Be Honest About the Cost of Renewable-Fuel Standards

(Bloomberg Opinion) -- If you are concerned about climate change, you are likely enthusiastic about renewable fuels, such as solar and wind, and about laws that require their use. For example, the Green New Deal calls for “meeting 100 percent of the power demand in the United States through clean, renewable, and zero-emission energy sources.”

Unfortunately, new research shows that renewable-fuel mandates are an unusually expensive way to reduce greenhouse-gas emissions. The expense comes in the form of increased electricity prices, which are a particular problem for low-income consumers.

A strong majority of states now have “renewable portfolio standards,” which require that a specified percentage of the electricity supply must come from renewables. In California, the 2030 target is 60 percent. In New York, it is 50 percent.

Some states have lower targets, but even so the standards are expected to produce significant increases in the use of renewable energy — and to move states in the direction of becoming carbon-free.

To evaluate renewable-portfolio standards, it is essential to answer two critical questions. First, how much do they do to reduce greenhouse-gas emissions? Second, how much do they cost?

To some people, it is tempting not to worry much about the second question, on the assumption that any costs will be borne by some abstraction called “companies.” But that’s unrealistic. Costs are often passed on to consumers. High costs might also reduce employment.

Michael Greenstone and Ishan Nath of the University of Chicago have done the first careful study of the actual effects of renewable-portfolio standards, focused on the two critical questions. They study outcomes in the 29 states that have adopted the standards, comparing them with states that did not. Taking advantage of the different timing in the adoption of the standards, and with some technical analysis, Greenstone and Nath are able to control for confounding variables and to isolate the actual effects of renewable-portfolio standards.

The good news is that such standards really work. The environmental benefits are large. Over their first seven years, such standards produced large cuts in carbon emissions — perhaps as much as 659 million metric tons.

At the same time, the standards turn out to be quite expensive. In their first seven years, they increased average electricity prices by about 11 percent in the 29 adopting states. (The residential sector experienced the largest increase.) In those years, the cumulative costs were about $125 billion.

Is that cost worthwhile? The authors estimate that over their first seven years, the cost of RPS policies, per ton of carbon dioxide abated, is $130 at a minimum. (The evidence leaves a fair bit of uncertainty, and the actual figure may be as high as $460.)

By way of comparison, the Barack Obama administration adopted a “social cost of carbon” of about $50 per ton (in 2019 dollars), and it used that figure to decide on the stringency of regulatory requirements. The $130 figure is also a lot higher than the price of permits to emit a ton of carbon dioxide in the world’s cap-and-trade markets. In California, for example, the current figure is around $15, and in the European Union, it’s about $25.

The upshot is that RPS programs aren’t cost-effective. Per dollar spent, they produce relatively modest reductions in carbon emissions. That’s a big problem. Getting the biggest bang for the buck is obviously good on economic grounds. It’s also good from the environmental standpoint: If you can get emissions reductions cheaply, you’re going to get more emissions reductions.

Does this mean that renewable-portfolio standards are a bad idea? Not necessarily.

According to some estimates, the social cost of carbon is a lot higher than $50 — perhaps in excess of $200. If that is right, the $130 figure starts to look a lot better. In addition, renewable-portfolio standards reduce a wide range of air pollutants, not just carbon dioxide.

Greenstone and Nash add that renewable-portfolio standards might promote innovation, ultimately producing significant decreases in prices. If so, a lack of cost-effectiveness, in the relatively short term, should not be decisive.

It remains true that as a matter of policy, the argument for a carbon tax remains compelling, not least because it allows the market to identify the cheapest mechanism for producing emissions reductions. (Nobel Prize winner William Nordhaus offers a good explanation.) So why are renewable-portfolio standards so much more popular?

The simplest answer is the best: Renewable-fuels requirements seem to be a way to take business away from the bad guys and to give it to the good guys. Their costs are not visible. People may well pay more for electricity, but they don’t see why.

Even with the recent findings, reasonable people might conclude that if carbon taxes aren’t feasible, renewable-fuels portfolios are better than nothing. But Greenstone and Nash offer a crucial lesson: To know what to do about climate change or any other environmental problem, it’s best to be disciplined about the actual consequences, rather than to think about good guys and bad guys.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Cass R. Sunstein is a Bloomberg Opinion columnist. He is the author of “The Cost-Benefit Revolution” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”

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