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In (Qualified) Praise of Utility-Only Cap-and-Trade

by Michael Levi
June 21, 2010

ClimateWire (via The New York Times) reports that several key players are considering a push for a utility-only cap-and-trade system as part of an energy bill. That could be a wise move, if it’s done right.

First the main substance. Take a look at this plot of emissions reductions under Kerry-Lieberman as projected by the EPA:



You’ll notice that almost all of the emissions reductions from U.S. energy use come from electric utilities, not just in the early years, but through 2050. Transportation, manufacturing, and “other” (my guess is mostly direct energy use in buildings) make up a very small fraction. A utility-only bill, then, should be able to get most of the reductions in U.S. emissions from energy use that an economy-wide bill would, but without some of the complexity and stigma. For this reason alone, utility-only should receive serious consideration.

Now for the potential problems. I can see at least four:

  1. The percentage cut in emissions from electricity generation would need to be substantially greater than the percentage cut in economy-wide emissions in order to achieve the same power-sector carbon price. (You’re cutting the same absolute amount off a much smaller base, so the fraction is bigger.) It may be complicated to explain why a target that looks much stronger than the 17% cut from 2005 levels by 2020 is actually no more onerous. If the result is a utility-only cap-and-trade with a 17% target for utilities, that will be a failure.
  2. Per the EPA graph, much of the emissions reductions in the EPA model of Kerry-Lieberman come from domestic and international offsets. A smaller-scale cap-and-trade system will almost certainly lead to lower demand for offsets. To the extent that the offsets represent real emissions reductions, utility-only would thus lead to lower emissions reductions. Similarly, to the extent that international cooperation is driven by financial flows from offset purchases, utility-only cap-and-trade would likely reduce such flows. This is not the end of the world, but it is not unimportant either.
  3. Many energy intensive manufacturers use electricity from the grid. If utility-only cap-and-trade increases the price of that electricity, but manufacturers don’t face direct limits on their own emissions, they may shift to lower-cost but dirtier on-site sources of energy, raising their emissions above business-as-usual and undermining the broader emissions control effort. Utility-only would thus need, at a minimum, to be accompanied by some sort of “no harm” efficiency standards for energy intensive manufacturing.
  4. The politics of cap-and-trade have traditionally involved using revenue from the transportation sector to compensate every other affected entity (utilities, manufacturers, consumers, etc). That is part of why so many business interests have been willing to support a bill. Utility-only doesn’t deliver that money. That may complicate the politics of a bill.

There is, of course, a fifth problem. It has been very tough to tie cap-and-trade to public outrage over the oil spill. A cap-and-trade system that deliberately does nothing about oil will be even harder to sell from that angle.

Post a Comment 6 Comments

  • Posted by Josiah

    I’m not sure that I would be as concerned about item number 3.

    Industrial energy efficiency efforts often involve transferring power production for industrial processes from the grid to local production. In general, manufacturers are able to use power produced locally MUCH more efficiently than they could use power produced for grid consumption. Largely becaues most local production efforts involve some kind of combined heat and power option which allows them to make use of the waste heat in their industrial processes, which they otherwise would have had to use power to produce anyway.

    I just don’t see having manufacturers switching over to Combined Heat and Power production on-site as having anything but good impacts overall. Especially since in most cases the most efficient uses of this power is also the most cost-effective for the manufacturer.

    I think if we simply provided some common-sense economic incentives for highly efficient CHP projects for industry, this item will largely resolve itself.

    [ML: Depends on the fuel source. Substituting efficient use of on-site coal for inefficient use of low-carbon electricity can still drive up emissions.]

  • Posted by Josiah

    The answer, as with most everything, is sure to be “it depends”; on the particular grid mix, transmission losses, the actual efficiency of the CHP, fuel fpr the on-site CHP (coal, natural gas, biomass, etc.).

    But my instinct tells me that often the switch to on-site generation would have a net benefit.

    Nice article, sparked some interesting discussions here.

  • Posted by satya

    “There is, of course, a fifth problem. It has been very tough to tie cap-and-trade to public outrage over the oil spill. A cap-and-trade system that deliberately does nothing about oil will be even harder to sell from that angle.”

    Which is why a utility only bill should be coupled with a vehicle electrification bill (e.g. Alexander-Merkley) that would increase the bill’s popularity with utility companies AND tie the issue to oil savings AND appeal to Lamar Alexander, who is shaping up to be a key vote in the Senate. Of course, you would have to give the utilities credit for reducing the emissions from the transportation sector to make the reductions work.

  • Posted by Green Mom

    I’m not sure your fifth problem is really much of a problem. Most people mash up oil, power, and fuel as all the same issue. In their heads, they don’t stop to separate transportation fuel from fuel used for electric power. It’s all “energy.”

  • Posted by John Galt

    Where do you guys expect to get all of this electricity? You expect the utilities to reduce emissions, while converting the cars to electric?
    “The politics of cap-and-trade have traditionally involved using revenue from the transportation sector to compensate (bribe) every other affected entity…”
    How many of you guys used to work in the old USSR central planning industry?

  • Posted by R Little

    Making use of Combined heat and power systems can make a huge difference in terms of a greener future.

    On a larger scale they also provide a local power source capable of keeping critical facilities operating during power outages. When power outages occur resulting in a black out, CHP plants can be ‘islanded’ from the grid and will continue to operate normally.

    Because they often rely on natural gas, CHP plants offer an excellent solution to ensure power continuity in critical infrastructures such as hospitals, schools, airports, military bases and government facilities. Thanks for the post.

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