Does Less and Costs More

• Author: Robert N. Stavins
• Position: Albert Pratt Professor of Business and Government at the John F. Kennedy School of Government, Harvard University, and Director of the Harvard Environmental Economics Program
• Pages: 16-16

Page 16 ❧ THE ENVIRONMENTAL FORUM Copyright © 2011, Environmental Law Institute®, Washington, D.C. www.eli.org.

Reprinted by permission from The Environmental Forum®, May/June 2011

By Robert N. Stavins

Does Less and

Costs More

When Congress gets beyond its

unproductive squabbling, it is

likely to give attention to renewable

portfolio standards. Such standards

would mandate that a given share of

an electric company’s production come

from renewable sources (most likely

wind power), or from an expanded list

including nuclear and hydroelectric

power (in which case they are often

called clean energy standards).

is approach, which focus exclusive-

ly on one sector of the economy, would

be less ef‌fective than a comprehensive

cap-and-trade approach to addressing

CO2 emissions, would be more costly

per unit achieved, and yet — ironically

— appears to be much more attractive

to the same politicians who strenuously

opposed cap-and-trade.

True enough, these standards can be

designed in a variety of ways, some of

which are better than others. But the

better their design (as a CO2 reducing

policy), the closer they come to the

much-demonized cap-and-trade ap-

proach. In an op-ed in e Huf‌f‌ington

Post, Professor Richard Schmalensee of

M.I.T. and I ref‌lected on this irony.

One day after the November 2010

election, White House press secretary

Robert Gibbs said that a national re-

newable electricity standard could be

an area of bipartisan energy coopera-

tion, after President Obama had said

cap-and-trade was not the only way “to

skin the cat.”

Whereas cap-and-trade would raise

the cost of fossil fuel, as its opponents

stressed so ef‌fectively, renewable stan-

dards would raise the cost of electric-

ity, which its supporters seem reluctant

to admit. If renewables really were

cheaper, even with federal subsidies, it

wouldn’t take regulation to get utilities

to use them.

Renewable or clean electricity stan-

dards are a very expensive way to re-

duce CO2 emissions — much more

expensive than cap-and-trade. ese

standards would only af‌fect electricity,

thereby omitting about 60 percent of

U.S. CO2 emissions. And even then,

the standards would provide limited

incentives to substitute away from coal,

the most carbon-intensive way to gen-

erate electricity.

Even more problematic, renewable/

clean electricity standards would pro-

vide absolutely no incentives to reduce

CO2 emissions from heating build-

ings, running industrial processes, or

transporting people and

goods. And unlike cap-

and-trade, which would

also af‌fect oil consump-

tion, the electricity stan-

dards would make no

contribution to energy

security. Only a very

tiny fraction of U.S. oil consumption

is used to generate electricity.

ose who believe that renewable

electricity standards would create a

huge number of green jobs have forgot-

ten the lesson of Detroit: a large domes-

tic market does not guarantee a healthy

domestic industry. At the end of 2008,

for instance, the U.S. led the world in

installed wind generation capacity, but

half of new installations that year were

accounted for by imports. And a recent

Lawrence Berkeley Laboratory study of

the impacts of the economic stimulus

package incentives for renewable elec-

tricity investments estimated that about

40 percent of the (gross) jobs created

by new wind-energy investments were

outside the United States, where many

wind turbines are manufactured.

A sounder approach, for those con-

cerned about green jobs, would focus

on the long-term determinants of

economic growth, such as technologi-

cal innovation. at’s where cap-and-

trade — which creates broad-based

incentives for technology innovation

— holds another edge over renewable

electricity standards.

It is often argued that if cap-and-

trade is dead, enacting renewable or

clean electricity standards is better than

doing nothing at all about climate

change. While that argument has some

merit, since the risks of doing noth-

ing are substantial, there is a real dan-

ger that enacting these standards will

create the illusion that we have done

something serious to address climate

change. Worse yet, it could create a fa-

vored set of businesses that will oppose

future adoption of more ef‌f‌icient, seri-

ous, broad-based policies — like cap-

and-trade.

If a national renewable electricity

standard is nonetheless inevitable, it

should not impose excess costs on busi-

nesses or consumers. It

should preempt state re-

newable portfolio stan-

dards, since with a na-

tional standard in place,

states’ programs simply

impose extra costs on

their citizens without

af‌fecting national use of renewables.

And any national program should al-

low unlimited banking to encourage

early investments. No environmental

or economic purpose is served by limit-

ing banking to two years, as some legis-

lative proposals would do.

Carbon cap-and-trade was killed in

the Senate, presumably because of its

costs. Renewable electricity standards

or clean energy standards would ac-

complish considerably less and would

impose much higher costs per ton

of emissions reduction. is hardly

sounds like a step forward.

A large domestic

market does not

guarantee a healthy

domestic industr y

Ro ber t N . St avi ns is the Albert Pratt Profes-

sor of Business and Government at the John

F. Kennedy School of Government, Harvar d

University, and Dir ector of the Har vard En -

vironmental Economics Program. He can b e

reached at rob ert_stavins@har vard.edu.

A E P