Mixing and Matching Electricity Sector Policies

RFF-DP-13-20_coverA number of concerns have emerged over the last decade about climate change, energy security, and energy efficiency, inspiring an equally long list of proposed policy fixes. The majority of these options, including renewables subsidies, performance standards, and emissions pricing schemes, apply directly to the power sector. Lawmakers can also choose to implement multiple policies in tandem, as the European Union did in its 20/20/20 by 2020 targets—a 20 percent reduction in emissions, a 20 percent share of renewables in total energy consumption, and a 20 percent improvement in energy efficiency. Similarly, California, in adopting an emissions cap-and-trade system, is retaining renewable energy mandates and subsidies, as well as energy conservation policies.  Despite the growing interest in using this mix-and-match approach, little research has been done to explore how cost-effectiveness and technological innovation are affected by interactions between coexisting policies.

In general, to address the damages posed by greenhouse gas emissions, economists recommend placing a price on those emissions, such as with a carbon tax or a cap-and-trade program. Many are skeptical of the need for additional policies, noting that once an emissions cap is in place, additional policies to expand renewable energy, for example, produce no new emissions reductions. (See a recent post by RFF University Fellow Rob Stavins of Harvard for more on this topic.) However, concerns about additional market failures, such as spillovers from innovation or the undervaluation of energy efficiency improvements, can justify additional interventions. Read More

New Issue of Resources Magazine

Resources 186

Image: Resources for the Future

A dramatic rise in world oil prices and skyrocketing domestic gas prices resulting from the 1973–1974 oil crisis prompted a recognized need for a national energy policy in the United States. One challenge is that the policies we put in place today will likely outlive the context in which they were created—and for quite a long time. Joel Darmstadter’s retrospective on the energy crisis, Stephen Brown and Charles Mason’s examination of lifting the oil export ban, and Joseph Aldy’s argument for eliminating domestic fossil fuel subsidies in the latest Resources magazine illustrate this point. Other articles from this issue include:

Do Driving Restrictions Reduce Congestion? Lessons from Beijing
Ping Qin and Jintao Xu
Pro-environment business behaviors are driven by a rich set of political and social factors that affect profitability—all of which conservation advocates can use as leverage to motivate change.

Groundwater Markets: Managing a Critical, Hidden Resource
Yusuke Kuwayama
Although 95 percent of usable freshwater comes from underground, withdrawals of this water are largely unmonitored and unregulated in the United States. By developing groundwater markets, governments can provide an incentive for more sustainable pumping of this critical resource.

Private Funding of Public Parks: Assessing the Role of Philanthropy
Margaret A. Walls
Private donations account for an increasingly large percentage of city parks’ revenue stream, but a new survey of park directors reveals a discrepancy between how this funding is used and the most pressing needs of today’s parks.

To view all articles from this issue of Resources, visit our website or download the Resources app for iPad, iPhone, or Android.

RFF ON THE ISSUES: Regulations for new power plants; European shale gas

Note: There is still time to register for the April 17th seminar, “From the Gulf to the Arctic: What Have We Learned since the Deepwater Horizon Spill?” Join RFF for two distinguished panels featuring experts from the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, the National Oceanic and Atmospheric Administration, the Bureau of Ocean Energy Management, the US Department of Energy, and more.

Regulations for New Power Plants

US Environmental Protection Agency (EPA) Administrator Gina McCarthy said last week that although the new regulations for existing power plants will not be “aspirational standards,” they will allow emissions targets to be achieved through a combination of strategies. This may signal a different direction from the rules for new power plants, and could provide states the flexibility needed to keep many older facilities open.

In a comment to EPA, RFF’s Nathan Richardson explains why separating regulations for new coal and gas plants, as EPA is currently proposing, could sharply limit the flexibility available under rules for existing plants. He writes: “Here’s hoping EPA has combined the categories. If they have not, I do not see how the agency can fulfill its promise to preserve existing [flexible] state climate programs.”
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This Week in the RFF Library

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:

Does Size Matter? ["Chaos" article arguing for downsizing of the power grid to reduce blackouts]
In a study published online Tuesday by the journal Chaos, two physicists and an engineer say the nation’s electrical distribution system would face a lower risk of severe outages if it were divided into scores of gridlets rather than the three major grids that exist today for the East, the West and a large chunk of Texas. — via Chaos: An Interdisciplinary Journal of Nonlinear Science

The Economic Case for Restoring Coastal Ecosystems
This report analyzes the economic benefits provided by 3 of the 50 coastal restoration projects that the National Oceanic and Atmospheric Administration, or NOAA, funded with grants from the American Recovery and Reinvestment Act, or ARRA, of 2009 and finds that each dollar invested by taxpayers returns more than $15 in net economic benefits for the three projects. — via Center for American Progress

Shifting Gears: A New Approach to Reducing Greenhouse Gas Emissions from the Transportation Sector
In 2007, Congress passed the Energy Independence and Security Act, which requires a certain percentage of biofuels like ethanol to be blended with the regular gasoline supply each year. A central goal of the Act was to take a bite out of the climate-changing pollution emitted from the tailpipes of motor vehicles. The transportation sector is second only to the electricity sector in its volume of carbon pollution, so targeting it for reductions makes good sense.  — via NYU School of Law, Institute for Policy Integrity

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Flexibility and Cost-Effectiveness in Proposed Climate Policies

RFF-DP-14-05_Page_01 Achieving the goal of an 83 percent reduction in US carbon dioxide (CO2) emissionsfrom 2005 levels by 2050 will require the electricity sector—which accounts for roughly 40 percent of US CO2 emissions—to make an enormous pivot away from fossil fuels toward non-emitting sources. Policy will be required to achieve this goal. In a recent RFF discussion paper with coauthor Matt Woerman, we analyze the economic and social welfare consequences of four CO2 emissions reduction policies, including a carbon tax, a tradable CO2 emissions rate performance standard (TPS), and two versions of a clean energy standard (CES). The analysis examines a way to tailor a CES to improve its efficiency. The Haiku electricity market model is employed in the analysis.

Although a carbon tax is fairly straightforward, the other policies that we explore may require some explanation.  A clean energy standard is similar to a renewable portfolio standard but with a broader scope. A CES imposes a requirement that a minimum amount of electricity sold in the market must be generated using low- or non-CO2 emitting technologies, such as renewables, nuclear, or natural gas combined cycle units.  Each kilowatt hour of electricity produced by these technologies receives some credit under the CES and these credits must add up to the minimum amount required under the policy. Under a technology-based CES, crediting of generation depends on technology alone, with renewables and non-emitting generators receiving full credit toward the standard and generation for other emitting sources (such as natural gas combined cycle plants) getting partial credit. For an emissions rate–based CES, crediting of emitting sources varies depending on their CO2 emissions rate and thus more efficient natural gas combined cycle generators can earn more credits. The last climate policy we examined, a tradable performance standard, imposes a maximum average CO2 emissions rate across all generators and allows generators that have a CO2 emissions rate below the average to sell credits to generators that emit at higher than the average rate.

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Preserving Flexibility

Decisions EPA is making today will have a major impact on the cost-effectiveness of its planned move to regulate carbon emissions from existing power plants. The agency has proposed and will soon finalize performance standards for new power plants. These new-source standards are a prerequisite for the planned existing-source standards, but are ostensibly otherwise unrelated – existing source standards can and will be less stringent, and will be ultimately imposed and enforced by states, not EPA directly. But, as I argue in a new comment to EPA, important structural elements of the new source standards – the “source categories” into which emitters are divided for regulatory purposes – will persist into the existing-source standards, with major implications.

From the comment, here’s the short version of how the connection works:

  • EPA’s decision to separate coal and gas power plants into different regulatory categories for its proposed New Source Performance Standards (NSPS) has little effect on those standards, but has important implications for upcoming existing source standards (ESPS).
  • The approach—split or combined categories—that the agency uses for its NSPS will almost certainly persist for ESPS.
  • Other research indicates that switching from coal to gas generation is the largest and lowest-cost emissions reduction opportunity in the power sector.
  • Combined categories are therefore crucial to the cost- and environmental effectiveness of ESPS. Trading between coal and gas that could incentivize this fuel switching is almost certainly legal if categories are combined, and almost certainly illegal if they are not.
  • Combining coal and gas into a single category, as the agency did in its first NSPS proposal in 2012, would not reduce EPA’s freedom to set standards, increase the rule’s complexity or add any significant legal risk.
  • EPA should therefore combine coal and gas into a single source category in its final NSPS rulemaking.

Just last week, EPA submitted its proposed ESPS to the Office of Management and Budget for review. The decision on whether to combine source categories has therefore likely already been made, at least for purposes of the proposal. Here’s hoping EPA has combined the categories. If they have not, I do not see how the agency can fulfill its promise to preserve existing state climate programs, many of which (like the cap and trade programs in California and the Northeast) have trading at their core.

RFF ON THE ISSUES: State implementation of the Clean Air Act; The natural gas revolution

State Implementation of the Clean Air Act

The draft of a rule by the US Environmental Protection Agency (EPA) that would create strict new limits on power plant emissions has reached the White House. While critics have expressed concern about the rule’s effect on the coal industry, EPA Administrator Gina McCarthy says that it offers flexibility and recently noted that the agency is working “hand in hand” with the states on implementation of the regulation.

RFF’s Dallas Burtraw notes that flexibility and cooperation with the states are two key aspects for successful implementation of this regulation. Building on his research on reducing carbon emissions, he recently answered frequently asked questions about the costs, challenges, and advantages of regulating power plant emissions at the state level under the Clean Air Act. Video highlights and full text of the FAQs about state implementation of the Clean Air Act are available online, as part of RFF’s resource page on regulating carbon emissions under the Clean Air Act.

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This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.

Planning For Fracking on the Barnett Shale: Urban Air Pollution, Improving Health Based Regulation, and the Role of Local Governments
A review by a University of Texas at Austin researcher highlights the rapid proliferation of gas industry operations in urban areas and questions whether state and federal air pollution regulatory programs are well designed to ensure health and safety. The review recommends increased government monitoring, health impact studies and regulation of air pollution. — via Virginia Environmental Law Journal

Trees, Trash, and Toxics: How Biomass Energy Has Become the New Coal
…this first-ever detailed analysis of the bioenergy industry reveals that the rebooted industry is still a major polluter. Comparison of permits from modern coal, biomass, and gas plants shows that a even the “cleanest” biomass plants can emit > 150% the nitrogen oxides, > 600% the volatile organic compounds, > 190% the particulate matter, and > 125% the carbon monoxide of a coal plant per megawatt-hour, although coal produces more sulfur dioxide (SO2 ). Emissions from a biomass plant exceed those from a natural gas plant… — via Partnership for Policy Integrity.

U.N. Intergovernmental Panel on Climate Change Working Group II Final Draft Report
…The U.N. Intergovernmental Panel on Climate Change said that climate change is already hurting the poor, wreaking havoc on the infrastructure of coastal cities, lowering crop yields, and endangering various plant and animal species.
But the Nobel Peace Prize-winning group said that climate change’s effects will grow more severe and that spending and planning are needed to guard against future costs, much as people buy insurance against a range of possible accidents or health problems. — via U.N. Intergovernmental Panel on Climate Change

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Identifying “Known Unknowns” in the Natural Gas Revolution

Last week, my colleagues and I released a new RFF report, The Natural NGI-coverGas Revolution: Critical Questions for a Sustainable Energy Future. At one point, I began referring to this document as the “Known Unknowns” report, in reference to a widely quoted Donald Rumsfeld speech. As the former secretary of defense noted, there are certain pieces of information that “we know we don’t know”—and those are what my coauthors and I have tried to identify for the broad world of natural gas development and use.

Our goal was extensive. We reviewed the literature and consulted experts in a range of different areas—from resource estimates, to demand drivers, to environmental risks and economic opportunities—to better understand what socioeconomic and policy questions researchers have already tried to answer. (Note the emphasis on socioeconomic and policy questions, areas that are the strengths of researchers at RFF; we largely chose not to explore technology questions, although there are many of importance.)

This search turned up a small number of relatively definitive answers (the known knowns, if you will), and many more uncertainties or remaining controversies. We sorted these into seven categories, which turned into chapters in the report: supply, demand, economic impacts, environmental impacts, climate impacts, regulatory and voluntary best practices, and international issues.

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Resources Magazine: Negotiating a Post-2020 Climate Agreement in a Mosaic World

As we approach the end game serious negotiations for a post-2020 international climate regime, Brian Flannery describes the difficult road ahead.

Architects of the 1997 Kyoto Protocol believed it would usher in a long-term, top-down process for mitigating climate change, with a growing set of nations taking on increasingly ambitious greenhouse gas emissions targets and carbon markets playing a central role. That has not happened.

Instead, the world has moved to a bottom-up approach, where nations take on self-determined obligations based on national priorities and circumstances—an approach that I characterize as a “mosaic world.” In the mosaic world, for many developed and developing nations, carbon markets play no role. Though it promises less, proceeding under a mosaic approach may ultimately accomplish more than insisting on a top-down approach, which runs the very real risk of reducing participation by many countries that account for significant emissions globally. Without their participation, ambitious goals will never be met.

Tension over these approaches are on display as nations commence serious negotiations to develop a post-2020 agreement to be concluded in Paris in late 2015, at the 21st meeting of the Conference of Parties (COP-21). Since the very visible failure to reach an agreement in Copenhagen in 2009 (COP-15), nations have grown increasingly frustrated and concerned over the viability of negotiations under the United Nations Framework Convention on Climate Change (UNFCCC). In part, this arises from a growing legacy of unmet expectations.

As the negotiations become increasingly complex, fundamental differences continue to grow and separate various coalitions of nations. Groups have yet to resolve central issues, including the following:

  • the magnitude of national emissions commitments, and whether they should put the world on track to limit warming to less than 2°C;
  • the means of implementation—particularly finance, but also technology and capacity building;
  • how the agreement will reflect differences between developed and developing nations based on common but differentiated responsibilities, equity, and historical responsibility; and
  • whether the ultimate agreement will be legally binding.

Given these differences and the realities of today’s mosaic world, progress in Paris may depend on whether nations can embrace bottom-up commitments in lieu of a more ambitious top-down, legally binding approach.

Read the rest of this article.