A Clean Energy Bargain; Containing Costs by Investing in Energy Efficiency, Renewables and then High-Quality Offsets

NRDC released the results of its year-long economic analysis of clean energy and climate protection legislation today. A summary of our main findings can be found here but I'd like to highlight some specific findings on the role of offsets.

Because we were concerned with the impacts of the House-passed American Clean Energy and Security Act (ACES) on the U.S. economy, a major goal of our analysis was to provide insights into how the U.S. can achieve its energy and climate protection objectives at the lowest cost. Naturally, the availability of offsets, and their affordability, was one of several key factors that affected the total costs of the program. Our modeling reflected the 2 billion ton annual limit on the use of offsets found in ACES, split evenly between domestic and international offsets, with the ability to raise the limit on international offsets should there be insufficient domestic supply. From 2017 onwards, we also included the 5:4 discount ACES applies to international offsets, so that for 4 tons of emissions, capped entities must submit 5 international offset credits. 

Using NEMS-NRDC, the first of two well-known energy models, we attempted to approximate what will happen under ACES, given real-world market imperfections. By comparing these results with those from MARKAL, a model that uses perfect foresight to choose the "ideal" -- i.e. least cost-outcome for the entire economy in the long-run, we were able to learn valuable policy lessons.

With regard to offsets, this comparison tells us something important about containing costs in general and the importance of environmental safeguards if we rely on offsets as a major source of abatement.

While domestic and international offsets serve as a major cost containment mechanism in NEMS-NRDC and account for 50% of economy-wide abatement in 2030, MARKAL uses much fewer offsets and still manages to keep allowance prices low.

MARKAL uses its foresight and invests more heavily and more quickly in energy efficiency and clean tech because many of these investments actually turn out to be cheaper than offsets in the early years -- for example, many energy efficiency investments have a negative cost over the long term once fuel cost savings are taken into account. As a result, the largest source of abatement in 2030 comes from a shift in the electric power sector away from dirty fuels towards a mix of clean energy sources.  Less reliance on offsets reduces attendant concerns about their environmental integrity -- and therefore our ability to achieve our environmental objectives-and means we send less money abroad, investing instead in our domestic economy.

The implications are twofold:

First, the single most important thing the U.S. can do to minimize the long-term costs of meeting our emissions reduction targets is to begin our transition from a fossil-fueled economy to a clean, energy-efficient economy as soon as possible. To do so, we need strong complementary policies that accelerate deployment of efficiency and renewables and immediately begin transforming key sectors such as power and transportation. Together with a cap on greenhouse gas emissions, these policies will ensure that we meet our climate protection and energy independence objectives at the lowest cost, delivering jobs, security and a healthier environment.

Second, given that NRDC-NEMS, without the advantage of perfect foresight, provides a closer reflection of reality, it is likely that a sizeable chunk of abatement will indeed come from offsets. As a result, it is critical that we set rigorous quality standards for the offsets market and make certain offsets regulations are enforced to ensure the environmental integrity of the entire program.

For more detailed assumptions and results, see our presentation.