Renewable Energy Standards: Less Effective, More Costly, but Politically Preferred to Cap-and-Trade?

The new Congress is beginning to consider various alternative energy and climate policies in the wake of last year’s collapse in the U.S. Senate of consideration of a meaningful, economy-wide CO2 cap-and-trade scheme.  Among the options receiving attention are various types of renewable portfolio standards, also known as renewable electricity standards or clean energy standards, depending upon their specific design.  These approaches, which focus exclusively on one sector of the economy, would be less effective than a comprehensive cap-and-trade approach, would be more costly per unit of what is achieved, and yet – ironically – appear to be much more attractive to some politicians who strenuously opposed cap-and-trade.

True enough, these standards can be designed in a variety of ways, some of which are better and some of which are worse.  But the better their design (as a CO2 reducing policy), the closer they come to the much-demonized cap-and-trade approach.

In an op-ed which appeared on November 24th in The Huffington Post (click here for link to the original op-ed), Richard Schmalensee and I reflected on this irony.  Rather than summarize (or expand on) our op-ed, I simply re-produce it below as it was published by The Huffington Post, with some hyperlinks added for interested readers.

For anyone who is not familiar with Dick Schmalensee, please note that he is the Howard W. Johnson Professor of Economics and Management at MIT, where he served as the Dean of the Sloan School of Management from 1998 to 2007.  Also, he served as a Member of the President’s Council of Economic Advisers in the George H. W. Bush administration from 1989 to 1991.  By the way, in a previous blog post, I featured a different op-ed that Dick and I wrote in The Boston Globe in July of last year (“Beware of Scorched-Earth Strategies in Climate Debates”).

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Renewable Irony

by Richard Schmalensee and Robert Stavins

The Huffington Post, November 24, 2010

One day after the election, the White House press secretary Robert Gibbs said that a national renewable electricity standard could be an area of bipartisan energy cooperation, after President Obama had said cap-and-trade was not the only way “to skin the cat.” It is ironic that while cap-and-trade — a sensible approach to reducing carbon dioxide emissions linked with climate change — is dead and buried in the Senate, considerable support has emerged for an approach that would be both less effective and more costly. A national renewable electricity standard would mandate that a given share of an electric company’s production come from renewable sources (most likely wind power), or, in the case of a “clean energy standard,” from an expanded list including nuclear and hydroelectric power.

One irony is that cap-and-trade is a market-based approach to environmental protection, which harnesses the power of the marketplace to reduce costs imposed on business and consumers, an approach championed by Republican presidents beginning with Ronald Reagan. Within its narrow domain, the renewable standard approach, which involves nationwide trading of renewable energy credits, is also market-based. Whereas cap-and-trade would raise the cost of fossil fuel, as its opponents have stressed so effectively, renewable standards would raise the cost of electricity, which its supporters seem reluctant to admit.  If renewables really were cheaper, even with Federal subsidies, it wouldn’t take regulation to get utilities to use them.

A second source of irony is that renewable or clean electricity standards are a very expensive way to reduce carbon dioxide (CO2) emissions — much more expensive than cap-and-trade. These standards would only affect electricity, thereby omitting about 60 percent of U.S. CO2 emissions. And even then, the standards would provide limited incentives to substitute away from coal, the most carbon-intensive way to generate electricity. Even more problematic, renewable/clean electricity standards would provide absolutely no incentives to reduce CO2 emissions from heating buildings, running industrial processes, or transporting people and goods. And unlike cap-and-trade, which would also affect oil consumption, the electricity standards would make no contribution to energy security. Only a very tiny fraction of U.S. oil consumption is used to generate electricity.

Increasing renewable electricity generation is no more than a means to an end for one part of the economy. Cap-and-trade keeps our eyes on the prize: moving the entire economy toward climate-friendly energy generation and use.

Those who believe that renewable electricity standards would create a huge number of green jobs have forgotten the lesson of Detroit: a large domestic market does not guarantee a healthy domestic industry. At the end of 2008, for instance, the U.S. led the world in installed wind generation capacity, but half of new installations that year were accounted for by imports. And a recent Lawrence Berkeley Laboratory study of the impacts of the economic stimulus package incentives for renewable electricity investments estimated that about 40 percent of the (gross) jobs created by new wind-energy investments were outside the United States, where many wind turbines are manufactured.

A sounder approach, for those concerned about green jobs, would focus on the long-term determinants of economic growth, such as technological innovation. That’s where cap-and-trade — which creates broad-based incentives for technology innovation — holds another edge over renewable electricity standards.

It is often argued that if cap-and-trade is dead, enacting renewable or clean electricity standards is better than doing nothing at all about climate change.  While that argument has some merit, since the risks of doing nothing are substantial, there is a real danger that enacting these standards will create the illusion that we have done something serious to address climate change.  Worse yet, it could create a favored set of businesses that will oppose future adoption of more efficient, serious, broad-based policies — like cap-and-trade.

If a national renewable electricity standard is nonetheless inevitable, it should not impose excess costs on businesses or consumers.  It should pre-empt state renewable portfolio standards, since with a national standard in place, states’ programs simply impose extra costs on their citizens without affecting national use of renewables at all. And any national program should allow unlimited banking to encourage early investments. No environmental or economic purpose is served by limiting banking to two years, as current Senate legislation would do.

Carbon cap-and-trade has been killed in the Senate, presumably because of its costs.  Renewable electricity standards or clean energy standards would accomplish considerably less and would impose much higher costs per ton of emissions reduction than cap-and-trade would.  This does not sound like a step forward.

Richard Schmalensee is the Howard W. Johnson Professor of Economics and Management at the Massachusetts Institute of Technology; Robert N. Stavins is the Albert Pratt Professor of Business and Government at the Harvard Kennedy School.

This entry was posted in Climate Change Policy, Energy Economics, Energy Policy, Environmental Economics, Environmental Policy. Bookmark the permalink.

10 Responses to Renewable Energy Standards: Less Effective, More Costly, but Politically Preferred to Cap-and-Trade?

  1. Cap and trade or the government getting into dictating what must do what, is all a disaster— re-arranging deck chairs on the titanic it is! Just look at the current contorted broken tax code or the painful health care reform attempt!
    We must simply tax energy use at the source—when the fuel is first mined. Period. Revenues must be 100% used to build the new grid and more efficient transportation systems. That’s one thing the government has proven it can do well—mega projects (roads, grid, etc).
    As a professor whose product is engineers, I watch with dismay as too many of the brightest head off to make money as deck chair re-arrangers (using their problem solving skills to write code to trade or to manipulate regulations to maximize profit…).
    We need to apply Ockham’s razor to lacerate government bovine growth by-product and just put in place a super ultra simple energy tax (at the source). A similar approach is needed for the US tax code—toss it all out and have a simple straightforward tax where the rate is proportional to the income. No deductions of any kind as that lets the camel’s nose under the tent…. Similar for corporations—It must be simple so I do not need to waste $ on an army of minds to figure out how to best game the system. This will result in net lower rates as the economy grows because our best brains will be focused on truly saving our country and the planet by design.
    Have a nice day (while we still can!)

  2. Walter Frick says:

    Professor Stavins,

    Thank you for your post. While it’s useful to compare an RES/CES to a carbon price, in today’s political environment a carbon price is (at least short term) unlikely.

    In this environment the question largely becomes how CES/RES compares to direct subsidy. From the economist’s perspective, I’d think it would compare quite favorably. If trading is allowed you have some level of efficiency, if only within the electricity sector. And while not technology neutral, it’s more neutral than directly subsidizing certain technologies.

    As you note in your post, “the better their design (as a CO2 reducing policy), the closer they come to the much-demonized cap-and-trade approach.”

    In my estimation – and I must stress this is my personal view only – a well-designed CES or RES may be one of the most economically desirable policies politically available, in the short term at least. Its benefits over direct subsidy seem more relevant in this political climate than its shortcomings relative to a carbon price.

  3. If you have submitted a comment to this or another post at this blog, and your comment has not appeared after 24 hours, it is probably because it went directly into my spam folder. With approximately 100 spam comments arriving per day, I can no longer go through the spam folder to make sure that legitimate comments have not mistakenly been sent there. So, if you have submitted a legitimate comment and it has not appeared after 24 hours, please send me an e-mail to alert me. Thanks.

    Rob Stavins

  4. Tony says:

    All of this in the midst of massive fraud exposed surrounding the very study of man-made climate change? How do you get caught lying about a crisis but still get to go on implementing your supposed solutions?

    We need to improve education, improve America’s ability to innovate, from a grassroots level, up to and including universities and corporate R&D, and face problems with technical solutions, not political “solutions.”

    When you’ve got chest pains who do you call? A doctor. When your engine breaks down, who do you call? A mechanic. So why, when faced with supposed climate change caused by our technology we are not consulting and investing in engineers, inventors, better technology – that will sustain more people at a higher quality of life simultaneously with a lower impact on the environment? Why instead are we handing this responsibility to politicians, bankers, and policy wonks? You surely wouldn’t visit any of them for chest pains or a broken down car.

    Why isn’t this being talked about? For eons mankind has conquered adversity through innovation to our ultimate advantage. Why have we surrendered our destiny now to Malthusians who feel for some reason, now is the time to make compromises between progress, freedom, and prosperity?

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  10. Skippy G says:

    The USA is the only country that would take a valuable food source namely corn turn it into a bio fuel at a loss.

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