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Are renewable energy mandates bad for the economy . . . AND the environment

January 23, 2014

That is the analysis of the Belfer Center’s Robert Stavins, who argues that the combination of a carbon emissions cap and a renewable energy mandate are perversely counterproductive and will raise energy costs while at the same time having no impact on the amount carbon released.

Here is Stavin’s basic  argument:

  • Under the umbrella of the EU ETS, the cap will be achieved cost-effectively (at minimum aggregate cost) if the cap is binding, which it surely will be with the new 2030 targets.  (Cost effectiveness is achieved because the CO2 cap-and-trade mechanism – like a carbon tax – provides incentives for all sources to control at the same marginal abatement cost.)
  • A “complementary policy” under the cap, such as a renewables target, will either be irrelevant (if it is not binding) or, if it is binding, any additional emissions reductions achieved in the electricity sector under the complementary measure (the renewables program) will cause electricity generators to have additional allowances they do not need.  And they will not tear up those allowances, but will sell them to other sources, such as those in other sectors.  Hence, emissions in those other sectors will be greater than they otherwise would have been, completely neutralizing the emissions-reduction impact of the renewables policy.
  • So, in the presence of the over-arching EU ETS, the renewables target has no incremental impact on CO2 emissions.  On net, the emissions reduction due to the renewables policy is zero.  But the bad news does not stop there.
  • With more emissions reductions in the electricity sector and less in other sectors than under the cost-effective allocation of control achieved by the cap-and-trade system on its own, aggregate abatement costs are actually increased.  Marginal abatement costs are no longer equated, and the allocation of control responsibility is no longer cost-effective.  There is too much abatement in the electricity sector, and not enough in some other sector or sectors.  Costs are driven up.
  • Hence, nothing is being accomplished in terms of CO2 emissions with the renewables policy, and costs have been driven up!  Wait, there is more.
  • If some emissions reductions are being achieved by the binding renewables policy, then there is less demand overall for tradable allowances.  Since the supply of allowances has not changed, this means that allowance prices are inevitably suppressed; and low allowance prices mean less induced climate-friendly technological change over time.

Stavins calls the result “a perverse trifecta”:  No emissions reduction, increased costs, and a stagnation of innovation.

Read the whole post, including the many thoughtful points – both for and against the argument – in the comments.  Also see Michael Levi’s response at CFR.

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