Risks of Going It Alone
A number of cities recently rang in the New Year with spectacular professional fireworks shows. Some parts of the US also allowed individual consumers to purchase fireworks and put on their own shows. That was the case where I grew up in the suburbs of Houston, Texas.
Fireworks are banned in the City of Houston due to the risks to public safety. The surrounding unincorporated areas of Harris County are, apparently, less concerned about the risks. I lived outside of the city, so was able to legally enjoy the teenage thrill of almost blowing off a finger.
Despite the ban, city residents could shoot off fireworks outside city limits or sneak them into the city and surreptitiously shoot them off there. Like clockwork, each year before New Year’s Eve, fireworks stands would appear just beyond the city’s boundaries to serve the city-dwellers.
When a regulation covers some jurisdictions, but not others, the effectiveness of the regulation can be undermined, as in the case of Houston’s fireworks ban. This phenomenon is referred to as “leakage”.
Sneaking Greenhouse Gas Emissions across State Borders
Leakage has been recognized as a challenge when individual states attempt to regulate electricity sector greenhouse gas emissions.
There are a couple reasons for this. First, states share a common grid and electrons do not respect state boundaries. This means electricity production can easily move from one state to another. Second, over time electricity demand can move from one state to another as well. For example, firms can move their manufacturing activities across state borders if energy costs are lower on the other side. Demonstrating this, Matthew Kahn and Erin Mansur found that energy-intensive firms tend to cluster in low cost counties, and high polluting industries tend to cluster in counties with laxer regulations.
The Energy Institute’s Meredith Fowlie authored a paper that illustrates how leakage can undermine a state’s efforts to address greenhouse gas emissions when other states aren’t playing along.
She considers one scenario in which greenhouse gases from power plants are regulated throughout the western US. In another scenario, the regulations only apply in California. She estimates the California-only scenario would only achieve one-third of the emissions reductions of the west-wide scenario. Since California is a net importer of electricity, some in-state emissions decreases would be offset by out-of-state emissions increases.
There are ways for a state to mitigate leakage, but those approaches can undermine the regulations in other ways.
The US was headed down the road of addressing the leakage through implementation of the Clean Power Plan (CPP). Through the CPP, states were assigned greenhouse gas emissions targets that would, in aggregate, reduce the nation’s greenhouse gas emissions by 30% relative to 2005 levels by 2030.
President-elect Donald Trump, however, has said he will kill the CPP. This means that states that remain committed to taking bold action on climate change, such as California and New York, need to consider the risk of leakage.
Get Ready for the Fireworks
It’s possible that some or all of the 27 states that have sued the EPA to kill the CPP, the anti-CPP states, will toss out their plans to cut greenhouse gas emission from the power sector.
Ohio, an anti-CPP state, could be the canary in the coal mine for this scenario. In December, the Republican-controlled legislature, anticipating the CPP’s demise, passed legislation that would gut the state’s renewable energy and energy efficiency requirements. Republican Governor Kasich vetoed the bill, but bill proponents have promised to come back in the next session, when the Republicans will have a veto-proof majority, and finish the job.
Other anti-CPP states could take similar actions. Some may find ways to proactively support more greenhouse gas intensive power plants. These states could become sanctuary states for dirty power plants and industries.
Leakage could become more challenging to mitigate if the anti-CPP states pursue a carbon intensive path at the same time that the pro-CPP states are regulating greenhouse gases more aggressively.
This is especially true because the anti-CPP states are net exporters of electricity to the pro-CPP states. Based on my calculations using Energy Information Administration data, over 10% of pro-CPP state electricity demand is imported.
The anti-CPP states also have, on average, dirtier generating fleets. Their power plants emit 16% more greenhouse gases per unit of electricity than the plants in the pro-CPP states, based on EPA data.
Together these factors could undermine the efforts of pro-CPP states to cut greenhouse gas emissions.
Building Bridges with Other States
The pro-CPP states need to carefully evaluate their next moves.
One approach is for the pro-CPP states to coordinate more closely together through joint efforts. California’s focus on expanding the cap-and-trade market to include other jurisdictions such as Quebec and Ontario is a good example of how sub-national entities can work together. In the same vein, the New England states are planning joint efforts to bring more clean energy onto the grid.
Perhaps there will also be opportunities for the pro-CPP states to cooperate with anti-CPP states in specific areas.
For example, Republican-leaning states in the windy Great Plains have pursued meaningful renewable energy goals. Also, since the election in November, Michigan, a state that voted for Trump and has a Republican legislature and governor, has even increased its renewable energy goals. There may be opportunities for pro- and anti-CPP states to cooperate on renewable energy development.
The expected demise of the CPP comes at a particularly tricky time in the West. California and its neighbors have been moving toward greater integration of their electric grids. California Governor Jerry Brown continues to be committed to this effort.
Integrating markets across the region could enable the grid to accommodate more wind and solar energy at a lower cost. That would tend to be good for climate change policy.
Yet, in a post-CPP world, it’s important to consider whether closer integration between pro- and anti-CPP states in the West could lead to more leakage and undercut progress toward targets. This could occur if coal power plants are able to operate more and stay in business longer in an integrated market. The analysis thus far suggests this is unlikely, and the other benefits are significant.
Mitigating climate change on a global scale is going to require significant cooperation between governments in a number of areas, including to address leakage. The US states that are committed to climate change action should take that to heart and demonstrate how they can work together to tackle the challenge.
Andrew G Campbell View All
Andrew Campbell is the Executive Director of the Energy Institute at Haas. Andy has worked in the energy industry for his entire professional career. Prior to coming to the University of California, Andy worked for energy efficiency and demand response company, Tendril, and grid management technology provider, Sentient Energy. He helped both companies navigate the complex energy regulatory environment and tailor their sales and marketing approaches to meet the utility industry’s needs. Previously, he was Senior Energy Advisor to Commissioner Rachelle Chong and Commissioner Nancy Ryan at the California Public Utilities Commission (CPUC). While at the CPUC Andy was the lead advisor in areas including demand response, rate design, grid modernization, and electric vehicles. Andy led successful efforts to develop and adopt policies on Smart Grid investment and data access, regulatory authority over electric vehicle charging, demand response, dynamic pricing for utilities and natural gas quality standards for liquefied natural gas. Andy has also worked in Citigroup’s Global Energy Group and as a reservoir engineer with ExxonMobil. Andy earned a Master in Public Policy from the Kennedy School of Government at Harvard University and bachelors degrees in chemical engineering and economics from Rice University.
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