Saturday, January 24, 2009

"Green" Energy Regulation Mandates and their Consequences

In the quest to reduce greenhouse gas emissions, states such as California are passing regulations encouraging the adoption of Renewable Portfolio Standards (RPS) and low carbon fuel standards. Intuitively, the RPS will require electric utilities to produce more of their electricity using renewable resources such as wind and solar. Will this shift in the portfolio away from "dirty" coal and natural gas (the traditional sources of fuel) lower greenhouse gas emissions per unit of power? This New York Times Editorial argues that the marginal effect of these costly RPS regulations will be to decrease natural gas use by electric utilities. Natural gas is expensive and relatively clean, so this author argues that the RPS standard will only have a small net effect on reducing California's average carbon dioxide emissions per unit of electricity generated. He argues that a perverse consequence of focusing on the RPS standard is to reduce investment in new technologies to capture CO2 from coal. He doesn't say whether his company has a stake in this technology but he correctly points out that a cap and trade system (rather than a RPS mandate) would encourage this technology. Such a carbon capture technology would have worldwide benefits because we expect that China will continue to produce power using coal fired plants.

The Low Carbon Fuel Standard is a similar "portfolio" regulation. This gasoline regulation requires that the average fuel used by vehicles have lower carbon content. This paper argues that such regulation is an implicit subsidy for fuels that contain carbon but that are cleaner than the average fuel. So, if people drive more using such "clean dirty" fuels, then this regulation may actually increase carbon emissions from transportation.

As economists point out these "foreseen" ex-ante consequences of well meaning regulations, will the policy makers listen to us and adjust the regulations? Or will they ignore our forecasts and allow the future to play out so that future economists in the year 2030 can write ex-post papers for the JPE and the Journal of Law and Economics on the "unintended consequences of regulation x , y and z".