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How More Transparent Electricity Pricing Can Help Increase Clean Energy

By: Beia Spiller and Kristina Mohlin

The price of most goods we purchase is CostPriceImagegenerally based on the costs associated with the goods' production, including the raw materials used to generate them, the labor associated with their manufacturing, and so on. However, when it comes to pricing residential electricity, many regulators choose to use a flat price per unit of electricity (kilowatt-hours, or kWh) that unfortunately fails to adequately reflect the underlying costs of generating and delivering energy to our homes.

This creates incorrect incentives for conservation and investments in distributed energy resources (like rooftop solar, energy storage, and demand response). Getting these incentives right can go a long way in creating more opportunity for efficiency and clean energy resources.

Pricing electricity generation

The cost of generating electricity from large-scale power plants varies significantly over the course of a day. When demand is low, electricity providers call upon the most efficient and inexpensive power plants to produce electricity. As demand increases, they must also utilize more inefficient and expensive power plants. So, for the price of generation to accurately reflect these costs, it too must vary with the time of day. Time-variant pricing charges customers more for using electricity during periods of high demand (such as during hot afternoons) and less when demand is not as great. This pricing system is an accurate reflection of generation costs.

In contrast, flat rates that don’t vary over time incentivize customers to consume more electricity when it’s most valuable to them, even though consuming during times of high demand places a larger cost on the system. Thus, the current, static pricing system creates incorrect incentives for conservation and electricity use. Read More »

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When it comes to developing natural gas – not all impacts are created equal

Over the past decade, Pennsylvania has seen a huge increase in natural gas production due to technology advancements. Horizontal drilling combined with hydraulic fracturing, the process of cracking rock open deep underground to release the gas trapped inside, has made Pennsylvania the nation’s second largest natural gas producer. While a thriving natural gas industry is a boon for the state’s economy, well-documented accounts of air and water pollution have been associated with its development.

But do the benefits and risks of natural gas production impact Pennsylvania’s communities equally? In particular, while the broad economic benefits (more jobs, cheaper gas prices, etc…) may accrue to all members in the community, the local environmental impacts may only affect those living in close proximity to a shale gas well.

A recent paper published this month in the American Economic Review examines the impact of increased drilling activity on the property values of homes located in close proximity to a well, and in particular, estimates whether this impact differs for homes dependent on groundwater for drinking compared to those with publicly supplied water. To determine how property values for these different types of homes may be affected, EDF, working with economists from the University of Calgary and Duke University, utilized transaction level data across the state to conduct comparisons in three different dimensions simultaneously:

  • properties very near a well to those further away;
  • properties dependent on groundwater for drinking to those with access to piped water;
  • and properties sold prior to a shale gas well being drilled with those sold after the well was drilled.

Furthermore, to account for the fact that many groundwater-dependent properties may be located further away from urban centers, the data were restricted to homes located near the piped water boundary. This helps eliminate differences in neighborhood characteristics that could affect both the price of the home and its proximity to a shale gas well.

The analysis determined that property values are impacted by proximity to a shale gas well, though results differ depending on the property’s drinking water source. Those with piped water can economically benefit from being very near a well (a value increase of 3 percent for properties within 1.5km of a well), potentially due to royalties and bonuses companies pay to develop on a homeowners land. However, the property values of homes that are dependent on groundwater and located within 1.5km of a shale gas well declined by an average of 13 percent. Importantly, the impact on both types fades with distance; showing that both the benefits (increased royalty payments) and costs (increased groundwater contamination risk) of proximity diminish as one moves further from shale gas development.

This analysis does not draw information from observed air or water contamination. Instead, the data reflects public perception and brings to focus two important observations.

The first is that oil and gas communities are becoming more aware of the environmental risks posed by development. Managing these risks is critically important, as nearly 10 million Americans live within one mile of a hydraulically-fractured oil or gas well.  Smart policies that improve operations and create more opportunities for public transparency are necessary to ensuring communities in close proximity to drilling feel adequately protected from the inherent risks of oil and gas development.

But the study also highlights another key issue – the economic and environmental consequences of oil and gas development (both positive and negative) do not impact communities evenly. There is a clear detriment to some populations – as there often is with any industrial activity.  And rigorous, economic and scientific analyses are important tools for helping policy leaders understand these discrepancies to respond effectively.

Economic research can provide insights into how markets internalize the environmental costs of economic activities, even if these costs do not have a monetary value associated with them (for example, you can’t buy greenhouse gases, but economic research has demonstrated that the social cost of a ton of carbon is around $40). This analysis demonstrates that the threat of drilling activity causing groundwater contamination – which has no market value – still has true costs. Rigorous economic analysis allows us to quantify these costs, leading to more informed policy decisions and better outcomes for both the environment and the local community.

 

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Cap and Trade under AB 32 – Now it’s an “Official Success”

(This blog post was co-authored with Tim O’Connor and originally posted on California Dream 2.0.)

iStock_000004415617SmallMany people have been following the AB 32 cap-and-trade program since it kicked off on January 1, 2013. After all, it’s the most comprehensive carbon market in the world; it has created billions in investments for pollution reduction in California communities and garnered intense international attention. Now, based on data showing the program has cut climate pollution during its first compliance period, the chair of the California Air Resources Board (CARB) has dubbed it “officially a success.”

Under California’s Mandatory Greenhouse Gas Reporting program, the largest polluters in the state across all sectors must report their emissions every year. This data is then collected and counted by CARB. Yesterday, the agency released the final tally of the 2014 greenhouse gas (GHG) emissions covered by cap-and-trade, and with data, we get the final word on what happened during the program’s first compliance period (for years 2013 and 2014).

Covered emissions went down…            

According to CARB’s report, although GHGs in 2014 experienced a slight increase compared to the year before, total climate pollution across the compliance period (2013 and 2014) decreased by over three percent to approximately 146 million metric tons (MMt) of carbon dioxide-equivalent. This means California’s emissions were nine percent under its 2014 cap of 159.7 MMt, putting the state well on its way to achieve its short-term emissions reduction target: bringing emissions back to 1990 levels by 2020. It also shows how cap-and-trade is best evaluated across compliance periods: since businesses have the incentive to cut pollution as quickly and deeply as possible, reductions in one year of the program may outpace those in another year.

… While California’s economy continued to prosper

Total emissions reported under the Mandatory Greenhouse Gas Reporting program, including those not covered under cap and trade, also decreased between 2012 and 2014, by about 1.3 percent. Meanwhile, the state’s gross domestic product (GDP) increased by almost three percent in 2014, surpassing the two percent GDP growth California’s economy underwent the year before. So while emissions were declining under AB32, the state’s economy grew, proving once again that economic output and emissions don’t necessarily go hand in hand.

California also experienced remarkable job growth during the same period. In 2013, California saw total employment increase by 2.1 percent, beating the national average. In 2014, job growth in the state reached an impressive 3.2 percent. As a comparison, the rest of the United States experienced only an average 2.2 percent growth in jobs that year.

Companies are complying with cap and trade

Under California’s cap-and-trade program, regulated polluters are also required to surrender some of their emissions allowances every year. Yesterday, they did just that, turning in allowances needed to cover the remainder of 2013 emissions and all of 2014 emissions. Total allowances for the first compliance period represent approximately 290 MMt of carbon dioxide-equivalent.

According to data released by the agency, over 99 percent of the required allowances were surrendered in the first compliance period, barely short of a perfect score, proving companies are prepared to incorporate cap-and-trade obligations in their everyday business practices.

Looking ahead

Starting on January 1 of this year, transportation sector emissions are also regulated under California’s cap-and-trade program. This is another important step forward: emissions from transportation represent almost 40 percent of the state’s GHG emissions. It is also a crucial building block, putting California on the right track to achieve its ambitious medium and long-term targets – with the ultimate goal of reducing emissions 80 percent below 1990 levels by 2050.

Today’s results confirm that the cap-and-trade program’s first compliance period was a success and that California has a strong foundation to build upon as it takes the next critical steps towards its climate change goals.

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Natural Gas-Fueled Buses and Trucks: Will the Climate really Benefit?

Kenworth truckAs readers of this blog will know, the freight transportation industry in Texas— a freight hub – has a significant impact on the state’s economy and environment. Recent market conditions and environmental concerns have ignited talk of expanding the use of natural gas trucks instead of diesel. But what would be the true climate benefit – or cost?

This post from our colleague Jonathan Camuzeaux, a senior economic analyst for EDF’s Office of Economic Policy and Analysis, explores this question from a national perspective, but we wanted to share this post with Texas Clean Air Matters because of its relevance to our state. We have the second-largest state-highway system in the U.S., as well as the Port of Houston Authority, which is the second busiest port in the nation when it comes to overall tonnage. Considering the switch to natural gas could have a big effect on the climate impact of the state’s truck fleets.

— The EDF Texas Clean Air Matters Team Read More »

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The holy grail of climate economics? A price on carbon.

(This blog post was co-authored with Dominic Watson and originally posted on EDF Voices.)

If there were a competition for the most important number in the world, the price on carbon would certainly be a strong contender.

The World Bank has been a long-time supporter of carbon pricing and its recent report, Decarbonizing Development, adds a strong voice to the chorus of climate policy experts, economists, and business leaders who champion the economic, social and environmental benefits of pricing pollution.

The report underscores the importance of getting the economics of climate change policies right so we can transition cost-effectively to a carbon-neutral economy.

Because we live in a world of ‘bottom-up’ climate policy, the authors rightfully say, this will require multi-pronged policy solutions, each tailored to a country’s particular economic and political conditions.

At the heart of this broader approach, however, lies the holy grail of climate economics: a price on carbon.

Markets bring results – fossil fuel subsidies don’t

Global temperatures must stay below the 2°C threshold for the world to avoid catastrophic climate change. This requires that net carbon emissions are reduced to zero by the middle to the end of the century.

A price on pollution has been shown time and time again to be the most cost-effective way to reduce emissions. By internalizing the cost of pollution to firms – meaning, making polluters pay for the right to emit carbon – they will have an incentive to reduce emissions and look for the cheapest emissions reduction options.

A tax on carbon, or a cap-and-trade system where permits – or allowances to emit carbon – are auctioned to firms, have the added benefit of bolstering government coffers. The additional revenue can be used to, for example, offset costs low-income households incur should power rates or costs on goods rise.

It can also be used to reduce taxes, including taxes on labor and capital that can affect social welfare and create market inefficiencies.

The World Bank reminds us that getting the price right will include removing costly subsidies on fossil fuels – now estimated at $548 billion worldwide. In addition to encouraging the overconsumption of fossil fuels, these subsidies have proven ineffective for helping the poor or for promoting competitiveness.

A mix of policies can boost clean energy

A comprehensive climate policy package should include a mix of additional policies to help address other market failures, the report notes. Policy makers can help boost innovation in clean technologies, for example, by supplementing a carbon price with temporary support for investments, targeted subsidies, performance standards and technology mandates.

Case in point: California’s AB 32 program, which guarantees emissions reductions through a market based cap-and-trade program while supplementing the cap with a range of statewide regulations.

Among other things, the legislation incentivizes utilities to invest in renewables and requires building, vehicle and appliance efficiency standards that help consumers save on their electricity bills.

Next: A global price on carbon

Some countries may choose to rely on such regulatory measures alone and opt out of market-based solutions for the time being. Such policies will certainly bring countries closer to meeting their emissions goals.

In the long-term, however, a carbon price must form the linchpin of any viable national emissions reduction plan.

And ultimately, if we’re to meet that net-zero carbon emissions goal in the most cost-effective way, all countries should face the same global carbon price.

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Big Rigs: Will the Climate Benefit from Switching Diesel Trucks to Natural Gas?

Originally posted on EDF's Energy Exchange.

16058670001_80994ae935_zThe surge in natural gas production that has reshaped the American energy landscape has many in the commercial transportation sector considering whether to start shifting their heavy-duty vehicle fleets from diesel to natural gas fuel. Many are looking to an advantage in carbon dioxide emissions to justify the higher cost and reduced fuel efficiency of a natural gas vehicle.

But in fact, a study published today in Environmental Science & Technology finds that while there are pathways for natural gas trucks to achieve climate benefits, reductions in potent heat trapping methane emissions across the natural gas value chain are necessary, along with engine efficiency improvements. If these steps are not taken, switching truck fleets from diesel to natural gas could actually increase warming for decades.

Methane, the main ingredient in natural gas, has 84 times more warming power than CO2 over a 20-year timeframe. Reducing emissions throughout the natural gas value chain is an important opportunity to reduce our overall greenhouse footprint.

Growing Body of Research

The new study examines several different types of engine technologies, and both liquefied and compressed natural gas fuels, and concludes that a conversion from diesel could lead to greater warming over the next 50 to 90 years before providing benefits to the climate.

These results align with an earlier paper published by EDF scientists in 2012 in the Proceedings of the National Academy of Sciences (PNAS), but reach these conclusions through updated and more detailed data, as well as analysis tackling a wider scope of vehicle sizes, engine technologies, and fuel types.

Pathway to Positive Climate Benefits

By examining a range of assumptions, the new study finds there are indeed pathways for heavy duty natural gas vehicles to achieve climate benefits, provided methane emissions across the value chain are reduced both upstream and at the vehicle level.

Improvements in fuel efficiency could help ensure these vehicles are climate friendly. Today’s natural gas truck engines are typically five to fifteen percent less efficient than diesel engines. Consuming more fuel for each mile traveled reduces the relative CO2 savings. If that efficiency gap can be closed, natural gas trucks will fare that much better compared to diesel.

Upcoming Policy Opportunities

While emissions in the natural gas value chain are a serious challenge, they also represent an opportunity to achieve significant, cost-effective reductions in overall greenhouse gas emissions. Several policy mechanisms are in play that could improve the climate prospects of natural gas trucks. These include recently announced federal upstream methane regulations and upcoming federal fuel efficiency and greenhouse gas standards for heavy trucks.

More information is needed to estimate with confidence the current climate footprint of trucks, and to get a better understanding of methane loss along the natural gas value chain. Significant research is underway to update estimates of methane emissions across the U.S. natural gas system, including the ambitious scientific research effort to publish 16 field studies launched by EDF and its partners.

Advancing Understanding

The paper released today is distinct from this ongoing effort and does not use any data from those studies, but it serves complementary purposes: First, it emphasizes the importance of gathering more and better data on methane loss; second, one of its major contributions is the various “sensitivity analyses” it presents.

These ranges of potential results are designed to understand the implications of changing underlying assumptions about methane emissions and efficiency. Our new paper creates a framework to evaluate the climate impacts of a fuel switch to natural gas in the trucking sector as we gain better data on the magnitude and distribution of leakage and as both leakage and vehicle efficiency evolve due to policy changes and market dynamics.

Policymakers wishing to address climate change should use caution before promoting fuel switching to natural gas in the trucking sector until we are more certain about the magnitude of methane loss and have acted sufficiently to reduce emissions and improve natural gas engine efficiency.

For more detail on the paper released today, please see our Frequently Asked Questions.

Image Source: Flickr/TruckPR

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