Memorandum by the Environmental Defense
Fund
On behalf of the Environmental Defense Fund
(EDF), I am pleased to respond to the House of Lords Select Committee
on Economic Affairs' inquiry in to the economics of renewable
energy. EDF is a leading United States-based non-profit environmental
organisation representing more than 500,000 members, with offices
across the United States and in Beijing, China. Since 1967, we
have linked science, economics and law to create innovative, equitable
and cost-effective solutions to society's most urgent environmental
problems.
There is no more urgent environmental challenge
facing our world today than the problem of global warming, and
renewable energy technologies have an important role to play in
solving it. Over the past 18 months, in researching and writing
Earth: The Sequel with my co-author, Miriam Horn, I have spent
countless hours speaking with energy technology inventors and
entrepreneurs about the necessary pre-conditions for bringing
advanced low and zero-carbon energy technologies to market. Lessons
learned from this work, along with EDF's thirty-year history of
pioneering market-based environmental regulation, informs my response
to your request for information on renewable energy policy.
Energy technology inventors and entrepreneurs
are not looking for subsidies and set-asides. What they are looking
for is a level playing field upon which to compete. Currently,
the greatest obstacle that many renewable energy technologies
face is a market that fails to fairly value the avoided carbon
dioxide pollution attributable to renewable energy. Therefore,
the most important policy for commercializing renewable energy
is one that caps carbon dioxide emissions, allows for trading
of the emission reduction obligation underneath that cap, and
thereby sets a market price for avoided CO2 emissions that rewards
low and zero carbon technologies for their positive emissions
profile, while forcing high-CO2 emitting technologies to internalize
the cost of their emissions into their production costs.
We know that cap and trade mechanisms can drive
environmental technology investment and innovation from the United
States' experience with the regulating sulphur dioxide emissions
(SO2) from power plants. The U.S. Acid Rain program, targeted
at achieving a 50% reduction in power plant SO2 emissions, achieved
greater reductions, sooner, at considerably lower costs than forecasted
when the program was enacted. In 1990, on the eve of legislation,
analyses estimated that the U.S. Acid Rain program would cost
$6 to $7.5 billion annually by the time it was fully implemented
in the year 2010. Subsequent estimates a few years later predicted
costs of roughly $2.5 billion. The most recent analyses—including
one by the Office of Management and Budget in the White House—peg
the costs at $1.1 to $1.8 billion a year.[77]
Meanwhile, academic studies have estimated savings of hundreds
of millions of dollars a year due to the use of a cap-and-trade
system rather than a hypothetical facility-level performance standard
achieving identical emissions reductions (with savings running
into the billions relative to a requirement that all generators
install end-of-pipe pollution control equipment).[78]
Perhaps what is most remarkable about this environmental
policy success story is that the program led to the development
of compliance strategies not contemplated when the program was
first enacted. Given the price incentive to reduce emissions,
engineers at power companies and technology firms found ways to
modify power plants to take greater advantage of lower sulphur
coals, and refine emerging SO2 scrubbing technologies to make
them more reliable and less costly to build and operate.
The point about innovation is important because
none of us today can fully imagine the types of low and zero carbon
renewable technologies and the many permutations of them that
will evolve over time. The best policy is one that does not try
to dictate an outcome based on a known set of current technologies,
but rather creates an incentive for inventors and entrepreneurs
to achieve the greatest output of low and zero carbon energy at
lowest cost.
Cap and trade policy can be a powerful driver
for technology deployment, but only if done right. There are two
lessons to be learned from the first phase of the European Trading
Scheme germane to the Select Committee's inquiry into renewable
energy deployment.
First, the price signal must be real. A cap
must be set based on the best scientific understanding of the
emission reductions necessary to avoid the worst consequences
of global warming, and the baselines used to assess the emission
reduction responsibility of sources covered by that cap, must
be based on real, verifiable, historic emissions data. The combination
of politically expedient targets and baseline data based on guesstimates
of future emissions growth will conspire to create a cap that
is neither effective in driving technology innovation and investment
or in achieving any meaningful environmental progress.
Second, the price signal must be sustained.
Energy technologies are capital intensive and long-lived. Deployment
of renewable technologies will not occur if investors cannot reasonably
expect to recover the value of their investment over time. Cap
and trade programs will not succeed in stimulating investment
or reducing pollution if they sunset every few years, or if the
emission reductions created by an investment in low and zero carbon
technologies cannot be banked with a reasonable expectation that
such reductions will have value in the future.
A real and sustained cap and trade program can
be a powerful tool for renewable energy deployment. U.S. Energy
Information Agency (EIA) modelling of the proposed Lieberman/Warner
national cap and trade legislation recently debated in the U.S.
Senate demonstrates the power a comprehensive cap and trade program
can have in commercializing renewable energy technology. According
to EIA, implementation of the Lieberman Warner cap would result
in 40 to 146% greater deployment of renewable energy technology
by 2030 than would otherwise be achieved in EIA's business as
usual scenario. According to EIA, under the Lieberman Warner cap
and trade program, between 21 and 61% of all generation built
between now and 2030 would be renewable resources. These results
are all the more impressive when you consider that EIA's business
as usual scenario already takes into account favourable renewable
energy provisions of the Energy Independence and Security Act
of 2007 and the fact that 29 states have renewable energy portfolio
standards of varying stringency. In short, the considerable renewable
energy gains achieved through the Lieberman Warner cap and trade
program are wholly additional to an already considerable policy
effort to promote renewable energy in the United States.[79]
More to the point, at the request of Senator
James Inhofe of Oklahoma, EIA analysed the efficacy of a national
renewable portfolio standard requiring 25% of electricity to come
from renewable energy by 2025. While this standard produces roughly
the same amount of renewable deployment as the Lieberman Warner
cap and trade bill, there is no comparison between the two policy
initiatives in terms of achieved CO2 reductions. The national
renewable portfolio standard moderated national CO2 emissions
growth, achieving a 14% reduction in electricity sector CO2 emissions
against EIA's business as usual base case, but national electricity
sector emissions still increased by 14% above 2005 levels.[80]
In contrast, the Lieberman Warner bill results in an absolute
reduction in electricity sector emissions between 17 and 47% below
2005 levels. In short, even an aggressive national renewable energy
policy is no substitute for a reasonable cap and trade policy
where the policy goal is reducing greenhouse gas pollution.
EDF has supported state initiatives to adopt
renewable portfolio standards as a way to jump start technology
deployment in absence of concerted national policy to cap and
reduce greenhouse gas pollution, but we do not see RPS requirements
as a substitute for a national cap. They are complimentary, at
best.
Likewise, the United States has achieved some
success in promoting renewable energy development through a production
tax credit for wind, and more recently, for solar. Here again,
in absence of a national cap, the production tax credit has proven
to be invaluable in jump-starting wind development in the United
States. We know of the direct relationship between this subsidy
and wind development, because, unfortunately, Congress has not
seen fit to enact this credit consistently. When the credit is
in place, wind development occurs. When it expires, wind development
virtually grinds to a halt. (See chart)
Source: American Wind Energy Association
As with a cap and trade program, the effectiveness
of the tax credits rests in large measure on the consistency of
economic incentive is essential for lasting impact on energy project
developers. Even then, as with the RPS, a production tax credit,
at best, is a down payment on needed technology deployment, but
it does not create the fundamental restructuring of electricity
production costs necessary to push renewable energy development
ahead of more carbon dioxide intensive options for generating
electricity.
Convinced as I am that a well-designed cap and
trade program is the cornerstone of any effective policy for capping
and substantially reducing greenhouse gas pollution, I recognize
that the traditional utility business model and nature of the
electricity grid are such that price signals alone may not be
enough to realize the full environmental potential of renewable
energy technology. Renewable technologies typically have low variable
costs but high capital costs, and rules must be in place that
enable utilities to enter into long term power purchase agreements
with project developers such that these developers can demonstrate
a revenue stream stable enough to secure financing from lending
institutions.
Work also needs to be done to upgrade transmission
lines and infrastructure to enable renewable energy resources
to easily integrate into the grid. By way of example, EDF is working
with policymakers in Texas to create pre-set renewable energy
corridors where transmission lines are easier to site and permit
for the purpose linking sites in west Texas that have high wind
power potential with growing population centers in eastern Texas.
EDF is also initiating work with utilities and regional transmission
planning organisations in the United States on ways to more quickly
deploy "smart" transmission and distribution technologies
along with innovative retail tariffs that promote demand response,
which, in total, will help maintain and improve grid stability
the grid plays host to greater amounts of variable wind and solar
generation.
Finally, there is room for government support
in basic research and development. For example, solar technology
was an early beneficiary of the United States space program, and
the network of United States national labs and research universities
obtaining government grants have a long legacy of helping to incubate
the technologies and materials reaching the market today. Basic
science is a cost difficult for any corporation to bear alone,
and a well-structured program of basic government-sponsored R&D
is valuable for spreading those costs broadly across society.
Here the trick is to develop methods of subsidizing research without
the government falling into the trap of picking technology "winners."
Inventors and entrepreneurs I speak with favour competitive mechanisms
like technology "prizes" as a way to reward research
that leads to commercial innovation. I should also note that auction
of even a fraction of CO2 allowances created under a cap and trade
program create a large and sustained funding source for government-sponsored
R&D, thus addressing one of the single greatest frustrations
associated with government-sponsored research: inconsistent annual
appropriations of funding from the treasury.
In conclusion, renewable energy is not an end
in and of itself, but a means to an end. The defining environmental
challenge of the 21st century is abating the threat of catastrophic
climate change. Renewable energy can play a large role in meeting
this challenge, but adopting strong policies to promote renewable
energy absent a commitment to cap and substantially reduce greenhouse
gas pollution is neither the most effective way to promote renewable
energy nor the way to solve the problem of climate change. Indeed
a laser-like focus on renewable energy deployment may actually
serve to obscure other more cost-effective strategies to reduce
greenhouse gas pollution, such as aggressive energy efficiency
and strategies to slow and reverse tropical deforestation. Society
is best served when environmental policy is achieved cost-effectively,
and a market for emission reductions created by a cap and trade
system is a proven method for doing just that.
I appreciate the opportunity to submit these
comments to the select committee and stand ready to be helpful
to your members in any way that I can be as you continue your
deliberations.
Fred Knapp
President
7 July 2008
77 Cost estimates cited in National Acid Rain Precipitation
Assessment Program, NAPAP Report to Congress: An Integrated
Assessment (Washington, D.C.: 2005). Back
78
See A. Denny Ellerman, et al, Markets for Clean Air: The U.S.
Acid Rain Program (New York: Cambridge University Press, 2000),
and Nathaniel O. Keohane, "Cost Savings from Allowance Trading
in the 1990 Clean Air Act: Estimates from a Choice-Based Model"
in Charles E. Kolstad and Jody Freeman, eds., Moving to Markets
in Environmental Regulation: Lessons from Twenty Years of Experience
(New York: Oxford University Press, 2006). Back
79
Report to be found at: http://www.eia.doe.gov/oiaf/servicerpt/s2191/index.html Back
80
Report to be found at: http://www.eia.doe.gov/oiaf/servicerpt/eeim/index.html Back
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