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".


Mattyoung said...

The best engine efficiency we have right now is to take the highest energy carbon fuel and run combustion engines at fixed speed.

So, if we are interested in getting the most transportation from the smallest engine CO2 foot print, except for capital costs, we have the solution.

What we are really interested in, however, is getting the most goods transportation from the smallest CO2 foot print totally. Personal transportation footprints have the greatest elasticity to CO2 footprint costs. I am not certain that engine limitations are the problem here.

Neil said...

My understanding of the electric generation industry is that natural gas is used only to take up the slack at peak periods of electricity demand. Coal fired plants cannot easily adapt their capacity and run at a certain base level. When demand exceeds this base level, natural gas is used because gas turbines can be quickly turned on and put to use. Given that solar and wind energy cannot be easily "ramped up", won't they fill the same function in meeting base demand as coal? Will natural gas really be replaced by renewable energy rather than coal as the NY times columnist suggests????

Carlos Ferreira said...

I agree that pricing mechanisms will be more efficient that efficiency standards, of course. Putting price on carbon reduces the opportunity cost of the next alternative, which has a higher marginal cost, allowing the substitution of inputs.