Unintended Consequences Built into the American Clean Energy and Security Act of 2009
Like the rest of you, I am spending July 4th reading the 1428 page ACES climate change mitigation Act that was passed by Congress in late 2009. Here are the key files.
Economists love to talk about unintended consequences and I'm starting to spot some in the Act. We know that the exisiting building stock of homes, commercial and industrial real estate consume a lot of electricity. "Building retrofits" is a big part of Section 202 starting on page 348.
In my ideal world, electricty prices for power produced from fossil fuels (i.e coal and natural gas) would rise and this would provide a strong incentive for people living and working in inefficient buildings to call Van Jones to create green jobs to retrofit their buildings.
I could be wrong but it appears to me that the Act hands out pollution permits to the coal fired power producers with the expectation that the power plants will not raise electricity prices for their consumers. But, in this case there is no incentive to "retrofit".
Now, the electric utilities may then announce an incentive plan for the existing housing, industrial, and commercial stock that says; "if you reduce your electricity consumption 20% below your baseline consumption, we will give you a yy% reduction in your bill or a payment of $xx dollars."
Could this "retrofit" incentive actually increase greenhouse gas production in the short run?
As usual, the question is how the baseline is set. Strategic agents may intentionally raise their electricity consumption in the short run (their baseline consumption) to raise the probability that they qualify for the retrofit rebate even if they don't take any real costly actions. To get around this, the utilities should set the baseline as consumption in spring 2009 before decision makers were aware of the program's details.
Whether this is an important example remains an open question, but my point is that it is key to keep an eye on the unintended consequences as we move forward.
Economists love to talk about unintended consequences and I'm starting to spot some in the Act. We know that the exisiting building stock of homes, commercial and industrial real estate consume a lot of electricity. "Building retrofits" is a big part of Section 202 starting on page 348.
In my ideal world, electricty prices for power produced from fossil fuels (i.e coal and natural gas) would rise and this would provide a strong incentive for people living and working in inefficient buildings to call Van Jones to create green jobs to retrofit their buildings.
I could be wrong but it appears to me that the Act hands out pollution permits to the coal fired power producers with the expectation that the power plants will not raise electricity prices for their consumers. But, in this case there is no incentive to "retrofit".
Now, the electric utilities may then announce an incentive plan for the existing housing, industrial, and commercial stock that says; "if you reduce your electricity consumption 20% below your baseline consumption, we will give you a yy% reduction in your bill or a payment of $xx dollars."
Could this "retrofit" incentive actually increase greenhouse gas production in the short run?
As usual, the question is how the baseline is set. Strategic agents may intentionally raise their electricity consumption in the short run (their baseline consumption) to raise the probability that they qualify for the retrofit rebate even if they don't take any real costly actions. To get around this, the utilities should set the baseline as consumption in spring 2009 before decision makers were aware of the program's details.
Whether this is an important example remains an open question, but my point is that it is key to keep an eye on the unintended consequences as we move forward.
posted by Matthew E. Kahn at 9:14 AM
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