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Cap-and-Trade by Any Other Name …

Tuesday, January 4, 2011

Renewing the threat: those in Congress smart enough to reject cap-and-trade should be smart enough to reject it again, even if it is couched in different language.

Now that cap-and-trade (emission trading to reduce greenhouse gas emissions) is more or less off the table, our politicians are starting to talk about something else—or, at least, something that looks like something else.

There are various names for this alternative scheme, from renewable energy portfolio standards to clean energy standards to green energy standards. All of them basically involve the same thing: the government mandates that a certain percentage of electricity that utilities obtain must come from something other than fossil fuels (wind power, solar power, biofuels, etc.). The New York Times reports that President Obama wants 10 percent of the nation’s electricity to come from renewable sources by 2012, and 25 percent by 2025.

Currently, 30 states have some form of renewable standard, while an additional seven states have renewable energy “goals.” The talk of the day is about implementing a federal renewable energy standard of some sort.

Senator Lindsey Graham (R-South Carolina) has expressed interest in the idea recently, hoping to use the scheme to get some leverage over the Environmental Protection Agency. As reported in The Hill, ”Graham told reporters that he wants to link the idea with proposals that would prevent the Environmental Protection Agency from ‘overly’ regulating several air pollutants—including carbon.” Senator Jeff Bingaman (D-New Mexico) is also big on renewable standards. His office told Reuters, “The renewable electricity standard has been around for many Congresses. We’ll certainly revisit it.” Senator Lisa Murkowski (R-Alaska), meanwhile, told The Hill that “I am kind of excited to be looking to how we can move towards a clean energy standard. Let’s figure out how we can facilitate more in the nuclear field, how we can really focus on these clean energy sources which ultimately do reduce our greenhouse gas emissions.”

Will the incoming Congress understand that a federal renewable energy standard would essentially impose cap-and-trade on utilities, hidden behind a different name?

The question is: Will the incoming Congress, with a more conservative tilt, understand that a federal renewable energy standard would essentially impose cap-and-trade on utilities, hidden behind a different name? Because that is essentially what it does.

Here’s how it works. To comply with the mandated standards, utilities have to submit “renewable energy credits” to the government, showing that they have met their mandate for using a certain percentage of renewable energy. One REC, as they are called, represents one megawatt-hour of electricity that was generated using eligible sources such as wind or solar power. And those RECs, according to the redoubtable Wikipedia, can be “sold and traded or bartered, and the owner of the REC can claim to have purchased renewable energy.” Note that word traded.

So, the government sets a cap on the amount of fossil fuel energy that can be used, and makes utilities purchase renewable energy credits, passing the cost onto consumers. By steadily ratcheting up the clean energy standards, the government essentially tightens the cap on fossil fuel energy, and utilities have to pay more and more for expensive renewables. In other words, the price of anti-carbon permits goes steadily up over time.

At least one environmental group is honest about this. The Union of Concerned Scientists describes renewable energy credit trading thus:

A common mechanism for complying with the renewable electricity standard is a renewable energy credit (REC) trading program. Under a REC program, a renewable energy facility earns one credit for every kilowatt-hour (kWh) or megawatt-hour (MWh) of electricity that is generated in a given year. These RECs can then be bought and sold by utilities with annual renewable requirements—much like the Clean Air Act emission allowance trading system. This market-based approach provides compliance flexibility while ensuring competition among renewable energy generators and creates an ongoing incentive to drive down costs.

In other words, cap-and-trade, through the back door.

And, just like cap-and-trade, renewable energy standards won’t be cheap. The Heritage Foundation estimates that “if Congress implemented a 22.5 percent RES by 2025, household electricity prices would jump 36 percent and industry prices by 60 percent by 2035. There would be 1 million fewer people working on average with the RES in effect than if there were no RES. And as the mandated level of renewable use rises over time, so do the losses imposed on the economy. Summing up the impacts for 2012–2035 yields a total loss of $5.2 trillion in GDP.”

A national renewable portfolio standard inevitably would engender a wealth transfer among states.

A key factor in prediction of ever-higher costs from a renewable energy standard is the constraint on the substitution of “renewable” power in place of conventional electricity. There are limited suitable sites for wind, solar, or other generation capacity; and the ease of placing (or utilizing) transmission assets from those sites is also a cost often overlooked in proposals for renewable portfolio standard (RPS) requirements. Because appropriate sites are not distributed evenly on a geographic basis, states with relatively fewer available sites would have to purchase RECs from other states. Accordingly, a national RPS inevitably would engender a wealth transfer among states. This should not be surprising, as politics to a significant degree is the art of wealth redistribution. Nor, as the “easy” sites are consumed, will it be surprising to find that the marginal cost of finding and using “appropriate” sites rises. This means that even if the cost of renewable technologies falls, due to achievement of scale economies, technological advances, or other factors (for which little evidence offers grounds for optimism), the overall cost of actually delivering renewable power may not fall at all.

One can only hope that those in Congress who were smart enough to reject cap-and-trade will be smart enough to reject it again, even if it is couched in different language, and only covers electrical utilities. After all, with everyone talking about moving transportation over to electricity (like electric cars), do we really want to increase the cost of electricity, and put more of it at the risk of intermittent sources such as wind and solar power?

Kenneth P. Green is a resident scholar at the American Enterprise Institute.

FURTHER READING: Green also discusses “Moderate Republicans and the Rachet Effect,” “The National Academy of Blacklists” in science, and “Who Should ‘Go First’ on Greenhouse Gas Control?” He outlines “Empowering the Free Energy Markets,” says of energy, “Subsidies? Just Say No,” and considers “Our Energy Society.”

Image by Darren Wamboldt/Bergman Group.

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