Market Forces

Firms can manage climate policy uncertainty. Here’s how.

This post was co-authored by Alexander Golub, Adjunct Professor of Environmental Science at American University.

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For companies that are large emitters of greenhouse gases, uncertainty about policies to address climate change can be a real challenge. But our new paper in the journal Energy shows how companies that invest now in a novel approach to climate mitigation could help manage their risk of future policy obligations more effectively and at a lower cost.

The challenge

In Energy, we demonstrate how policy uncertainty puts greenhouse gas emitting companies in a bind, raising risks for these companies and making it likely that carbon prices—an indicator of costs—will rise in a series of sudden bursts, rather than following a smooth transition.

Policy uncertainty discourages private investment in low-carbon technologies. However, when credible climate policy is finally in place, industry will have missed out on prudent investment opportunities and face spiking costs as they rush to catch up with tightened emissions controls requirements.

In the paper, we show that companies have a latent demand for suitable strategies that can help manage these risks.

Abatement short squeeze

When a government institutes stronger climate policy, businesses may find themselves over-weighted with carbon-intensive assets. Caught short of investments to reduce or “abate” emissions, companies will rush to rebalance their capital stock in favor of lower carbon technologies. At the same time, other businesses will also be rushing to unload high-carbon assets and adopt the lower carbon technology. This can cause carbon prices and associated costs of reducing emissions to rise dramatically.

This is similar to the case in financial markets when prices jump as investors must rush to square accounts on an investment they have bet against—going “short” rather than “long” — in anticipation of falling prices. Until now, such a “short squeeze” was a phenomenon of the stock market — product of speculations and uncalculated risk. Climate change threatens to create such a squeeze of much broader scope and economic consequences.

A down payment on abatement

Companies need access to strategies to manage the risks of future climate liabilities. In our study, we describe how companies could reduce the costs of meeting pollution targets in an uncertain policy landscape by making relatively small investments today that can preserve the flexibility to reduce emissions more dramatically in the future—essentially putting a down payment into cost-effective climate protection programs from large-scale sources. Such strategies can include investments in research and development that could pay off in the future through the availability of low-carbon technologies.

A conceptually similar way to manage exposure to future climate costs is by helping to secure and preserve low-cost “call options” on future abatement. A “call” is a type of option that gives companies the right but not the obligation to purchase an underlying product (whether it be a stock, commodity, or carbon credit) in the future at a guaranteed price. We highlight tropical forest conservation as an ideal type of program that companies can use to buy large-scale call options on abatement. A down payment on abatement on forest protection programs would yield an immediate impact on protecting climate, biodiversity, and local communities, while protecting companies’ ability to obtain further cost-effective emissions reductions in the future.

Call options on large-scale forest protection programs (REDD+)

Tropical forests contain the world’s largest reservoir of carbon within natural ecosystems that once lost cannot be recovered within the necessary time to avoid dangerous climate disruptions. Protecting these forests is thus a time-limited opportunity, but it doesn’t require expensive new technologies or infrastructure. As a result, tropical forest conservation offers one of the least cost ways to immediately reduce carbon emissions at large scales, while providing a multitude of other local and global benefits. Forests also remove carbon from the atmosphere, and as long as they remain intact they will continue to store that carbon. A relatively small investment in protecting forests now can provide urgent near-term financing for conservation while securing call options on carbon credits from ongoing future forest protection.

Tighter emissions targets could lead companies to rush to invest in renewable energy more or less simultaneously. This spike in investment may well exceed the ability of the global capital market to mobilize capital and investment resources. For example, it would be impossible to double or quadruple production of wind turbines or solar panels over a year or so. The economy may reach a physical limitation that could be hardly compensated by pumping capital.

Instead, hedging this risk by investing to secure the ability to generate credits from large-scale programs to protect tropical forests (known as REDD+ programs), companies, and the world, could “flatten the curve” on the costs of capital rebalancing to comply with climate policies. This keeps the total volume of investment below a critical level that could lead to bankruptcy or excessive macro-economic disruption (green line in figure 1).

Who benefits?

By selling REDD+ credits or call options on such credits to firms, forest nations, particularly in the tropics, can start receiving a fair price for keeping their forests protected. Such financing is important to help governments cover their costs of protecting forests and to align incentives of communities, farmers, ranchers and commodity buyers and consumers around forest protection and sustainable agriculture, rather than destructive activities like illegal logging and inefficient cattle ranching.

EDF and partners are pioneering innovative pay-for-performance mechanisms for reducing deforestation. These include the Emergent Forest Finance Accelerator, which links private sector buyers to environmentally rigorous, high-integrity carbon credits from large-scale forest protection programs.

Investments in high-quality REDD+ programs can play an important role in protecting the climate, environment and communities, while allowing companies to better prepare for the moment when society begins implementing more dramatic measures to tackle climate change. To help start the flow of credits, policymakers, companies and other stakeholders should agree on high standards for environmental quality and support the inclusion and prioritization of high-quality REDD+ programs within voluntary climate commitments as well as regulated carbon market systems.

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More confirmation that the Trump administration has been disregarding the true costs of climate pollution

This post originally appeared on Climate 411

A new report highlights the Trump administration’s dangerous efforts to obscure the real costs of climate change, while a major court decision firmly rejects the administration’s approach.

Costly flooding in Houston after Hurricane Harvey

new report from the Government Accountability Office (GAO), an independent agency tasked with providing objective nonpartisan information to policymakers, confirms what we’ve known for years: that the Trump administration has been ignoring the enormous costs of climate change. By ignoring these damages, the administration is turning its back on communities across the nation who are footing the bill for those impacts today.

In addition, a federal court recently issued a clear-cut rejection of the administration’s deceptive math on the cost of methane pollution, another greenhouse gas that is 84 times more potent than carbon dioxide over a 20 year time period. This ruling reinforces the fact that the administration has been blatantly disregarding widely accepted science and economics when it comes to the costs of climate change.

All of this comes amid a raging and widespread pandemic that underscores the absolute necessity of relying on experts and scientific data when crafting policy. With unchecked climate change fueling more devastating storms, droughts, and other public health impacts — all of which hit vulnerable communities the hardest — incorporating accurate costs of climate change in policy decision-making matters now more than ever.

Here is what this new report and court decision reveal about the administration’s backwards and harmful approach to decisions on climate change — and how experts and the courts are wholly rejecting it.

Why undervaluing the cost of climate change is dangerous

To justify its own political agenda, the Trump administration has manipulated the calculations behind the estimated impact of emissions to allow for more climate pollution from major sources like power plants and cars. The new GAO report outlines the steps the administration has taken to drastically underestimate the “Social Cost of Carbon” — a measure of the economic harm from climate impacts that is used to inform policy and government decision-making. These impacts include extreme weather events like flooding and deadly storms, the spread of disease, and sea level rise, increased food insecurity, and more.

After a 2008 court decision requiring the federal government to account for the economic effects of climate change in regulatory benefit-cost analysis, an Interagency Working Group (IWG) comprised of experts across a dozen federal agencies began in 2009 to develop robust estimates of the social costs of carbon that could be used consistently by agencies across the government. These estimates were developed through a transparent and rigorous process based on peer-reviewed science and economics that included input from the National Academy of Sciences and the public — and were periodically updated over time to account for the latest science. More recently, the NAS conducted a thorough assessment to provide guidance on updating the social cost of carbon estimates and suggestions for continuing to build on and strengthen it.

The GAO report underscores the importance of implementing those recommendations, while pointing to the fact that the federal government has done absolutely nothing to follow through. In fact, in 2017 the Trump administration recklessly disbanded the IWG — the very federal entity that already had the mandate to take on this task.

Since then, federal agencies like the EPA have been relying on an “interim cost” to inform important regulatory decisions that is seven times lower than the IWG’s estimate — a move that dramatically underestimates the profound impacts climate change has on families, businesses, taxpayers and local governments. To make matters worse, the administration is dramatically reducing the IWG figure even though it is widely recognized to be an underestimate of the true costs. There is wide consensus that the true costs are much likely significantly higher.

The Trump administration substantially reduces estimates through two key flaws in its calculations, both of which fly in the face of established science and economic principles. First, the reduced estimates ignore that carbon emissions are a global pollutant, omitting important categories of climate change impacts on the United States. Second, they undervalue the harm to our children and future generations by significantly over-discounting future climate impacts.

By vastly undervaluing the costs of climate change — and thus, the benefits of acting on climate — the administration has been able to justify rolling back critical protections such as the landmark federal Clean Car Standards. These important rules offer critical public health benefits and fuel savings for consumers.

A court ruling refutes the administration’s deceptive math on pollution costs

In encouraging news, a recent court decision outright rejected the administration’s deceptive math on a similar metric, the ‘Social Cost of Methane,’ used to estimate the impacts of methane pollution. The Bureau of Land Management, under former Department of Interior Secretary Ryan Zinke, has been using an interim social cost of methane that is more than 25 times less than the estimate from the IWG. The U.S. District Court for the Northern District of California recently overturned the BLM’s attempt to ease protections from dangerous methane leaking, venting and discharging from oil and gas activities on public and tribal lands, where it used a distorted social cost of methane as justification. EDF joined the states of California and New Mexico and a broad coalition of health, environmental, tribal citizen and Western groups to challenge in court the rescission of these vital safeguards.

In the opinion, the judge ruled that the BLM’s decision to rely on a lower interim estimate for the social cost of methane was “arbitrary” and “capricious,” and therefore, “failed to quantify accurately the forgone methane emissions and the resulting environmental impacts.” In addition, the court underscored that “the President did not alter by fiat what constitutes the best available science” on the social cost of greenhouse gas emissions. This is a major win for not only the broad coalition involved in the case, but for the basic principle of science-based decision-making on climate change. The court’s meticulous critique of the flaws in the interim social cost of methane — and the process used to develop it — could be influential in future cases involving the social cost of greenhouse gas emissions. Such a critical ruling like this opens the possibility that the Trump administration and future administrations could be required to properly account for the costs of climate change.

The Trump administration’s unwavering, politically motivated attempts at twisting facts and discrediting experts is putting Americans’ lives, health and financial well-being at risk. Unfortunately, its effort to skew the costs of climate change is far more than a political game. It is already causing real harm to communities across the country suffering from climate impacts — and it will only add to the mounting costs our children and grandchildren will pay. That is why ongoing efforts to uncover and overturn unjust climate decisions are all the more essential.

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Decarbonizing industry is difficult but possible

Industry is the backbone of the U.S. economy: it provides and transforms raw materials, goods and chemicals needed for civilization, including the energy transition. Yet, it is also responsible for a third of global greenhouse gas (GHG) emissions and 30% of U.S. GHG emissions .

Industrial GHGs include direct (combustion of fossil fuels, leaks and byproducts) and indirect emissions (the purchase of electricity and heat). Even if we reduce indirect emissions through electrification and clean energy, uncontrolled direct emissions from industry would still be responsible for at least 20% of GHG emissions both globally and in the US. Heavy industry, which creates products like cement, iron and steel, chemicals and plastics is particularly carbon intensive, which is why we should invest in ways to mitigate its large direct emissions of CO2.

Why decarbonizing heavy industry is a challenge

Decarbonizing heavy industry is difficult, because its direct emissions are the byproducts of chemical reactions or related to processes that require very high heat or fossil fuels as feedstocks. And because industry uses fossil fuels like coal as feedstock, manufacturing processes often rely on them for heat as well, making it more challenging to reduce industrial fossil fuel consumption. Moreover, there are other obstacles to rapid decarbonization, such as the long lifetimes of industrial facilities (possibly 30+ years) and their high capital intensity. This makes it difficult—but also necessary—to retire or retrofit them on a timeline consistent with limiting warming to 2 degrees Celsius or less.

Another constraint: industrial products must often meet precise quality criteria to comply with safety regulations. In other words, lowering the carbon content of steel or cement manufacturing could impact the quality of the material outputs. Hence, if the characteristics  of carbon-intensive industrial products change, the specifications associated with  building codes and standards may need to change as well, especially if changes imply a modification of the physical properties of common building materials. Finally, geographical limitations like the local availability of renewable energy, key energy feedstocks and infrastructure as well as carbon storage capability may dictate the possibility of decarbonizing heavy industry or not.

That’s why we need to move forward with developing technology and processes that can decarbonize direct emissions from heavy industry. Luckily, several options are available.

Reducing CO2 emissions from high temperature industrial processes 

For industrial heat, there are temperature, quality and flow rate constraints on viable options that stand in contrast to electricity and residential heat (the temperatures required in heavy industry varies from 200°C to 2,000°C). The Columbia Center on Global Energy Policy identified hydrogen (blue, from natural gas or green, from renewable feedstocks), biomass and biofuels, electricity (resistance and microwave), nuclear (conventional and advanced), concentrated solar energy, and carbon capture utilization and storage (CCUS) as options for tackling decarbonization of industrial heat. Each has technical and economical tradeoffs:

  • Biodiesel and hydrogen have the highest heat potential, while conventional nuclear the lowest.
  • Nuclear is the least expensive option, while Green Hydrogen the costliest. They estimate CCUS adding up to 50% cost to the fossil fuel.
  • Green Hydrogen and nuclear have the lowest carbon footprint, while blue hydrogen the highest.
  • Biofuels and Hydrogen are the most feasible, while Nuclear is the most challenging to implement or build.
  • Considering indirect costs and quality of heat needed, these options could increase wholesale costs of production between 10 to 200 percent depending on the sector and specific application.
  • Many options are not cost competitive with retrofitting existing fossil fuels plants with CCUS, and low carbon hydrogen seems the most viable option in the future due to both costs and feasibility.

Cutting process CO2 emissions

The other major source of direct emissions, process emissions, represent an even greater challenge. This is where the rest of direct emissions fits: leaks, fossil fuels as feedstock for chemical reactions and GHG emissions as byproducts of chemical reactions. Rissman et al. (2020) identified the following options:

  • On the producer side: CCUS, use of new materials, energy efficiency, new chemical reactions, leak repairs.
  • On the consumer side: circular economy; 3D printing; reduced material use: longevity, intensity and material efficiency; alternate materials.

The role for policy 

Incentivizing industry decarbonization will require collaborating with industry and engaging policy makers. There are several ways policy can mobilize development and deployment of new processes and technologies in heavy industry, including:

  • Carbon pricing, which increases the costs of using fossil fuels in industrial processes. To ensure domestic producers are not put at a disadvantage in the global market and that there is no emissions “leakage” overseas, the carbon price should include a border adjustment on imported products and materials from heavy industry in other countries.
  • Energy efficiency and/or emission standards to drive deployment of low-carbon technologies.
  • Federally funded research, development, and deployment (RD&D) as well as robust financial incentives to spur private RD&D.
  • Procurement standards and government-sponsored pilot projects to help address the financial risks facing entrepreneurs and early movers.

New initiatives show promise

IEA has noted that in order to get to net zero emissions by 2050, it is important to avoid locked-in emissions from investment in the industry sector, especially considering investment cycles beginning around 2030 will endure for 25 years. By boosting spending on research and development, low carbon technology for the Industry sector might be mature enough to be marketable by the time new investments are done.

While there is still a long way to go, some companies are already exploring ways to deploy decarbonizing technology. The Hybrit initiative, backed by Swedish and Finnish state owned companies LKAB, SSAB and Vattenfall,  is preparing the construction of a demonstration plant to produce low carbon steel with hydrogen by 2035. Canadian Carbon Cure is already mixing recycled CO2 into cement reducing the carbon footprint of their production process. Massachusetts-based Boston Metal is already producing steel with molten oxide electrolysis, a process that removes the need to use coal as feedstock and therefore has no CO2 emissions. Archer Daniels Midland Company (ADM) has deployed a commercial scale Carbon Capture and Storage ethanol refinery plant in Illinois.

These examples highlight some of the strategies and tools that can be used to allow heavy industry to continue to provide the goods and materials we rely on – and the emerging technologies necessary for a clean economy – while decarbonizing. But it will take robust policy support and a significant increase in RD&D funding to reduce direct and indirect industrial emissions at the speed and scale science demands.

 

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How the Suspension of EPA Regulations Fails to Recognize the COVID-19 Crisis and Social Costs

COVID-19’s burden on healthcare systems worldwide, a mounting death toll, and the impacts this has on people across the globe is truly alarming. In addition to the public health crisis, the pandemic has also brought most countries’ economies to their knees. Governments are making decisions today that will resonate for decades for future generations, which is why interventions must be intelligent and forward-looking, while practical, rapid and cost-effective. 

One of the macroeconomic aspects that has critical ramifications is determining what is deemed essential, in terms of jobs and services. Food, health care, and emergency services are clearly essential. And while policymakers can debate the merits of other positions, make no mistake, pollution monitoring and enforcement are also critical.

EPA’s Suspension of Enforcement

On March 26, EPA administrator Andrew Wheeler announced that the agency would suspend enforcement against violations of a broad set of environmental regulations, with no end date. This announcement effectively provides companies across the United States with a waiver from clean air and other public health protections, and has massive implications for human health at a time when keeping citizens healthy is paramount. We know air pollution causes diabetes, heart and lung diseases and worsens asthma, putting people at higher risk of severe effects of COVID-19. In fact, recent analyses find areas with high air pollution levels before this crisis reported higher COVID-19 death rates.

The naive expectation is that companies will continue to abide by the law and self-report any pollution amid the pandemic. This ignores well-established economics literature demonstrating how self-regulation does not work. Even if it is argued that reducing regulation will ease economic burdens at a time when it should be redirected for economic stimulus – that is also a fallacy that is undercut by the current administration’s analysis.

The Clear Benefits of Environmental Regulation

Every year, the Office of Management and Budget (OMB) performs a benefit-cost analysis (BCA) of all government agencies and federal rulings. The table below is taken from the most recent OMB report that did a thorough analysis and took a retrospective look over a 10 year period. [n.b, slated for release in 2017, this report was not made public until 2019. OMB only released one report during the Trump administration years, which was one-fifth of the length of previous ones, only did single-year BCAs, and was released two days before Christmas in 2019.]

Estimates of the Total Annual Benefits and Costs of Major Federal Rules (For Which Both Benefits and Costs Have Been Estimated) by Agency, October 1, 2006 – September 30, 2016 (billions of 2020 dollars). Sorted from best to worst Benefit-Cost Ratio, figures rounded to the nearest billion.

Agency# of RulesBenefitsCostsBenefit-Cost Ratio
2020$2020$
Environmental Protection Agency (EPA)39215 to 76250 to 61 4.3 to 12.6
Joint DOT and EPA449 to 8612 to 22 4.2 to 3.9
Department of Labor1011 to 303 to 7 3.6 to 4.2
Department of Health and Human Services187 to 352 to 7 3.1 to 5.0
Department of Energy2723 to 449 to 13 2.6 to 3.3
Department of Transportation (DOT)2725 to 459 to 17 2.6 to 2.6
Department of Justice32 to 51 to 1 2.1 to 4.0
Department of Agriculture51 to 21 to 1 1.2 to 1.4
Department of Homeland Security41 to 21 to 1 0.8 to 1.6

The table above underscores the crucial role EPA regulations play in human health and benefits to society. For each dollar spent on EPA’s programs, Americans derive a $4-13 benefit in the form of improved livelihoods. In general, rules exhibiting the greatest benefit-cost ratio relate to air pollutants, which have a great deal of interplay in terms of at-risk populations for COVID-19 and associated respiratory impacts. An EPA report focusing on the Clean Air Act amendments of 1990 finds a central estimate of a 32$ return for each dollar invested. Critically, these analyses do not monetize all of the health benefits of regulations, and thus these figures likely undercount the true benefits to society (the costs, however, are much more certain).

In terms of their benefit-cost ratio, EPA and major environmental rules result in benefits to the public that far outweigh their costs to government and industry. These rules are designed to preserve and protect human life and ecosystems. Removing protections presents a tremendous social cost.

Of course, EPA’s ability to enforce regulations during a pandemic has its limits. We wouldn’t want to put anyone at risk of contracting coronavirus. Still, there are ways to continue enforcement. EPA could redesign monitoring initiatives to continue digitally in places where this isn’t already the case. But announcing a sweeping, indefinite suspension that ignores most of what we know from behavioral economics and human nature makes little sense.

While the future is full of uncertainty, and economic turmoil is already here, we need to think carefully and critically about how to best protect people, the environment, and avoid slipping into a deep recession. Removing EPA’s ability to provide health protections to society during a public health crisis is lunacy. Doing it in the name of cutting costs is entirely misguided, as each dollar taken away results in an additional $4 to $13 in social costs.

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How we can make Time of Use Pricing work for everyone

How we pay for electricity has important implications for our bills, as well as for the costs of the electric system. Most people pay a flat rate, essentially one price per unit of electricity (or kWh) they consume, regardless of when they consume it. However, because the cost of generating and delivering electricity varies throughout the day, having varying prices over the course of the day creates an important and actionable signal: use less electricity during high-priced and high-cost times; use more of it when it’s cheaper. This helps keep costs down in the long run and allows customers to save money by shifting their consumption to low cost times.

Yet there is some evidence that certain communities may be disadvantaged under this type of pricing structure; thus, we must identify and implement policy solutions to address this misalignment.

New study highlights inequities

A new study by Lee White and Nicole Sintov published in Nature Energy highlights some of these challenges. They looked at a pilot study in a southwestern electric utility that implemented time-of-use (TOU) tariffs (with a high cost peak period and a low cost off-peak period). White and Sintov gathered data from participants, including Hispanic, low income, elderly, and those with disabilities, and found some areas for concern.

For example, they find that the elderly and customers with disabilities saw greater increases in bills on TOU than their non-vulnerable counterparts, likely due to a reduced ability to shift their consumption to cheaper, off-peak times.

They also find that some of these customers who faced smaller bill increases, likely due to underlying preferable load profiles, faced either worse health outcomes (this was true for Hispanic households), or more discomfort than others (true for low income households).

Low-income and Hispanic households reported turning off AC more often than their non-vulnerable counterparts, but did not have a greater reduction in on-peak use. These households appear to have made a much more extreme sacrifice to achieve the same level of peak time reduction achieved by other pilot participants without negative health and comfort impacts.

It is likely that these potential negative health and comfort outcomes of TOU rates are exacerbated by the stock of older, less efficient appliances and leaky homes, common in low-income households. When households have to rely on less efficient appliances, it is harder for them to shift the timing of their cooling to cheaper hours of the day; many have to turn off the A/C altogether, leading to severe discomfort. Furthermore, when the house is leaky, any efforts to pre-cool the home during cheap times will not result in comfortable indoor temperatures during costly times of day.

Policy solutions can make TOU rates work for everyone

So we face a dilemma: TOU rates can help improve the system, and could help all customers reduce their bills, but achieving these benefits with old appliances and leaky homes is a major challenge. How can we maximize the benefits of implementing TOU rates while ensuring that all communities can participate?

Fortunately, policy solutions exist that can help level the playing field.

  • Bill protection: Utilities can implement bill protection, whereby customers will not face bill increases under a TOU rate for a limited period of time. This allows customers to benefit if they are able, but will not harm those who find themselves unable to adequately shift consumption. In California, for example, Southern California Edison provides a full year of bill protection for customers transitioning to TOU rates.
  • Programs to help with weatherization and appliance upgrades: Programs like the Low Income Home Energy Assistance Program (LIHEAP) target less affluent customers and can provide assistance with either weatherization or efficiency improvements in appliances.
  • Robust marketing, education and outreach (MEO): Ensuring electric customers understand what rate they are on, and how changes in consumption can help them achieve lower bills is key to maximizing the benefits of TOU rates. This requires significant marketing, education and outreach. For customers who may face language or information barriers, the need for targeted MEO is even more pronounced.
  • Ensure that TOU rates are actionable: For TOU rates to be most effective at reducing consumption during peak hours, the ratio of peak to off-peak prices needs to be significant, and the length of the peak hours manageable. This provides ample space for customers to shift away from peak times and benefit from a greater number of low cost hours.
  • Allow TOU rates to be optout: Mandating TOU for all customers can exacerbate these disparities, especially among those who face challenges in responding to the time differences. Many low-income customers rent rather than own their homes, making it more difficult to invest in home weatherization or energy efficient appliances, two strategies that can make TOU rates easier to respond to. Allowing customers to opt out provides an important option to ensure equitable outcomes from more advanced electricity pricing, particularly for low-income renters. California utilities currently implement all TOU rates as opt-out.

TOU rates can provide many benefits to society and the environment, and could help put money back in the pockets of low-income and elderly customers. However, in order to avoid any negative consequences due to inefficient appliances and leaky homes, we will need to take extra measures outside of rate setting itself.

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How an open-source tool helps state climate policy

Empowered by the Paris Agreement and a lack of national leadership on climate policy in the United States, state and local governments are leading on their own climate initiatives. California, New York and Colorado have set ambitious greenhouse gas emission and renewable energy targets for 2030. Just last week, Massachusetts introduced sweeping climate legislation targeting net zero emissions by 2050.

As these environmental and energy policies move ahead, experts need to invest in economic data and tools that allow them to conduct robust economic analysis, to better inform policymakers, stakeholders and the public on how to design robust alternative climate and energy policies.

To target this capacity need, Environmental Defense Fund collaborated with Thomas F. Rutherford (University of Wisconsin-Madison), Andrew Schreiber (United States Environmental Protection Agency) and Christoph Böhringer (University of Oldenburg) to launch a project  to build a subnational economic model framework for climate and energy policies in North America.

An Open-Source tool emerges

An important byproduct of the first phase of this project is the Wisconsin National Data Consortium (WiNDC), an open-source data and modeling framework for the U.S. WiNDC is comprised of regional (state-level) social accounting matrices and a calibrated static multi-regional, multi-sectoral computable general equilibrium model that runs on the constructed dataset. This tool, the technical details of which can be found in a peer-review article about its development, makes it possible to conduct analysis of environmental and energy regulations as well as trade policies taken both at the subnational level and at the national level.

A forthcoming paper investigating the potential economic and environmental impacts from the imposition of a carbon adder on New York Independent System Operator’s energy market is the first to utilize the WiNDC accounts in a state-level analysis of climate and energy policies. The study finds that the carbon adder—a carbon tax equal to marginal environmental damages from carbon emissions not already covered under existing policies—gives the “right” price signal for New York’s power generation to turn into a greener one.

In another paper by Balistreri, et al. (2018) “The Impact of the 2018 Trade Disruptions on the Iowa Economy,” WiNDC is used to analyze the state-level impacts of the 2018 tariffs on a wide range of Chinese imports ranging from agriculture and manufactured goods on the state of Iowa. The authors examined the overall gross state product impacts, as well as lost labor income and tax revenue due to additional tariffs.

WiNDC’s aim is to meet the demand for more robust evidence-based regional analysis of environmental and energy regulations. It provides an easy-access, open-source platform for all stakeholders to conduct analyses of environmental and energy regulations taking place at both state and federal levels. The open-source nature aims to encourage further collaboration within the research community and development of this valuable resource.

WiNDC is a powerful and unique tool that could give states the opportunity to design their own climate policies in the light of their economic and environmental objectives and help them align with policies implemented by other states that are increasing economic and environmental efficiency.

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