On Monday, December 1st, the Twentieth Conference of the Parties (COP-20) of the United Nations Framework Convention on Climate Change (UNFCCC) commences in Lima, Peru. Over the next two weeks, delegations from 195 countries will discuss and debate the next major international climate agreement, which – under the auspices of the Durban Platform for Enhanced Action – is to be finalized and signed one year from now at COP-21 in Paris, France.
What to Expect in Lima
Because of the promise made in the Durban Platform to include all parties (countries) under a common legal framework, this is a significant departure from the past two decades of international climate policy, which – since the 1995 Berlin Mandate and the 1997 Kyoto Protocol – have featured coverage of only a small subset of countries, namely the so-called Annex I countries (more or less the industrialized nations, as of twenty years ago).
The expanded geographic scope of the incipient Paris agreement – combined with its emerging architecture in the form of a pragmatic hybrid of bottom-up nationally determined contributions (NDCs) plus top-down elements for monitoring, reporting, verification, and comparison of contributions – represents the greatest promise in many years of a future international climate agreement that is truly meaningful.
A Diplomatic Breakthrough: The Key Role of the China-USA Announcement
If that confluence of policy developments offers the promise, then it is fair to say that the recent joint announcement of national targets by China and the United States (under the future Paris agreement) represents the beginning of the realization of that promise. From the 14% of global CO2 emissions covered by nations participating (a subset of the Annex I countries) in the Kyoto Protocol’s current commitment period, the future Paris agreement with the announced China and USA NDCs covers more than 40% of global CO2 emissions. With Europe, already on board, the total amounts to more than 50% of emissions.
It will not be long before the other industrialized countries announce their own contributions – some quite possibly in Lima over the next two weeks. More importantly, the pressure is now on the other large, emerging economies – India, Brazil, Korea, South Africa, Mexico, and Indonesia – to step up. Some (Brazil, Korea, Mexico?) may well announce their contributions in Lima, but all countries are due to announce their NDCs by the end of the first quarter of 2015.
The announced China-USA quantitative contributions are themselves significant. For China, capping its emissions by 2030 (at the latest) plus increasing its non-fossil energy generation to 20% by the same year will require very aggressive measures, according to a recent MIT analysis. For the USA, cutting its emissions by 26-28% below the 2005 level by 2025 means doubling the pace of cuts under the country’s previous international commitment.
The world economy has seen a 40 percent drop in oil prices since mid-June, partly because of a recent Saudi Arabia decision to not cut oil production in the face of global oversupply. This price drop, should it last more than a few months, raises the issue: Will low prices end or seriously diminish the revolution in oil production in the U.S. created by hydraulic fracturing and other related technologies?
In the short term, data from the U.S. Energy Information Administration (EIA) show that the U.S. industry is weathering the price drop well so far. The EIA’S weekly oil production report shows that U.S. crude oil output actually increased from last week over the weeks before to its highest level ever: over 9 million barrels per day. Comparing financial statistics EIA gathered on 30 publicly traded companies operating in tight oil areas for the 3rd quarter of 2013 to those of the third quarter 2014 shows that net income is way up, debt increases are much smaller and return on equity rose from about 7 percent to about 23 percent. They are also protecting themselves from falling oil prices by hedging. Nevertheless, what are termed asset impairments rose, which means that companies are writing down the value of the reserves because of lower oil prices.
While these statistics present a fairly rosy picture, not included in the EIA survey are the smaller, privately held companies, whose finances may be less able to withstand low oil prices for very long. The result may be industry consolidation, a good thing for the environment if you believe that the larger, publicly traded companies are better stewards.
If prices hover in the $60-70 per barrel range for some time more, will the pain eventually be felt in the oil patch? The relationship between the marginal costs of extracting a barrel of oil and the oil price is key. There is large variation in well productivity. Even in the most favorable locations. Thus, the industry says that some wells in the Bakken shale formation in North Dakota, for instance, start to become uneconomic at $70 per barrel, with significant numbers uneconomic at $60. The current price is $71, up from $66 a few days ago.
One thing is clear: exploiting tight oil deposits requires a lot of churning, tight oil wells decline in productivity much faster than conventional wells, which means there is a continuous need for financing, drilling rigs, and gathering lines, not to mention railroad cars to transport Bakken oil. If prices don’t rise soon, this churning will stop. The major companies, in particular, will be quick to exit when expected rates of return fall below those of other investments. While localized and even state level economic disruptions will follow, some slow down might have a silver lining for the environment (beyond the slowdown itself), if it allows time for improvements in regulations in places like North Dakota.
But in the longer term, higher oil prices are likely, primarily because of increased population and oil demand in growing developing countries and the limited ability of major supplying countries like Russia and Saudi Arabia to withstand the cut in their revenues. To help supply this growing demand, as we have said in previous blogs, it makes economic sense for the U.S. crude oil export ban to be lifted.
By Richard Newell and Juha Siikamäki.
To minimize costs, consumers looking to purchase a new appliance should give equal weight to the purchase price and the discounted operating cost over the appliance lifetime—that is, they should be willing to pay $1 in increased purchase cost for each dollar of reduced lifetime operating cost of the appliance. But many experts argue that in reality, consumers undervalue energy savings. This results in the classic energy efficiency gap—consumers are reluctant to adopt energy efficiency investments that could save them money down the road.
One possible reason is that understanding the operating cost can be a challenge that involves calculating the daily kilowatt-hour consumption rates of appliances to estimate annual costs and energy consumption per year. To streamline this process, appliance manufacturers are required to provide information about the operating costs of major household appliances through labeling programs, such as EnergyGuide. But do these labels actually encourage energy efficient purchases? And what label features most effectively encourage investment in energy efficiency?
In an experimental study to examine these questions, we evaluated the effectiveness of different energy efficiency labels in guiding households’ energy efficiency decisions. We surveyed 1,248 households and used randomized treatments with alternative energy efficiency labels to see how the label and the information it contains affects households’ willingness to pay for energy efficiency. The labels in Figure 1 on page 16 represent an illustrative subset of the labeling treatments used in the experiment. We sampled respondents who are the owners of single-family homes and asked them to make choices about purchasing a central household water heater.
We found that providing simple information on the cost of operating the appliance was the most important element for encouraging investments in energy efficiency. Information on physical energy use and carbon dioxide (CO2) emissions has additional but lesser importance. And labels that endorse or grade appliance models have a substantial impact on encouraging choices with higher energy efficiency, potentially even beyond what makes economic sense.
Energy Efficiency Labels
The current EnergyGuide label (Figure 1, Label D) provides the baseline for most of the treatments we administered. Our experimental approach involves evaluating both the information content and the style of representing the information on the label. We evaluated the use of economic information, physical information on energy use and CO2 emissions, a letter grade indicating efficiency rank, the Energy Star logo, as well as the inclusion or exclusion of the range of energy costs of other, similar appliance options in the market. To evaluate the effectiveness of these attributes, we fielded multiple treatments, which either included or excluded the above information content, to enable us to empirically identify the effect of a specific piece of information.
If you’re a fan of crime fiction with a dash of humor, you might have read some of Carl Hiaasen’s books—Skinny Dip, Nature Girl, Paradise Screwed, to name three. If so, you’ve probably noticed Hiaasen’s love of nature, specifically the wild and woolly swamps and back woods of south Florida. In early November, Hiaasen wrote an impassioned plea to Floridians in the Miami Herald to vote yes on Amendment 1 in the November 4 elections. Amendment 1, The Florida Water and Land Conservation Initiative, was to establish a constitutional amendment that would dedicate 33 percent of revenues from an existing document stamp tax to the Land Acquisition Trust Fund, which acquires land and conservation easements for parks, trails, wildlife habitat, historic sites, wetlands, and more. Hiaasen’s opinion piece must have worked: the Amendment passed resoundingly, with 75 percent of the vote. Only 11 other states have constitutional amendments like this and many are for funds that are quite small. The new initiative in Florida really is noteworthy.
Florida already had the most aggressive land conservation program in the country. Its Florida Forever program, created in 2001, authorized spending of $300 million per year on land acquisitions and conservation easements. Together with the precursor program, Preservation 2000, which operated from 1990-2000 and had similar levels of funding, Florida Forever has protected over 2.5 million acres of land. These spending and acreage totals dwarf the numbers in other states, and 29 percent of Florida’s land area is now protected, a percentage significantly above other states. I’m guessing these facts might come as a surprise to many people who think only of Florida’s densely developed coastal areas and high population growth rate. The purpose of the new constitutional amendment is to restore funding to the program, which in recent years had been diverted to other uses. Passage of the amendment might also come as a surprise, but the track record on conservation ballot initiatives suggests this is no anomaly: between 1988 and 2014, according to the Trust for Public Land’s LandVote database, voters across the country have passed 75 percent of the conservation funding initiatives that have been placed on ballots.
What next then for Florida? Read More
In an excerpt from his remarks at an RFF Policy Leadership Forum, Chris Crane, president and CEO of Exelon, shares his thoughts on how the electricity industry is responding to major changes in how energy is produced, delivered, and consumed.
On the Natural Gas Boom
The advent of shale gas, as we all know, has been a game changer. Having plentiful, cheap gas is great for the economy and for industry.
That said, it’s caused all of us in the industry to reexamine our investments. Shale gas and renewables have decreased the margins of conventional fuel profits. They have made many coal plants and some nuclear plants less economically viable—to the extent that if we were to build a new generation facility right now, we would build natural gas. The problem is, as an industry, we’re all going to the same fuel source again. So fuel diversity is an important consideration for maintaining competitiveness—one that the independent grid operators should keep in mind as they design their capacity markets.
Take, for example, this past winter, when we saw a noticeable shift from oil to natural gas for heating homes. We had to move more generation to natural gas to meet demand during a very cold period. Home heating became the top priority. If you disrupt gas to a large population, just the time to relight the pilot lights could have a significant effect. This winter our transmission was constrained, and there were natural gas plants—including some of our own—that failed to meet demand. As a result, there was a dependency on some of the old coal units that are about to retire to be able to meet the load during that period.
By contrast, if we load the core of a nuclear plant and fuel it to run 18–24 months, it does not matter what the weather is like outside—that plant runs, so it’s highly reliable. It can support the needs of the grid in stress periods. I think the market design must compensate assets for their capability around that. If a natural gas plant has a dual-fuel mix with oil storage to meet those peak capacity needs, it should have a compensation mechanism.
On Renewables and Distributed Energy
Exelon has a small distributed generation business. It is a customer-facing product that we offer to our larger industrial customers who receive gas and electricity now, but if they want solar panels, we will install them. We also are doing a deep evaluation of fuel cells, as we look at potentially expanding our business line. For example, I have spent time at the Toshiba research facility in Yokohama, Japan, learning more about how its engineers are perfecting the manufacturing and efficiency of fuel cells for the residential level. Researchers at Bloom Energy in San Jose, California, are doing fantastic work on their industrial-scale solid oxide fuel cells, which are much larger. So technology is advancing, but we need to design a system that is reliable and fair to all consumers.
Exelon is piloting a microgrid with the Illinois Institute of Technology in Chicago, and the focus of the project is on reliability. If the grid goes down, the hospitals, the University of Chicago, a very important police command center, and other critical infrastructure would isolate from the grid, and the distributed generation would pick up and run. That’s a neat concept. It’s all about reliability and security. There is a defense mechanism in there, but at the end of the day, that customer base still needs to be attached to a larger grid to provide economic-scaled generation.
On Subsidies and Customer Choice
People should have choice, but it should be understood that we cannot continue to subsidize everything. When customers want to have a microgrid, that should be facilitated for them within the regulatory framework and the utility’s suite of products that they offer. Consumers can then decide from there.
Likewise, if you put a solar panel on your roof, that is your choice. If you have excess power and want to sell that power back to the grid, that’s fantastic for the grid, but what has to happen to enable that? The design of the local distribution system has to handle the voltage fluctuations. Every customer has a specific service capacity. If a family has a 200-amp service entrance on their house, that utility distribution system needs to be designed to provide them 200 amps at any instantaneous moment they want. Just because they install a solar panel does not mean they are disconnecting from the grid. There’s a dependency, but there should be an enabling on the grid to allow for solar, and the consumer should be compensated at the wholesale price of energy.
Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.
Using Recent Land Use Changes to Validate Land Use Change Models
[Executive Summary] Economics models used by California, the Environmental Protection Agency,and the EU Commission all predict significant emissions from conversion of land from forest and pasture to cropland in response to increased biofuel production. The models attribute all supply response not captured by increased crop yields to land use conversion on the extensive margin. – via Iowa State Univ., Center for Agricultural and Rural Development / by Bruce A. Babcock and Zabid Iqbal
Efficiently Energizing Job Creation in Los Angeles
[Abstract] This report seeks to estimate the magnitude of job-creation benefits for 18 energy efficiency programs administered by the Los Angeles Department of Water and Power (LADWP) in 2014. The study finds the job-creation benefits for these programs are large in both absolute and relative terms, especially when compared to other energy sector investments. Not only are these programs local job creators, but they are also benefiting a diverse set of LADWP customers in energy and economic savings. – via UCLA Luskin School of Public Affairs / by J.R. DeShazo, Alex Turek, Michael Samulon
This is the ninth in a series of questions that highlights RFF’s Expert Forum on EPA’s Clean Power Plan. Readers are invited to submit their own comments to the questions and/or the responses using the “Leave a Comment” box below. See all of the questions to date here.
Under EPA’s Clean Power Plan, states will need to make long-term planning decisions even though significant uncertainties exist about the costs of complying with the rule. Could an alternative compliance payment (ACP), which might allow an electricity producer to pay an emissions charge in lieu of complying with a particular policy, aid in planning and allow states to better manage electricity prices and electricity system reliability? How might an ACP be designed and implemented so that its use ensures compliance with the Clean Power Plan?
“Scholarly research suggests that an alternative payment mechanism linked to investment can be designed to meet and exceed environmental goals and produce more rapid investment in innovative technologies, and improve environmental outcomes at lower cost . . . the approach could yield similar investment outcomes in the context of the Clean Power Plan.” See full response.
—Dallas Burtraw, Darius Gaskins Senior Fellow, Resources for the Future
—Karen Palmer, Research Director and Senior Fellow, Resources for the Future
“Yes! … EPA could facilitate this approach by including in the final rule a carbon price that, if imposed by a state on its generators during the compliance period, would satisfy EPA that the state would achieve sufficient reductions during that period.” See full response.
—Kathleen Barrón, Senior Vice President of Federal Regulatory Affairs and Wholesale Market Policy, Exelon Corporation
“EPA should confirm the availability of the ACP option. Consistent with previous ACP applications, EPA also should confirm that the near-term price for a building block 1 ACP should reflect the upper bound of EPA’s anticipated building block 1 cost (e.g., $6 to $12 per ton of greenhouse gas emissions reduction) because the ACP would serve as an alternative to building block 1–related reductions.” See full response.
—Robert A. Wyman, Jr., Partner, Latham & Watkins LLP
The rebound effect from improving energy efficiency has been widely discussed—from the pages of the New York Times and New Yorker to the halls of policy and to a voluminous academic literature. It’s been known for over a century and, on the surface, is simple to understand. Buy a more fuel-efficient car, drive more. Invent a more efficient bulb, use more light. If efficiency improves, the price of energy services will drop, inducing increased demand for those services. Consumers will respond, producers will respond, and markets will re-equilibrate. All of these responses can lead to reductions in the energy savings expected from improved energy efficiency. And so some question the overall value of energy efficiency, by arguing that it will only lead to more energy use—a case often called “backfire.”
In a new RFF discussion paper, “The Rebound Effect and Energy Efficiency Policy,” we review the literature on the rebound effect, classify the different types, and highlight the need for careful distinction between causal links—which are indeed worthy of the “rebound” label—and mere correlations, which are not. We find, in fact, that measures to improve efficiency, despite potential rebound effects—are likely to improve welfare, generally. Read More
That centerpiece is the cap-and-trade Emissions Trading System (ETS), under which companies buy and sell carbon reduction credits. The cause of the problems plaguing the European market is the presence of a two-gigaton surplus of emissions allowances. The oversupply is the result of a number of factors, including the economic downturn, the influence of carbon taxes and other complementary policies in several member states, an influx of certified reduction credits from international offsets, the banking of allowance leftovers, and the early auctioning of next phase allowances.
The surplus has created a problematic decline in the price of emissions allowances, which dropped as low as €2.81 in April 2013. Through the fall of 2013, prices hovered near €5, recovering somewhat to near €7 in early 2014. While low prices are generally good news, these are an order of magnitude lower than the estimated €32 to €63 needed to motivate investments necessary to achieve the European Union’s emissions reduction target.
If this situation looks familiar to some market followers, it’s because almost every previous cap-and-trade program has overestimated the costs faced by firms, causing initially high prices to fall.
What can be done? Solutions often suggested include revising emissions targets or retiring allowances. But these options would introduce new information and change the balance of supply and demand in the market, creating uncertainty for investors eyeing future price trends. For that reason, while initially intuitively appealing, they tend to fall from favor.
Another option exists to save the European climate emissions reduction market, and I believe it deserves more attention: the adoption of a price floor.
A price floor easily could be enforced by introducing a minimum price in allowance auctions. When a market’s price dips below the price floor, a portion of allowances is held back from being sold; this restricts supply and supports healthier, more stable market prices. That is part of the reason that a price floor is generally considered an important feature of good auction design. In fact, as my son pointed out to me, this is the same mechanism that one sees on eBay, where a seller can introduce a minimum price for bids that will be considered.
Detractors of the price floor idea have mischaracterized it as a tax, but it is certainly not a tax. A large portion of emissions allowances in the EU trading system are still given away for free, and they would not be affected. In fact, recipients of those allowances would benefit from the price support for the value of the allowances as an asset in the market.
In the debates surrounding a lifting of the oil export ban, what is sometimes missed is that exceptions—some big, some small—to permit exports have been made for decades. President Reagan issued a finding in 1985 that exports to Canada for consumption in Canada would be in the national interest and such exports began to be allowed. He made an additional finding in 1988 that additional exports of crude oil from Alaska were in the national interest and they too were allowed. President G.H.W. Bush in 1992 issued a similar finding for exports of some heavy crude oil from California, which the Clinton Administration implemented in 1995. Beginning in 1988 those findings and their resulting exceptions to the ban on exports were when US net oil imports were greater than today and anxiety about permitting exports would have been correspondingly greater.
Economic analyses by researchers at RFF and elsewhere earlier this year found that gasoline prices are likely to fall if exports are allowed. Our paper showed that gasoline prices fall because the light crude currently being inefficiently refined in the United States could then be more efficiently refined abroad, raising oil supplies and lowering oil prices a tiny bit, and lowering US gasoline prices directly, as well.
Given these results and historical precedent, we can envision a step-by-step approach to removing the export ban. Such an approach builds in the possibility of a mid-course correction should the first step produce unexpected results. The first step would be to allow crude oil exports to Mexico and the European Union, the latter having imported 30 percent of its crude oil from Russia in 2013. This step would thus lead to an increase in domestic activity and jobs, and, as in the finding of President Clinton in 1996 in supporting exports of Alaskan North Slope crude oil: “Permitting this oil to move freely in international commerce will contribute to economic growth, and create new jobs for American workers, It will not adversely affect oil supplies or gasoline prices on the West Coast, in Hawaii, or in the rest of the nation”. A second step would be to permit such exports to Latin America and the major importers of Japan and South Korea with whom the United States has major security interests.
In lieu of such steps, the United States could continue granting exceptions for condensate exports and take other approaches to chipping away at the ban. In our view it would be more transparent and justifiable to lift the ban itself over time, assuming there are no surprises.