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As Congress Tackles Climate, Markets Are The Engine But Policies Set The Direction

Category: Energy & Environment,Finance

States Capitol Close Up with dramatic blue sky, Washington DCGetty

As the 116th Congress nears its debut, efforts by both parties to pursue new climate and energy policies are afoot. Representative-elect Alexandria Ocasio-Cortez (D-NY) has announced plans to develop a “Green New Deal,” Meanwhile, three Democrats and three Republicans have introduced a bipartisan Energy Innovation and Carbon Dividend Act to enact a federal carbon tax.

Considering the Republican-controlled Senate and the Trump Administration’s opposition to aggressive climate policy to date, the chances that either measure will produce signed legislation and a seismic shift in the US energy system are remote. However, the political environment can change dramatically within two years, and these proposals further stoke the debate about whether and how to pursue federal policy to decarbonize the US energy sector.

Let’s get one thing out of the way: the central question is not whether the US and the rest of the world needs to reduce greenhouse gases (GHGs) to mitigate climate change risks. The scientific evidence, backed recently by the Trump Administration’s own climate assessment report, speaks for itself on that front.

But is policy intervention necessary—or can natural energy market forces organically achieve deep decarbonization? Those favoring the second point of view cite the 14 percent reduction in energy sector CO2 emission in the United States since 2005 as evidence that the market acting alone can achieve substantial emissions reductions. After all, they note, this progress occurred during a period without comprehensive federal climate policy.

I am a big believer in the power of markets to power an energy transition, but current market forces alone cannot achieve the types of deep decarbonization levels called for in the United States and elsewhere to arrest the climate problem. Focusing here on US efforts, here are 4 reasons why:

Current emission reduction rates are not large enough.

Emissions have dropped on average 1.2 percent per year since 2005. Continuing at that rate out to 2050,  emissions would drop by another one-third, taking it to 43 percent below 2005 levels. To achieve the 1.5 to 2.0 degree C targets under the Paris Accord, the US contribution to reductions would need to be roughly twice as large. The scale just isn’t there.

Current reductions have been focused almost entirely in one sector – electric power – and there are limits to how much more can be accomplished there on energy prices alone.

Continuing the US emission reduction rates of the the last decade is far from guaranteed under current market conditions. The advent of hydraulic fracturing ushered in a period of abundant and cheap natural gas. Electric power generators switched from coal to natural gas en masse, a move that cuts emissions roughly one-half for each megawatt hour of electricity produced. In 2005, coal accounted for 51 percent of electric power generation and natural gas, 18 percent. Now those numbers are each 31 percent, and emissions have dropped 28 percent.

This fuel-switching has been the dominant source of reductions and has been largely, though not entirely, driven by decentralized energy market forces. With natural gas now the largest source of generation, the scale for further switching of coal to natural gas is diminished. Moreover, if markets push prices of natural gas up to levels seen a decade ago, the switch is not economical. With well-known troubles in opening and operating US nuclear power, the opportunity to shift generation to emissions-free nuclear generation faces major hurdles as well.

The power sector’s reductions have not all been “market-driven”; policies have played a big role.

Twenty-nine states and Washington, D.C. have renewable portfolio standards (RPS) that target the percentage of power generation that must be met by renewable sources. Power producers in ten states currently face a carbon price via cap-and-trade programs, with two more states – New Jersey and Virginia soon to follow. These have all played a role in declining US power sector emissions.

The US Energy Information Administration now estimates that the amount of emission reductions attributable to switching from fossil to non-fossil generation in the power sector equals the reductions attributable to switching fossil generation from coal and oil to natural gas. State RPS and federal tax credits have incentivized the building and operation of wind and solar generation for much of the last decade, with those sources now accounting for 8 percent of total US generation. While the cost of renewables has now come to the point that it can directly compete with fossil generation without subsidies or carbon pricing, early subsidization of renewables and other policy incentives in the US and in Europe have played a large role in kick-starting the scale economies that allowed this to happen.

Looking ahead, electric power can also decarbonize with carbon capture and storage of emissions from fossil generation, now incentivized with a tax credit under Section 45Q of the Internal Revenue Code, passed into law by the current Congress as part of the 2017 budget deal.

Decarbonizing other sectors will likely require extensive electrification of their energy sources.

The general prescription for economy-wide decarbonization is to fully decarbonize the power sector and electrify the other sectors to run on zero-carbon electricity. This would require a massive capital transformation that is unlikely to happen on its own or in a timely manner without enabling policies.

For example, transportation is now this country’s largest source of GHG emissions, with a dominant incumbent technology (the internal combustion engine) that until recently has had few decarbonization options. Electric vehicles now account for about 1.2 percent of all new car sales in the US. While growing rapidly, electric vehicles still pose adoption hurdles of charging infrastructure and affordability, challenges that will require policy inducements for the time being. Electrification of residential and commercial buildings and industrial processes is technically feasible, but has its own adoption hurdles of cost and performance that will require policies to overcome.

What does all this mean?

If deep decarbonization is to happen in the United States, market-driven, profit-seeking behavior will provide the basic mechanism. Natural market incentives can and have moved the needle in this direction. To give just two examples, consider the substitution of natural gas for coal in power generation and investment in cost-saving energy efficiency measures.

But there are limits to the scale and permanence of those incentives.  Natural gas is a lower-emitting fuel than coal, but it still emits GHGs. Moreover, what unchained markets can deliver in the form of fuel substitution, they can also take away. Markets have also delivered energy systems in industrial, commercial and residential sectors of the economy that depend heavily on fossil fuels rather than on electricity. Sparking the changes in technology and preferences to electrify those sectors is quite unlikely without policies aimed at achieving that outcome. If the long-term goal is energy decarbonization, market incentives must be intentionally aligned that way by policy, preferably through a direct tax or other price on GHG emissions, perhaps complemented by performance standards that place an implicit price on GHGs and incentivize lower carbon alternatives.

This, of course, is not a new debate. In 2003, Senators John McCain and Joseph Lieberman tried and failed to advance a federal cap-and-trade bill, a market-based approach to limit greenhouse gases (GHGs). In 2009, the Waxman-Markey cap-and-trade bill narrowly passed the House, but stalled in the Senate. More recently, the Obama Administration issued the Clean Power Plan to reduce GHGs from power plants, an effort that was initially stalled by the courts and then rescinded by the Trump Administration when it took office. These and other legislative efforts provide a point of departure for the 116th Congress. The question remains whether there is bipartisan support to depart.

[I thank my Duke University Energy Initiative colleagues Sarah Rispin Sedlak, Will Niver, and Braden Welborn for their input on this article.]

 

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States Capitol Close Up with dramatic blue sky, Washington DCGetty

As the 116th Congress nears its debut, efforts by both parties to pursue new climate and energy policies are afoot. Representative-elect Alexandria Ocasio-Cortez (D-NY) has announced plans to develop a “Green New Deal,” Meanwhile, three Democrats and three Republicans have introduced a bipartisan Energy Innovation and Carbon Dividend Act to enact a federal carbon tax.

Considering the Republican-controlled Senate and the Trump Administration’s opposition to aggressive climate policy to date, the chances that either measure will produce signed legislation and a seismic shift in the US energy system are remote. However, the political environment can change dramatically within two years, and these proposals further stoke the debate about whether and how to pursue federal policy to decarbonize the US energy sector.

Let’s get one thing out of the way: the central question is not whether the US and the rest of the world needs to reduce greenhouse gases (GHGs) to mitigate climate change risks. The scientific evidence, backed recently by the Trump Administration’s own climate assessment report, speaks for itself on that front.

But is policy intervention necessary—or can natural energy market forces organically achieve deep decarbonization? Those favoring the second point of view cite the 14 percent reduction in energy sector CO2 emission in the United States since 2005 as evidence that the market acting alone can achieve substantial emissions reductions. After all, they note, this progress occurred during a period without comprehensive federal climate policy.

I am a big believer in the power of markets to power an energy transition, but current market forces alone cannot achieve the types of deep decarbonization levels called for in the United States and elsewhere to arrest the climate problem. Focusing here on US efforts, here are 4 reasons why:

Current emission reduction rates are not large enough.

Emissions have dropped on average 1.2 percent per year since 2005. Continuing at that rate out to 2050,  emissions would drop by another one-third, taking it to 43 percent below 2005 levels. To achieve the 1.5 to 2.0 degree C targets under the Paris Accord, the US contribution to reductions would need to be roughly twice as large. The scale just isn’t there.

Current reductions have been focused almost entirely in one sector – electric power – and there are limits to how much more can be accomplished there on energy prices alone.

Continuing the US emission reduction rates of the the last decade is far from guaranteed under current market conditions. The advent of hydraulic fracturing ushered in a period of abundant and cheap natural gas. Electric power generators switched from coal to natural gas en masse, a move that cuts emissions roughly one-half for each megawatt hour of electricity produced. In 2005, coal accounted for 51 percent of electric power generation and natural gas, 18 percent. Now those numbers are each 31 percent, and emissions have dropped 28 percent.

This fuel-switching has been the dominant source of reductions and has been largely, though not entirely, driven by decentralized energy market forces. With natural gas now the largest source of generation, the scale for further switching of coal to natural gas is diminished. Moreover, if markets push prices of natural gas up to levels seen a decade ago, the switch is not economical. With well-known troubles in opening and operating US nuclear power, the opportunity to shift generation to emissions-free nuclear generation faces major hurdles as well.

The power sector’s reductions have not all been “market-driven”; policies have played a big role.

Twenty-nine states and Washington, D.C. have renewable portfolio standards (RPS) that target the percentage of power generation that must be met by renewable sources. Power producers in ten states currently face a carbon price via cap-and-trade programs, with two more states – New Jersey and Virginia soon to follow. These have all played a role in declining US power sector emissions.

The US Energy Information Administration now estimates that the amount of emission reductions attributable to switching from fossil to non-fossil generation in the power sector equals the reductions attributable to switching fossil generation from coal and oil to natural gas. State RPS and federal tax credits have incentivized the building and operation of wind and solar generation for much of the last decade, with those sources now accounting for 8 percent of total US generation. While the cost of renewables has now come to the point that it can directly compete with fossil generation without subsidies or carbon pricing, early subsidization of renewables and other policy incentives in the US and in Europe have played a large role in kick-starting the scale economies that allowed this to happen.

Looking ahead, electric power can also decarbonize with carbon capture and storage of emissions from fossil generation, now incentivized with a tax credit under Section 45Q of the Internal Revenue Code, passed into law by the current Congress as part of the 2017 budget deal.

Decarbonizing other sectors will likely require extensive electrification of their energy sources.

The general prescription for economy-wide decarbonization is to fully decarbonize the power sector and electrify the other sectors to run on zero-carbon electricity. This would require a massive capital transformation that is unlikely to happen on its own or in a timely manner without enabling policies.

For example, transportation is now this country’s largest source of GHG emissions, with a dominant incumbent technology (the internal combustion engine) that until recently has had few decarbonization options. Electric vehicles now account for about 1.2 percent of all new car sales in the US. While growing rapidly, electric vehicles still pose adoption hurdles of charging infrastructure and affordability, challenges that will require policy inducements for the time being. Electrification of residential and commercial buildings and industrial processes is technically feasible, but has its own adoption hurdles of cost and performance that will require policies to overcome.

What does all this mean?

If deep decarbonization is to happen in the United States, market-driven, profit-seeking behavior will provide the basic mechanism. Natural market incentives can and have moved the needle in this direction. To give just two examples, consider the substitution of natural gas for coal in power generation and investment in cost-saving energy efficiency measures.

But there are limits to the scale and permanence of those incentives.  Natural gas is a lower-emitting fuel than coal, but it still emits GHGs. Moreover, what unchained markets can deliver in the form of fuel substitution, they can also take away. Markets have also delivered energy systems in industrial, commercial and residential sectors of the economy that depend heavily on fossil fuels rather than on electricity. Sparking the changes in technology and preferences to electrify those sectors is quite unlikely without policies aimed at achieving that outcome. If the long-term goal is energy decarbonization, market incentives must be intentionally aligned that way by policy, preferably through a direct tax or other price on GHG emissions, perhaps complemented by performance standards that place an implicit price on GHGs and incentivize lower carbon alternatives.

This, of course, is not a new debate. In 2003, Senators John McCain and Joseph Lieberman tried and failed to advance a federal cap-and-trade bill, a market-based approach to limit greenhouse gases (GHGs). In 2009, the Waxman-Markey cap-and-trade bill narrowly passed the House, but stalled in the Senate. More recently, the Obama Administration issued the Clean Power Plan to reduce GHGs from power plants, an effort that was initially stalled by the courts and then rescinded by the Trump Administration when it took office. These and other legislative efforts provide a point of departure for the 116th Congress. The question remains whether there is bipartisan support to depart.

[I thank my Duke University Energy Initiative colleagues Sarah Rispin Sedlak, Will Niver, and Braden Welborn for their input on this article.]

 


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