Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.
Lord Stern’s New Paper on Carbon Pricing
[Abstract] ‘To slow or not to slow’ (Nordhaus, 1991) was the first economic appraisal of greenhouse gas emissions abatement and founded a large literature on a topic of great, worldwide importance. In this paper we offer our assessment of the original article and trace its legacy, in particular Nordhaus’ later series of ‘DICE’ models. From this work many have drawn the conclusion that an efficient global emissions abatement policy comprises modest and modestly increasing controls. On the contrary, we use DICE itself to provide an initial illustration that, if the analysis is extended to take more strongly into account three essential elements of the climate problem – the endogeneity of growth, the convexity of damages, and climate risk – optimal policy comprises strong controls. To focus on these features and facilitate comparison with Nordhaus’ work, all of the analysis is conducted with a high pure-time discount rate, notwithstanding its problematic ethical foundations… — via London School of Economics
Comparative Life Cycle Assessment of 2.0 MW Wind Turbines
Wind turbines produce energy with virtually no emissions, however, there are environmental impacts associated with their manufacture, installation, and end of life. The work presented examines life cycle environmental impacts of two 2.0 MW wind turbines. Manufacturing, transport, installation, maintenance, and end of life have been considered for both models and are compared using the ReCiPe 2008 impact assessment method. In addition, energy payback analysis was conducted based on the cumulative energy demand and the energy produced by the wind turbines over 20 years. Life cycle assessment revealed that environmental impacts are concentrated in the manufacturing stage, which accounts for 78% of impacts. The energy payback period for the two turbine models are found to be 5.2 and 6.4 months, respectively. Based on the assumptions made, the results of this study can be used to conduct an environmental analysis of a representative wind park to be located in the US Pacific Northwest… — via International Journal of Sustainable Manufacturing
This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.
On June 2nd, the Obama Administration’s Environmental Protection Agency (EPA)released its long-awaited proposed regulation to reduce carbon dioxide (CO2) emissions from existing sources in the electricity-generating sector. The regulatory (rule) proposal calls for cutting CO2 emissions from the power sector by 30 percent below 2005 levels by 2030. This is potentially significant, because electricity generation is responsible for about 38 percent of U.S. CO2 emissions (about 32 percent of U.S. greenhouse gas (GHG) emissions).
On June 18th, EPA published the proposed rule in the Federal Register, initiating a 120-day public comment period. In my previous essay at this blog, I wrote about the fundamentals and the politics of this proposed rule (EPA’s Proposed Greenhouse Gas Regulation: Why are Conservatives Attacking its Market-Based Options?). Today I take a look at the economics.
Cost-Effective, Perhaps – but Efficient?
The proposed rule grants freedom to implementing states to achieve their specified emissions-reduction targets in virtually any way they choose, including the use of market-based instruments (the White House has referenced cap-and-trade in this context, although somewhat obliquely as “market-based programs,” and state-level carbon taxes might also be acceptable – if any states were to include them in their plans to implement the regualtion). Also, the proposal allows for multistate proposals and for states and regions to establish linkages among their state and multi-state market-based instruments. Some questions remain regarding the temporal flexibility (banking and borrowing) that the proposed rule will allow, but it’s reasonable to conclude at this point that although EPA may not be guaranteeing cost-effectiveness, it is allowing for it, indeed facilitating it. AsDallas Burtraw of Resources for the Future has said, the proposed rule ought to be judged to be potentially cost-effective.
Cost-effectiveness (achieving a given target at the lowest possible aggregate cost) is one thing, but economists – and possibly some other policy wonks – may wonder if the proposal is likely to be efficient (maximizing the difference between benefits and costs). This is a much higher mountain to climb, and a particularly challenging one for a regional, national, or sub-national climate-change policy, given the global commons nature of the problem.
The Challenge of this Global Commons Problem
GHGs mix globally in the atmosphere, and so damages are spread around the world and are unaffected by the location of emissions. This means that any jurisdiction taking action – a region, a country, a state, or a city – will incur the direct costs of its actions, but the direct benefits (averted climate change) will be distributed globally. Hence, the direct climate benefits a jurisdiction reaps from its actions will inevitably be less than the costs it incurs, despite the fact that global climate benefits may be greater – possibly much greater – than global costs.
In a prior blog post, I describe the contribution of energy efficiency to state emissions-reduction targets in EPA’s Clean Power Plan. As EPA has pointed out, including energy efficiency in states’ targets does not mean that states will necessarily choose to include energy efficiency programs in the compliance plans they submit to EPA. Many factors will no doubt play a role in a state’s decision on what to do about energy efficiency, but here are a few points to keep in mind.
First, it matters if a state chooses to convert its emissions rate target (tons CO2 per MWh of electricity generation) to a mass budget (tons CO2)—the proposal allows states to do so if they choose. Limiting emissions to a mass budget can be done in a variety of ways but economists have long advocated imposing a cap and allowing trading across sources of emissions under it, or imposing an emissions fee on covered sources calibrated to achieve a similar level of reductions—as at least one state is already considering and some in Congress have advocated.
Energy Efficiency under a Mass Target
If states use either of these policies to raise revenue and reduce other preexisting taxes (and there are many good reasons why a state might want to do that, as discussed in the RFF carbon tax FAQs) electricity prices could rise by as much as 10 percent in 2020, according to a recent RFF analysis. That increase in prices could lead to substantial changes in behavior and investment that improve energy efficiency. However, if a state selects a budget approach with emissions trading and then returns revenues to local electric distribution companies or to generators, the policy will have only modest impacts on electricity prices. This would provide little direct incentive for consumers to adopt more efficient appliances or equipment. This makes separate policies to encourage energy efficiency more attractive.
Given China’s high-profile air pollution problem and dominant contribution to global carbon dioxide (CO2) emissions, many in the West are surprised to learn that China has spent more on addressing these problems than any other country. RFF Visiting Fellow Mun Ho recently sat down with Resources to discuss China’s efforts and the reasons the country is not keeping pace with rapidly rising emissions, drawing on lessons from his recently published book, Clearer Skies over China: Reconciling Air Quality, Climate, and Economic Goals, coedited with Chris Nielsen and available from MIT Press.
Resources: China’s record in addressing climate and air pollution includes a mix of successes and failures—but the big picture doesn’t seem to give a sense that tremendous progress is being made. What is China’s status on these issues?
Mun Ho: The headlines highlight the negative parts of the story and, at times, they present a misleading picture. Everybody knows about the very rapid rate of economic growth in China, which has hovered just below 10 percent for a long period of time. Those who read the newspapers know that the air pollution problem is very serious, and it is often attributed to the inability or unwillingness of the government to deal with this issue. But while indeed the air pollution problem is severe, the government has done quite a lot to improve air quality.
The biggest example is the effort to reduce sulfur dioxide (SO2) emissions during the recent 11th Five-Year Plan covering 2006–2010. During this period, China aimed to reduce SO2 emissions by 20 percent and was quite successful by mandating flue gas desulfurization plans in electric power plants. That reduced emissions—and did so at a remarkably low cost.
Unfortunately, we since have seen Chinese pollution continue to increase because of rising electric power generation and industrial activity, such as cement production. So China has made great efforts to reduce emissions, but the level of industrial output keeps rising. The government is fighting an uphill battle.
China’s record on climate change is similar. There is no policy to reduce emissions of CO2 directly, but China has ambitious energy efficiency targets. Officials stated at the United Nations Framework Convention on Climate Change meeting in Copenhagen in 2009 that China plans to reduce the energy per unit of GDP by 40 percent over the next 20 years. The country is in line to achieve such a target but, again, with the economy growing in excess of 7 percent, China will continue to have rapidly rising carbon emissions. It overtook the United States many years ago and will continue to be the world’s largest emitter for many years to come.
Natural Gas in EPA’s Plan
Analysis that accompanied EPA’s Clean Power Plan predicts that “natural gas [will] edge out coal to become the most common fuel for power plants by 2030.” The EPA says that this could have significant environmental benefits because “natural gas emits about 40 percent less carbon than coal for the same amount of energy.”
There will be economic benefits as well, according to RFF researchers. In a recent blog post, RFF’s Alan Krupnick writes: “With the new plan, the demand for natural gas will increase even more. In the old days, this would have led to big increases in costs and prices to bring that gas to market. But the shale gas revolution has changed all that.” Research by Krupnick, RFF’s Stephen P.A. Brown, and Margaret Walls on the cost of a similar plan “shows that the natural gas revolution can shave a [a billion dollars] off of the plan’s cost.”
Insuring against Climate Change
Recently, a major insurance company dropped the lawsuits it filed against Chicago municipalities who it says are failing to prepare for climate change. The company argued that the cities and suburbs have been aware of the increasing impact of global warming on regional rainfall “since the 1970s” and that the lawsuits were intended to “encourage cities and counties to take preventative steps to reduce the risk of harm in the future.”
At a recent RFF seminar (video now available), experts questioned whether disaster events that are exacerbated by climate change and globalization are becoming increasingly uninsurable. RFF Fellow Carolyn Kousky noted that “insurability is a dynamic concept that changes over time,” requiring risk management tools that can accommodate levels of financial and scientific uncertainty to keep insurance profitable for its writers and affordable for its buyers. (Related: See “How Much Do Weather-Related Disasters Cost?” for Kousky’s examination of the costs and why they are increasing.)
EPA’s recently released Clean Power Plan to regulate emissions of carbon dioxide (CO2) from existing power plants under the Clean Air Act includes four building blocks that are used to establish the target CO2 emissions rate for each state. Earlier blog posts by my RFF colleagues have described these different building blocks; my focus here is on building block four, based on energy efficiency potential.
The purpose of building block four is to find the electricity generation savings that states could achieve through energy efficiency programs and factor those potential savings into the emission rate target calculation as a non-emitting energy resource. The higher the energy savings potential, the tighter the state’s emissions rate obligation under the policy, all else equal.
These calculations are based on existing state policies: 24 states have adopted Energy Efficiency Resource Standards (EERS) that target a specific minimum ratio of efficiency program related energy savings to total electricity consumption. Twelve of those states have EERS policies that require or soon will require a 1.5 percent incremental reduction in total statewide electricity consumption each year, a target that EPA adopts in its proposal.
Here’s how it works: states currently achieving 1.5 percent annual energy savings are assigned that rate in 2017 and for all future years. States that have yet to attain that amount of savings are assumed to start at their 2012 annual incremental savings rate in 2017 and then the annual savings target is incremented by 0.2 percentage points per year until it reaches 1.5 percent where it remains going forward. In both cases new energy efficiency programs are expected to yield energy savings for multiple years and these cumulated savings are reflected over 2020-29. According to EPA’s calculations, total energy efficiency potential in 2029 (which determines the target in 2030) ranges from 9.3 percent of annual electricity sales in Louisiana and Virginia to just over 12 percent in Maine.
New drilling technology and supportive market prices have opened vast reserves of oil and natural gas resources to extraction in North America. Canadian oil sands development is now operating at scale, the shale gas and tight oil revolutions are upon us in the United States, and major institutional energy reforms in Mexico are under way that could enable substantial new investment in the Mexican oil and gas sector.
The three countries have much to gain from these developments. The exploitation of these resources and the potential for enhanced cross-border energy trade will make the energy-intensive economic sectors more competitive, improve energy security, dampen short-term energy price volatility, and stimulate continent-wide economic growth.
How this boom will impact the environment is an unresolved question. On one hand, extraction and use of these reserves could increase North American carbon dioxide (CO2) emissions far beyond the limits espoused by each country. Then again, to the extent that natural gas substitutes for coal in electricity generation (and fugitive methane emissions are low) and electric vehicles powered by relatively clean electricity substitute for gasoline and diesel, CO2 emissions over the next two decades could be far less than expected 10 years ago.
Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.
The Untapped Potential of California’s Water Supply
[From Press Release] California could be saving up to 14 million acre-feet of untapped water – providing more than the amount of water used in all of California’s cities in one year – with an aggressive statewide effort to use water-saving practices, reuse water, and capture lost stormwater, according to a new analysis released today by the Pacific Institute and the Natural Resources Defense Council… — via National Resources Defense Council
Financing Energy Improvements on Utility Bills: Market Updates and Key Program Design Considerations for Policymakers and Administrators
The State and Local Energy Efficiency Action Network (SEE Action), a state- and local-led effort facilitated by the U.S. Department of Energy and the U.S. Environmental Protection Agency to achieve all cost effective energy efficiency, recently published a new report that provides an overview of the current state of on-bill lending programs with actionable insights for consideration by state policymakers, utility regulators and program administrators. States and utilities are increasingly turning to on-bill financing to stretch their limited efficiency program dollars and encourage the uptake of energy improvements in residential and non-residential properties… — via US Department of Energy
On June 5, RFF hosted a seminar titled, “Making Sense of EPA’s Proposed Rule for Reducing Greenhouse Gas Emissions from Power Plants.” We did not have time to answer all of the questions posed by our Twitter audience during that event due to time constraints. Below are our responses to some of those questions.
#askRFF Could you please talk a bit about why EPA has developed different standards for different states?
— Christian (@GallAerie) June 5, 2014
Dallas: Some states start with no coal-fired generation while other states start with a generation mix that is over 90 percent coal fired. That means that, as a point of departure, the emissions rate of electricity generation varies by a factor of six across states. EPA is taking this initial rate, and the initial mix of generation in a state, as the basis for calculating the state’s obligation to improve. To do otherwise and impose the same standard on all states would be cost-effective but it would impose greater costs on some states than others.
Nathan: Yes – states can choose among the blocks as they see fit, or choose other options for reducing power sector emissions that EPA did not consider in setting the targets.
As I mentioned last week, my colleague Art Fraas and I have a new paper in which we compare EPA regulation of greenhouse gases under the Clean Air Act to most (though not all) economists’ preferred alternative – a carbon price (either cap and trade or a carbon tax). When we wrote the paper, no concrete regulatory or carbon price options were on the table to compare with each other, so we instead offered pointers on what to look for in such proposals when they did emerge, grouped into 10 issues. Since we now do have a proposal from EPA, it’s worth a quick look at those issues. What did EPA do, and how might it compare to an (admittedly hypothetical) carbon price?
1) General Cost-Effectiveness
EPA appears to have set its targets in an effort to level the burden across states, rather than setting targets that reflect a cost-effective level of control in each state. However, the proposal also allows the states to enter into multi-state agreements that could include emissions trading approaches that could yield more cost-effective outcomes. The general cost-effectiveness under the EPA proposal will ultimately rest with decisions in the individual states. Even if states implement wise policies and elect to cooperate, overall cost-effectiveness would still almost certainly be less than under an ideal economy-wide carbon price. But any carbon price legislation that could emerge from Congress is unlikely to be ideal – there will be many compromises and handouts.
The proposal is limited to electric generating units. EPA will likely proceed to regulate other sectors in the future, likely starting with oil and gas extraction. As we have stated before, regulation of carbon through this industry-by-industry rulemaking process will be a long and cumbersome process. An economy-wide carbon price would be simpler and would equalize costs across different sectors. But, of course, no such proposal appears politically viable today.
The proposal appears to be directed to achieve a moderate level of stringency–a level consistent with President Obama’s commitment that the US would achieve a 17% reduction in emissions from a 2005 baseline by 2020. It’s unclear whether any carbon price would be more or less stringent.