The welfare cost and greenhouse gas emissions effects of sector-specific energy policies
At present climate and energy policy in the US consists of a patchwork of technology and performance standards implemented in different economic sectors and at different levels of government, rather than a more efficient economy-wide carbon tax or cap-and-trade policy. This is evidenced by policies such as state-level Renewable Portfolio Standards (RPSs), national Renewable Fuel Standard (RFS), and the recently finalized EPA rule for power plants: the Clean Power Plan (CPP). These sector-specific policies when implemented jointly can interact with each other in ways that are synergistic or competitive and affect the mix of renewable energy, fossil fuels and prices in the electricity, transportation and agricultural sectors. The purpose of this research is to examine the effect of these overlapping policies on greenhouse gas reduction and welfare costs for the electricity, transportation, and agricultural sectors relative to levels that would have been achieved by each of these policies individually. Joint implementation of the RFS and the RPSs can increase the cost of bio-electricity and biofuels by competing for biomass and shift the mix and spatial pattern of production of renewable fuels used for compliance; on the other hand, renewable electricity generated as a co-product of the cellulosic ethanol refining process could lower the cost of complying with the RPSs but not add significantly to the greenhouse gas reductions achieved by the RPS. Similarly, implementing the CPP and the RPSs together could result in more renewable and low carbon electricity and greenhouse gas reduction than with either policy alone but at higher welfare costs than with either policy alone or with a cross-sector carbon tax. This research seeks to disentangle the complex and multi-sectoral spillover effects of these policies by developing an integrated, dynamic, open economy model of the US electricity, transportation and agricultural sectors. It contributes to the literature that has focused on analyzing these policies in isolation and using single sector models. In the first paper I quantify the effects of concurrent implementation of the RFS and RPSs on the spatial pattern of biomass prices and production, the level and price of bio-electricity, and carbon intensity of electricity over the 2007-2030 time period. I find that spatial pattern of bio-electricity is changed by implementation of the RFS, where it is used less intensively in RPS states and no longer used is some non-RPS states, though the carbon intensity of biomass feedstock is decreased. In the second paper I examine the welfare and greenhouse gas (GHG) emission effects of the state level RPSs and the RFS both individually and when implemented jointly, in order to quantify the policy interactions and spillovers. I also compare the effects of the jointly implemented RFS and RPS to an economy-wide carbon tax that achieves equivalent GHG emissions reductions to measure the welfare cost. I find that the RFS & RPSs jointly implemented cause spillovers that increase welfare cost of the two policies by 7 billion dollars relative to the sum of what each attains independently; and that their welfare cost relative to a GHG-equivalent carbon tax is 109 billion dollars. I also find that a national RPS could achieve an equivalent share of renewables to the state-level RPSs at a 62 billion dollars lower welfare cost for the electricity, transportation and agricultural sectors combined. In the third paper I shift focus to the CPP in order to consider how the welfare cost and its distribution changes based on whether the state-level targets are implemented as rate-based or mass-based standards and how they compare to a hypothetical national emissions cap that achieves equivalent emissions reductions. I find that a mass-based CPP is a more efficient in achieving GHG reductions than a rate-based CPP, but also leads to larger electricity price increases. A national electricity sector emission cap with permit trading, which would achieve the same economic outcome as a carbon tax, could achieve equivalent GHG reductions at 57 billion dollars or 36 billion dollars lower cost than the state-level rate-based or mass-based standards, respectively. The state-level RPSs are not obviated by the implementation of either a rate-based or mass-based CPP as they still lead to greater levels of electricity generation from renewable sources and lower cumulative GHG emissions. The RPSs, which also lead to a lower average consumer electricity price, reduce the magnitude of the electricity price increase found from the CPP. These results suggest that implementing energy policy with a sector-specific or region-specific approach can results in significantly higher welfare cost and reduced effectiveness of policies that should be considered in decision making.
Renewable Portfolio Standard, Clean Power Plan, Welfare cost, Greenhouse gas emissions, Price-endogenous sector model, Dynamic optimization, Spatial analysis, Bioenergy
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign