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.
US-China Emissions Agreement
The United States and China have reached an agreement to jointly reduce emissions, with the United States increasing the stringency of its current targets and China promising to cap emissions by 2030. The deal has been touted as “a real shot of momentum for international climate negotiations,” which will take place in Paris late next year.
In an article for the Huffington Post, RFF President Phil Sharp comments that the United States and China “have much to learn from each other” about building and maintaining their environmental policies. He writes: “China and America are in far different places, but the desire for prosperity by both requires continual attention to the intersection of the economy and the environment.” However, RFF Visiting Fellow Nathan Richardson cautions that “The US-China agreement doesn’t’ offer much, if anything new.”
Natural Gas Potential
A Nigerian oil and gas venture is pushing to increase funding for construction of compressed natural gas (CNG) stations across the country in order to “take full advantage of the global CNG market.” The group cited a report co-authored by researchers at Resources for the Future and the National Energy Policy Institute in their assessment that “expanding the use of natural gas trucks is ‘the most effective and cost-effective policy option available to decrease reliance on petroleum.’”
The report, Toward a New National Energy Policy: Assessing the Options, also examines the welfare costs of transportation policies supporting the replacement of diesel in heavy trucks with liquefied natural gas (LNG). The authors note that “only a limited number of refueling stations would be required” for heavy-duty vehicles as compared to light-duty vehicles, and that fueling heavy trucks with LNG rather than compressed gas gives them “acceptable long-haul ranges of 350 miles on one tank.”
Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy.
How Clean Energy Works for the Military
[Cache Valley Daily] As America honors its veterans Tuesday, a new report concludes the military in Utah, and across the U.S., is leading the nation in the use of clean energy and energy efficiency. The study, titled How Clean Energy Works for the Military, was published by the nonprofit and nonpartisan organization Environmental Entrepreneurs. Bob Keefe, executive director at Environmental Entrepreneurs, says the military is quickly moving away from fossil fuels. – via Environmental Entrepreneurs
CO2 Emissions from Fuel Combustion 2014
In recognition of fundamental changes in the way governments approach energy-related environmental issues, the IEA has prepared this publication on CO2 emissions from fuel combustion. This annual publication was first published in 1997 and has become an essential tool for analysts and policy makers in many international fora such as the Conference of the Parties. The twentieth session of the Conference of the Parties to the Climate Change Convention (COP 20), in conjunction with the tenth meeting of the Parties to the Kyoto Protocol (CMP 10), will be meeting in Lima, Peru from 1 to 12 December 2014. – via International Energy Agency
A lot has been written about the new climate agreement between the US and China made at the APEC summit this week. Almost all of it is very positive, framing the agreement as a major policy breakthrough with big impacts on both international climate negotiations and on the climate change problem itself. I confess I’m much more skeptical. I don’t think the agreement signals much change from the status quo.
Criticism of the agreement has focused mostly on the Chinese side, claiming that China could or should do more to cut emissions. In the agreement, China promised not that it would reduce its emissions, but that its emissions would “peak” in 2030, or perhaps before. It’s possible that this would have happened anyway. The agreement clearly envisions continued rapid increase in Chinese emissions – in fact, it gives China an incentive to increase its emissions in two ways. First, by setting a time limit on fossil fuel expansion, it’s in China’s interest to complete emitting projects sooner, increasing emissions in the short term. Second, it’s in China’s interest to make its agreed emissions peak as high as possible. Fossil-fueled economic growth before 2030 gets more or less locked in, and once China starts cutting emissions after 2030, the higher its peak the more tons it has to bargain away. Future negotiations that include China as a developed country with emissions-cutting responsibilities might limit the impact of these perverse incentives, but the agreement does not.
Moreover, as Tyler Cowen points out China’s ability to make (and commit to) emissions cuts is limited – as in the US – by domestic factors. China is currently struggling to reduce its conventional air pollution (chiefly particulates). Coal, the worst offender in both climate and conventional pollution terms, makes up two thirds of China’s power mix (far greater than the US’ 20% or the world average of 30%). If controlling local air pollution is not sufficient to reduce the country’s dependence on coal, despite widespread public anger, then it’s hard to be optimistic that a climate agreement could change Chinese internal priorities and/or abilities.
In June, the US Environmental Protection Agency (EPA) announced a proposed rule for reducing carbon dioxide emissions from existing power plants. Using its authority under the Clean Air Act, EPA set state-specific targets for emissions rates reductions (Figure 1). However, many questioned how this proposed plan would impact actual emissions from the electricity sector and how these reductions could be achieved.
In new analysis, RFF’s Anthony Paul and Sophie Pan estimated actual carbon dioxide emissions reductions by converting the proposed targets from emissions rates to tons of emissions (Figure 2). EPA gives states the option to convert their rate targets into mass (tons) targets, and their choices will be consequential. If a state adopts a rate target, the amount of carbon emitted will depend on how much electricity is produced. Power generation would increase with brisk economic growth or an influx of electric vehicles, and corresponding emissions would increase even while still complying with the rate target. A mass-based target would ensure a consistent emissions outcome, but states and utilities would have to find ways to reduce emissions more if power generation increases.
EPA also selected four “building blocks” as the “best system of emissions reduction” for states to meet their targets (Figure 2). But which building blocks will survive legal challenge? Figure 2 shows possible futures for emissions reductions if any of the building blocks fall. If just building block #1 survives, only the emissions reductions represented in light blue in Figure 2 will be made, and EPA will lose the opportunity to make meaningful reductions in emissions across the sector.
This is the eighth 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.
EPA’s proposed Clean Power Plan sets carbon emissions targets for each state, denoted in pounds of carbon dioxide per megawatt-hour of electricity, but does not explicitly mention a carbon tax as an option for states to achieve their targets. Some argue that a carbon tax represents a simple and effective way to reduce emissions. A state that wishes to use a carbon tax to comply with the Clean Power Plan would likely have to convince EPA that this approach would allow the state to achieve its emissions target. Should EPA allow states to use a carbon tax to comply with the Clean Power Plan and, if so, how could a state demonstrate the associated carbon emissions reductions?
“We believe EPA should revise its proposal to be consistent with a state carbon tax as a primary means of achieving the emissions guidelines. . . . Just as for other compliance strategies, a state can demonstrate through economic modeling that its carbon tax program is likely to achieve the emissions standard set by EPA.”
—Michael Wara, Associate Professor and Justin M. Roach, Jr. Faculty Scholar, Stanford Law School (See full response.)
—Adele Morris, Fellow and Policy Director for the Climate and Energy Economics Project, The Brookings Institution (See full response.)
“EPA should allow states to achieve their carbon intensity targets through an upstream cap-and-permit system . . . [such a system] is preferable to a carbon tax or fee without an upstream cap—even if the fee is accompanied by dividends—because it sets the quantity of carbon that can be burned rather than the price.”
—Peter Barnes, Entrepreneur and Author of With Liberty and Dividends For All (See full response.)
“EPA’s Clean Power Plan allows cap and trade as a compliance option, so it is natural to allow carbon taxes as well. … However, EPA needs to be careful about how that option is implemented.”
—Roberton Williams III, Senior Fellow and Director of Academic Programs, Resources for the Future (See full response.)
Climate Change Opinions
Members of Congress have offered a wide range of responses to the Intergovernmental Panel on Climate Change’s Fifth Assessment Synthesis Report, demonstrating the partisan divide over climate change. Senator James Inhofe (R-OK) released a statement that the climate report would “cripple the global economy,” and Representative Eliot Engel (D-NY) emphasized that “irreversible problems” could result if the report’s findings were ignored.
While Democrats and Republicans may be divided in Congress, a new Resources article reveals that the American public largely supports taking action to mitigate climate change. RFF University Fellow Jon Krosnick of Stanford writes: “Our surveys suggest that Americans have been overwhelmingly ‘green’ on climate change issues for many years, despite a barrage of natural disasters, media events, and campaign speeches that one might have imagined would impact such opinions.
Clean Power Plan Impacts
Members of the North American Electric Reliability Corporation (NERC), the utility-funded nonprofit regulator for US electricity distribution, say that the proposed timeline for the US Environmental Protection Agency’s Clean Power Plan “does not provide enough time to develop sufficient resources” to ensure the reliability of the electricity grid by the plan’s 2020 deadline. A report released by NERC suggests delaying the Clean Power Plan’s initial deadline to allow more grids to adopt “reliability enhancements.”
In an installment of RFF’s Expert Forum on the Clean Power Plan, RFF’s Dallas Burtraw comments on the ability of existing natural gas combined cycle units to increase their average capacity in order to meet the electricity demands of US grids as coal usage declines. Burtraw notes that increasing capacity to a 70 percent average—part of the Clean Power Plan’s building blocks— “could be more costly than what is revealed by recent trends for newer plants,” depending on where plants are located in the electricity system.