An Evaluation of the Cost-Effectiveness of Carbon Reducing Policies Related to Electric Utilities in the United States
CitationEarls, Kelly S. 2019. An Evaluation of the Cost-Effectiveness of Carbon Reducing Policies Related to Electric Utilities in the United States. Master's thesis, Harvard Extension School.
AbstractThis paper examines different types of carbon-reducing policies implemented by legislation or administrative laws or rules, and attempts to assess which policies have been the most effective in consideration with costs in all fifty states in the United States. This is imperative as this paper attempts to address a policy need to determine what carbon reducing policies should be implemented moving forward.
The primary hypothesis being examined is – what carbon-reducing policies in the electric industry have been most effective at reducing carbon dioxide (CO2) emissions, and therefore should be implemented moving forward? With a secondary hypothesis that asks whether a price on carbon is the best indicator of carbon dioxide emission reduction in the electric market? The policies explored are:
1. Implementing a price on carbon, either via a carbon tax or a cap-and-trade system: several American and global economists have determined that a carbon tax will be the most effective way to reduce CO2 emissions. However, while many countries have adopted a carbon tax, currently no U.S. state has implemented a carbon tax. A review of the literature provided insight on the potential success of a statewide or national legislation, yet, as no such tax has yet been implemented in the United States, a calculation of its effectiveness was not included in the overall analysis for is paper. However, a cap-and-trade system, (as applied to electric utilities) is very similar to a carbon tax, where there is a mandate on emission limits on output. A cap-and-trade system can be done nationally by having the EPA or state agency place a legal limit on the amount of CO2 a utility can emit per a certain amount of energy output, such as per megawatt (MW). In regards to the trade system on a cap-and-trade, sources emitting below the limit could potentially trade the increment of permitted emissions, essentially creating a carbon market. In the United States, nine states in the Northeast participate in the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade program established in 2009 California is the only state in the west that actively participates in a cap-and-trade system, and began operating a cap-and-trade program in 2013.
2. Energy efficiency and demand-side management measures: both energy efficiency (EE) and demand-side management are measures aimed at reducing the utility’s load and ultimate consumption of energy. Nearly all states participate in some form of these measures, but only half have EE mandated goals.
3. Renewable portfolio standards and incentives: a renewable portfolio standard (RPS) is a mandate that a utility purchase or produce a certain percentage of its energy requirements from renewable generation. Nearly half of the states have RPS, and 3/5ths have some form of renewable energy requirement.
Overall, an evaluation of all fifty states’ CO2 emissions from electricity between the years 2007-2016 was performed. The evaluation examined the trend of each state in reducing CO2 emissions from 2007-2016 from electric generation. The evaluation also reviewed the cost of electricity in each state from 2007-2016 to determine how the cost of electricity coincided with the trend in CO2 emissions. Every state utility regulatory commission was contacted to determine what information was publicly available. With all of the information gathered an assumption was made that the rising cost of electricity would correlate directly with the states that saw reductions in emissions, as generally the political deterrent to impose more stringent policies is the argument that policies will dramatically inflate the cost of electricity.
However, the data was showing that it was not as correlated as perhaps many would assume. Therefore, to determine the correlation, a covariance matrix was calculated to summarize the linear relationship between the percentage in the change in electric prices and the percentage of CO2 reduction over the same time period. A correlation analysis was also performed, specifically the Pearson Correlation Coefficient to test for linear relationships between the data, i.e. the correlation of the change in CO2 and the change in electric price. This revealed a correlation of 0.37, a slight positive correlation, meaning that there is some correlation with reductions in CO2 emissions and a rise in electric prices, but it is not very strong.
After determining the correlation, the percentage of change in electricity prices as a number was added to the percentage reduction in CO2, and multiplied by the correlation to create an Index of the Relative Efficiency (IRE). The IRE is a new way to determine the benefit arrived in implementing the CO2 reduction policies congruently with the overall cost of electricity. The states were then ranked based on the number that was derived, with the lowest numbers representing the greatest benefit achieved when compared with overall change in electric price.
After these numbers were logged and calculated, the IRE was reviewed in comparison to the CO2 reduction policies that were implemented in each state. Not surprisingly, the states with the most carbon dioxide reductions over the last ten years have energy efficiency targets and state mandated renewable requirements. However, most notably, the top six states at reducing carbon dioxide emissions all participate in a carbon market. Conversely, of the six states with the lowest IRE, none participated in a carbon market, none had mandated targets related to energy efficiency, and only one, South Dakota, had a renewable requirement.
The most substantial and surprising take-away from the research is that over the course of ten years from 2007 to 2016, the states with the biggest reductions in CO2 emissions, did not see an overall large increase in the price of electricity over those same ten years. In fact the top six states that saw the biggest reduction in CO2 emissions saw on average only a 6.68% increase in electric prices over the ten year period, less than the national average increase of 27.69%. More surprising, the six worst states at reducing CO2 emissions saw on average a 51.16% increase in the overall price of electricity.
Lastly, a spreadsheet analysis for decision making was performed, to determine which policies state and federal regulatory agencies should consider, independent of what future policies the EPA enacts. This evaluation concluded that CO2 reduction legislation works, and having a price on carbon is likely the best policy factor in reducing CO2. In addition, the research shows that CO2 reduction policies are not heavily correlated to the concern of rising electric prices, indeed some electric companies’ integrated resource plans show that there are projected values and reduced costs in switching away from fossil fuels to renewables; further, other CO2 reduction policies, such as energy efficiency has yielded net gains overall to the average electric consumer. Therefore, policy makers should not have the overarching concern that overall electric prices are negatively impacted by carbon dioxide reduction policies, and therefore cost should not be considered a deterrent by legislators in implementing more stringent CO2 reducing policies.
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