing GHG regulations for new and existing power plants. With these policies in place along with CAFE, EV subsidies probably increase average GHG emissions rates.
So, it would appear that in the presence of stricter CAFE standards, EV subsidies over the next few years cannot be justified on the basis of reducing GHG emissions. But, if there are advances in EVs, there is a potential for much lower GHG emissions and less reliance on oil over the long term. Many argue that EVs hold such promise but, because they are at an early stage of development, manufacturing and consumer learning will determine their future success in the market.
“Spillover” effects are the second potential market failure for EVs. On the production side, investments by one manufacturer in R&D on battery innovation, power-train development, or vehicle design are likely to provide information and cost reductions to other manufacturers. Other firms may benefit from the learning or mistakes of first-mover companies, in which case firms will not invest in enough innovation or product development because their efforts spillover to others. On the other hand, if the firm captures all the benefits of its learning, there is no market failure and no reason to subsidize learning. Taking a lesson from the semiconductor industry, when learning is internalized, firms “price to the learning curve” and subsidize their own product to sell more and learn more. If, however, more innovation and product development by one firm informs other firms, then there are spillovers and hence a justification for government intervention.
In the case of EVs, auto manufacturers probably cannot capture all the benefits of their learning. Auto manufacturers try to protect new technology and production design, but as soon as prototype vehicles are available, other firms have access and they learn in ways that improve designs or lower costs or both.
There may also be learning on the consumer side of the market. Consumers are likely to be unfamiliar with the performance of EVs relative to traditional gasoline vehicles. One person’s use and learning about a new vehicle technology such as EVs can provide information to friends and neighbors or to the broader public.
Such spillovers may be an argument for subsidies to EVs, but because subsidies for a particular technology amount to “picking winners,” they carry a good deal of risk. It may be that EVs will remain too expensive, and will not get the improvements in battery development, design, and consumer acceptance that are needed, even with large subsidies. And what is the appropriate amount for society to spend to spark the possible spillover benefits? Subsidies should be aligned to the size of the spillovers, but it is very difficult to assess their magnitude, both on the manufacturing and consumer sides.
The purpose of any subsidy for EVs should be clearly identified, against which progress can be assessed. If the goal is to address manufacturer spillovers, is there evidence of learning across firms? Are declining costs over time not just due to internal scale economies at a given firm, but due to learning across firms? Finally, subsidy policies should be targeted as closely as possible to the market failure, and avoid distorting other markets. For example, it makes sense to target purchase subsidies to consumers who would not have purchased EVs otherwise. But what about offering HOV lane access to single-occupant EVs? Bento et al. show that granting single-occupancy access to HOV lanes for EVs can impose large unintended costs on carpoolers.
Floods accounted for more lives lost and more property damage than any other form of natural disaster in the United States during the twentieth century. And the wreckage continues: In 2012, Hurricane Sandy killed more than 100 people and inflicted billions of dollars in infrastructure damage. In 2008, Hurricane Ike killed dozens of people and flooded more than 100,000 homes along the eastern coast of Texas. In Wisconsin that same year, heavy rainfall caused record-setting flooding, with 31 counties declared federal disaster areas.
According to the US Environmental Protection Agency, bolstering US public water systems in the face of climate change and land development will require more than $330 billion over the next 20 years, including investments of more than $50 billion for dam safety and community resilience in particular. As governments weigh their options, “green” infrastructure is gaining recognition as a cost-effective substitute for or complement to the “gray” infrastructure—pipes, dams, levees, and the like—traditionally used to control flooding, store water, and reduce urban stormwater overflows.
Green infrastructure refers to natural systems that absorb and filter pollutants from the air and water, protect communities from flooding and storm surges, reduce erosion, and enhance both community and environmental well-being. Floodplains and wetlands can provide buffers against flood risks, for example, and public parks and other permeable urban surfaces can naturally slow and filter polluted runoff.
Green infrastructure investments will often require new kinds of economic and environmental analyses, as well as negotiations and collaboration among numerous stakeholders. But state and local governments often lack the resources and data necessary to evaluate green infrastructure technologies and their benefits. What tools can communities use to target ecosystem investments?
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The Clean Air Act provides the current regulatory framework for climate policy in the United States. A key component of US policy as called for in President Obama’s recent memorandum to the US Environmental Protection Agency (EPA) will be the use of flexible approaches in achieving reductions in greenhouse gas emissions. EPA is expected to regulate existing stationary sources using tradable performance standards (averaging) under section 111(d) of the act. This section requires states to develop plans to implement the regulation. EPA will issue guidelines for states and may provide a model rule representing their ideal regulation for states to potentially incorporate in their plans, but many states are expected to propose additional flexibility mechanisms.
With coauthor Matt Woerman, we recently completed a paper that considers a variety of policy approaches that EPA will need to evaluate, whether as part of a model rule or if introduced by states. Unlike other parts of the Clean Air Act, section 111(d) requires consideration of multiple criteria. This section has a technological basis, so emissions rate changes would be a justified metric. The eventual outcome of interest is environmental performance, so emissions reductions are also meaningful. This section also calls for consideration of costs, and evaluation of policies according to a common marginal abatement cost could be used to compare stringency.
This approach is especially interesting because it leads to cost-effective regulation among the affected sources, and could be observed in the modeling that states will provide to support their implementation plans. We find that expanding flexibility enables an increase in ambition along any one of these metrics (emissions rates, reductions, and costs), but it can lead to ambiguous results with respect to other metrics, suggesting that multiple criteria should be balanced to fit the legal justification of the regulation.
Using RFF’s Haiku model, Matt Woerman and I simulated a tradable performance standard regulation at coal-fired power plants to achieve a 4 percent reduction in the average emissions rate based on recent engineering studies that identify technical opportunities to improve plant efficiency. The regulation results in a reduction of 93 million short tons of carbon dioxide emissions.
We then expanded flexibility by enlarging the set of generators that could contribute. At the same marginal abatement cost, a tradable performance standard that covers all generation sources results in nearly four times the emissions reductions. This approach maximizes net benefits, achieving more than $25 billion per year in net benefits (2009$ in 2020), split roughly evenly between climate-related benefits and reduction of other air pollutants, with an electricity price increase of only 1.3 percent.
These reductions could be expected to take the United States past 15 percentage points of the 17 percentage-point reduction from 2005 levels that President Obama pledged in Copenhagen in 2009. President Obama has asked his cabinet to look across federal rules and regulations to identify further opportunities to reduce emissions. Calibration to a consistent marginal abatement cost would be important to achieve cost-effectiveness in this effort. The marginal abatement cost we model in the electricity sector builds on a technical foundation of what is achievable at existing coal-fired power plants. Coincidentally, it is similar to recent estimates of the social cost of carbon dioxide emissions, suggesting a focal point for coordinating other regulatory efforts.
Last month’s Black Forest fire in Colorado was the second-most costly fire in the state’s history. The El Paso County Sherriff’s Office “ruled out natural causes of the blaze,” which destroyed 486 structures.
RFF’s Sheila Olmstead and Carolyn Kousky agree that “a big part of each natural disaster isn’t ‘natural’ after all.” In an article for Resources magazine, they write: “US wildfire suppression, for example, is largely funded by federal and state taxpayers, not homeowners in fire-prone places, creating an implicit incentive to develop these areas. Our research confirms that in the western United States, development is greater on lands benefiting from federal suppression efforts, all else equal.”
Carbon Tax Impacts
NPR’s Planet Money recently tallied up the impact that a carbon tax would supposedly have on one average person as $410 for the first year. They discussed that the collected revenue could be returned to the public in lump sum rebates or—a “smarter” way—via income tax cuts.
In preliminary research results, RFF’s Jared Carbone, Richard Morgenstern, Rob Williams, and Dallas Burtraw find that “using carbon tax revenues to lower capital taxes (corporate taxes or personal income rates on interest, dividends, or capital gains) produces the largest economic benefits, roughly offsetting the economic cost of a carbon tax.” Returning the revenues to the public through reductions in payroll taxes or personal income taxes is less economically efficient than through capital tax reductions, though the differences are modest. However, lump sum rebates is the worst option for the economy. Watch a video of their results here and learn more about the impacts of a carbon tax here.
Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy. Check out this week’s highlights below:
Damages from Pollution and Biodiversity Loss Have Cost India Almost 6% of GDP: World Bank
First study of its kind warns Indian growth is unsustainable unless urgent steps are taken to tackle air and water pollution. Environmental degradation is seriously restricting India’s economic growth, costing it around Rs. 3.75tr ($80bn) or 5.7 per cent of GDP each year. That is the stark conclusion of a major new report from the World Bank… — via World Bank
The Quality of Our Nation’s Waters: Ecological Health in the Nation’s Streams, 1993—2005
A new USGS report describes how the health of our Nation’s streams is being degraded by streamflow modifications and elevated levels of nutrients and pesticides. The national assessment of stream health was unprecedented in the breadth of the measurements—including assessments of multiple biological communities as well as streamflow modifications and measurements of over 100 chemical constituents in water and streambed sediments… — via US Geological Survey
Technology Roadmap: Carbon Capture and Storage
This carbon capture and storage (CCS) roadmap aims at assisting governments and industry in integrating CCS in their emissions reduction strategies and in creating the conditions for scaled-up deployment of all three components of the CCS chain: CO2 capture, transport and storage. To get us onto the right pathway, this roadmap highlights seven key actions needed in the next seven years to create a solid foundation for deployment of CCS starting by 2020… — via International Energy Agency
Benefits of Rebuilding Global Marine Fisheries Outweigh Costs
It could cost up to $292 billion and take almost three decades, but University of B.C. experts have a proposal to save the world’s fisheries. In a study released Friday in the online journal of the Public Library of Science, a team of American and Canadian economists and ecologists… — via PLOS ONE
Sea Level May Rise 2 Meters (6.6 Feet) for Each Degree Celsius of Warming
Sea levels may rise by more than 2 meters (6.6 feet) for each degree Celsius of global warming the planet experiences over the next 2,000 years, according to a study by researchers in five nations. The research, published today in the Proceedings of the National Academy of Sciences, attempts to iron out the impact of short-term fluctuations in sea levels… — via Proceedings of the National Academy of Sciences
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In this series of blog posts, RFF researchers Virginia D. McConnell and Joshua Linn take a look at the current state of the electric vehicles (EVs) and the effect of current and future policies on the market. Click to read the first, second, third, and fifth installments.
Subsidies to consumers that we discussed in the previous blog (“Can Electric Vehicles Compete on Price?) are substantial and come in a number of forms including tax credits, free electric charging and HOV lane access. These are not the only subsidies for EVs however. There are also indirect sales and production subsidies that are evolving out of new policies to reduce greenhouse gases (GHGs).
Federal fuel economy regulations, the so-called reformed Corporate Average Fuel Economy (CAFE) standards, have recently been revised in a two-stage process affecting vehicles for model years 2012 to 2025. These standards require increasing average fuel economy from vehicles sold by all manufacturers, and they also require reductions in GHG emissions for the first time. Average fuel economy will almost double from its current levels by 2025, and GHG emissions must fall by more than 40% over the same period.
The GHG provisions of the new rules established by the EPA give special status to EVs in several ways. First, miles driven on an electric charge are counted as zero emissions (thereby disregarding upstream GHG emissions that occur at power plants where the electricity is generated). This provision makes EVs more appealing to manufacturers as a way to comply with standards. More EVs in a manufacturer’s fleet means less reduction in GHGs is needed from other vehicles.
Another provision of the new federal CAFE rules that will have a similar effect for EVs is that there is a “credit multiplier” for electric vehicles for MYs 2017-2021. For example, an all- electric vehicle will count as 2 vehicles in 2017, though the amount of the credit will decline over time. This will also mean that increasing the number of EVs produced and sold will lower a manufacturer’s costs of meeting the standard.
How large are these subsidies for EVs? It is not clear yet how much either of these subsidies to manufacturers will be worth since they depend on the future costs of reducing emissions from traditional vehicles that EV manufacturers will avoid—that is, the size of the subsidy depends on how costly the standards will be to meet in the future. But some simple calculations suggest that the implicit subsidies may amount to a couple thousand dollars per vehicle within the next 5 years.
Another significant regulation that provides subsidies for EVs is the co-called “ZEV mandate,” which originated in California and has been adopted by 10 other states. Under the mandate, a set percentage of vehicles sold by large automakers (over 60,000 vehicles a year sold in a participating state) must be zero emission vehicles (ZEVs). All-electrics and fuel cell vehicles qualify, with PHEVs given partial credit based on their estimated all-electric miles driven. The required ZEV percentage started small in 2012, but must reach 15.4% by the 2025 model year. A credit market allows automakers to buy and sell ZEV credits that can be used instead of actual ZEV sales. This allows firms that exceed the required share of ZEVs to receive further subsidies. For example, in the first quarter of 2013, Tesla sold $68 million worth of credits to other automakers in California, which is $13,600 for each of the 5,000 cars it sold in the quarter. This provides a sizable additional subsidy for sales of electrics in states where the ZEV mandate is in place.
These incentives to produce EVs under the new CAFE and ZEV rules are not the only subsidies on the manufacturing side. There are also subsidies for manufacturing batteries for EVs and for basic research in battery development. For example, the federal government has supported investment in electric battery production facilities with over $2 billion in subsidies, and spends nearly $80 million a year for electric battery research and development. Another subsidy that effectively increases the demand for electric vehicles are certain federal and state requirements that a certain share of both public and private fleet vehicles must be alternative fuel vehicles such as EVs.
While these subsidies are likely to have significant effects on EV technology development and adoption, it is difficult to estimate the implied average subsidy per vehicle. Fleet mandates for EVs vary a great deal by geographic region, and the effect of R&D subsidies would need to be captured by vehicle production over many years.
In summary, total subsidies for electric vehicles—those to consumers to induce them to buy EVs, and those to manufacturers to induce them to produce and sell EVs—are large. Direct subsidies to consumers can be $9,500 per vehicle (or more in some states), implicit subsidies to manufacturers under CAFE rules are roughly a couple thousand per vehicle, and there are many other subsidies that are very hard to quantify on a per-vehicle basis but which nonetheless create very strong incentives. We next turn to what might justify such subsidies.