This post authored by Rachel Fakhry, Schneider Fellow, NRDC.
Even though the Trump Administration is expected to move to rescind the Clean Power Plan—the nation’s first standards for cutting harmful climate pollution from power plants—that won’t make climate change go away. Our country must still fulfill its obligations to address dangerous changes in the climate, to meet our international climate commitments and to protect all Americans, and future generations, from harm. States can work to develop solutions, and a strong, well-designed mass-based carbon reduction program is one way to meet these obligations.
In fact, mass-based carbon reduction programs that set a maximum number of tons of carbon dioxide that may be emitted by covered power plants are proven, successful and cost-effective ways to cut the key source of pollution driving climate change. In its latest issue brief, NRDC argues that states should consider these programs because they can provide them with opportunities to reduce electricity bills for households and businesses, while delivering measurable economic and environmental benefits that can boost the economy and public health.
In recent years, mass-based pollution reduction programs have been implemented in various forms across the U.S. Examples of such programs include the U.S. EPA’s Acid Rain Program to reduce sulfur dioxide pollution, California’s AB 32 program, an economy-wide effort targeting carbon dioxide emissions, and the Regional Greenhouse Gas Initiative (RGGI), a program in nine northeastern and mid-Atlantic states to limit carbon dioxide emissions from the power sector. A mass-based approach is also one of the ways in which power plants can choose to implement the EPA’s Clean Power Plan.
Mass-based carbon emissions trading programs require dirty generators to pay for the pollution they produce. Today, NRDC shows how coupling mass-based carbon emissions trading programs with strong energy efficiency and renewable energy investments, as well as policies that support allowance revenue reinvestment, can offset rising prices and ensure electricity bills stay low while delivering a string of economic and environmental benefits.
For more details and illustrations of how allowance trading programs work and impact wholesale power prices, please refer to the issue brief.
Energy efficiency is the cornerstone of keeping bills lows
Proven to be the cheapest energy resource, energy efficiency is a great asset in reducing the cost of a mass-based carbon reduction program.
First, by reducing energy consumption, energy efficiency directly reduces customer electricity bills. Electricity bills are a function of the price of electricity and the amount of electricity the customer uses, and investments in efficient appliances, efficient lighting, and building efficiency retrofits can significantly reduce electricity use while providing the same amount of electric output.
Second, maximizing investments in energy efficiency lowers wholesale electricity prices. By lowering demand, energy efficiency reduces the need to run costlier and less efficient plants, thereby decreasing wholesale prices for all customers. (For an illustration of this dynamic, please refer to Figure 3.)
Finally, energy efficiency reduces carbon allowance prices in a mass-based carbon reduction program by dampening demand for electricity generation. Generators will thus require fewer allowances, which will reduce total demand for allowances and lower allowance prices. This, in turn, will decrease wholesale prices, costs for generators, and customer electricity bills.
In addition, energy efficiency investments produce an array of economic benefits. Energy efficiency creates a sizeable number of jobs and helps maintain grid reliability. Additionally, energy efficiency can reduce the need for more transmission infrastructure. This can help reduce a utility’s cost of service and enable it to redirect that deferred capital into other investments for customers’ benefit.
Renewable energy can lower wholesale power prices
Renewable energy investments can offset wholesale power price increases that could result from a mass-based carbon emissions trading program.
First, renewable energy technologies, including solar and wind energy, have very low operating costs because they do not consume fuel in order to generate electricity. In fact, numerous studies focusing on regions as diverse as Ohio, Texas, and California have shown that clean energy investments tend to lower wholesale electricity prices. The minimal operating costs enable solar and wind projects to bid very low in the wholesale power market, edging out costlier and dirtier plants and thereby lowering wholesale prices for the benefit of all customers. (Please refer to Figure 4.)
At the same time, solar and wind technologies can reduce total electricity production costs (fuel and O&M) across the market, as they displace fossil fuel plants that have high production costs. These savings can outweigh the higher upfront capital investments of renewables, reducing power prices and delivering lasting bill savings.
There are also a number of economic benefits associated with renewable energy. Per unit (MW) of capacity, renewable energy generation (and energy efficiency) creates more jobs than fossil generation. The U.S. Department of Energy recently estimated that, out of the electrical generation workforce, the U.S. solar industry alone employed more people in 2016 than the coal, gas and oil industries combined. Similarly, DOE's most recent tally counts twice the number of employees in the wind energy sector than AWEA tracked in 2013.
Adding more renewable energy carries large public health and environmental benefits in addition to facilitating compliance with mass-based carbon reduction programs. Renewable energy delivers large public health and environmental benefits, cutting hazardous air pollution and reducing reliance on natural gas.
Harnessing allowance revenues benefits customers
Under a mass-based carbon reduction trading program, states can sell allowances through an auction to generators or provide allowances to generators at no cost, thereby subsidizing polluters (among other distribution options). Conducting an allowance auction could generate billions of dollars in revenue that could be invested to help keep electricity bills low. States have demonstrated success benefiting households and businesses by reinvesting the proceeds from allowance auctions in electricity bill assistance rebates, energy efficiency, and renewable energy.
RGGI is a prime example. States were able to reinvest nearly $2 billion over the program’s first six years in programs that support energy efficiency, community renewable projects and electricity bill assistance for low-income households. This generated an estimated $2.9 billion in net economic benefit to the region between 2009 and 2014.
Similarly, under California’s AB32, allowance auction revenues finance sustainable transportation, affordable housing, energy efficiency, and more. By reinvesting allowance revenues and offering electricity bill rebates, AB32 is expected to financially benefit low-income households in the state to the tune of an estimated $215 to $246 cumulatively from 2016 through 2020.
Mass-based carbon emissions reduction programs offer states opportunities to cut harmful pollution, while keeping electricity bills low for households and businesses. Coupling such programs with complementary policies that support energy efficiency, renewable energy and allowance revenue reinvestment will enable states to enjoy cleaner air, low electricity bills and a long list of economic benefits.