What Counts as Success in Energy Efficiency Programs?

Most countries’ plans for reducing greenhouse gases rely heavily on energy efficiency programs. So, even if you aren’t an energy efficiency specialist, it’s important to understand how, and how well, those savings get counted. When it comes to measuring the impacts of energy efficiency programs, this means disentangling which energy consumption changes can be credited to the program, and which would have happened anyway. For those of you who aren’t steeped in the intricacies of this energy efficiency accounting exercise, let me provide a bit of background.

My husband often compares electricity market regulations to the rules for Dungeons & Dragons, a 1980s gaming craze that captivated some – mostly pre-teen boys – and bemused everyone else. It involved multiple 100+ page rulebooks that explained things like how many “experience points” a character might get for slaying a certain monster.

Energy efficiency policy can be as complex as Dungeons & Dragons. This isn’t a criticism. It’s endemic to energy efficiency policy for one fundamental reason: it’s really difficult to measure the savings from energy efficiency programs. There’s no meter that runs backwards to measure those savings. As a result, there are lots of discussions and evolving rules on how to measure them.

To take an example, imagine that your local utility offers rebates for homeowners who buy energy efficient hot water heaters. The task for the regulators is then to assess how much less energy homeowners will consume because of the rebate program.

One of the core issues is figuring out how many homeowners would have bought an efficient hot water heater even without the utility rebate. Those who would have are labeled “free-riders” – they get paid the rebate for doing something they would have done anyway.

A standard method for measuring savings from a rebate program is to first develop an “engineering estimate” of the savings associated with each hot water heater replacement and then add those savings up across everyone who applied for a rebate. This represents the “gross” savings.

The next step is to figure out what share of homeowners are free-riders and then take that share out in order to estimate the “net” savings. Sometimes, regulators ask consultants to survey homeowners about whether they would have bought the efficient hot water heater absent the rebates. This can be an inherently difficult process – effectively asking people to construct a counterfactual world for their past selves.

Colleagues and I have argued elsewhere that there are better ways to develop estimates of savings from energy efficiency programs, including randomized controlled trials and other quasi-experimental approaches. One of the advantages of these approaches is that they provide an estimate of the net-to-gross ratio. (They can also highlight other shortcomings of the engineering estimate approach I described above, for instance if the engineering estimates are too optimistic.)

For instance, a few years ago, Judd Boomhower and Lucas Davis applied a quasi-experimental technique to evaluate a “cash-for-coolers” rebate program in Mexico that subsidized refrigerator and air conditioner replacements. They found that even without the rebate about half of the participants would have replaced their inefficient appliances with a more efficient one, and many would have done so for a lower rebate than they were paid.

Despite this sort of evidence, I’ve heard several energy efficiency advocates, recognizing the difficulty in calculating net-to-gross ratios, assert that it doesn’t really matter. They say things like, “The climate doesn’t care about the difference between net and gross savings.” The implication seems to be that we should pat ourselves on the back for achieving the gross savings.

But, focusing on gross savings is problematic for two reasons:

  • We will not solve climate change by focusing only on U.S. energy customers. (This point has come up repeatedly on this blog, such as here and here.) One implication of this is that we need to export the right policies to the rest of the world. So, it’s essential to figure out whether an energy efficiency program causes people to take certain steps or whether they would have taken them anyway.

Imagine, for example, that the hypothetical utility rebate program for hot water heaters has a low net to gross ratio (i.e., a lot of people would have bought the efficient hot water heater even without the rebate). Maybe they would have bought the efficient hot water heater because of another energy efficiency policy, such as efficiency standards. We need to know if standards are doing all the heavy lifting  so that other parts of the world will adopt the most effective policies.

And, it’s really true that other countries are watching what we’re doing carefully. A couple months ago, I spoke to a deputy energy minister from the Pakistani province of Punjab, who was more up-to-date on California net-metering policy than me.

  • It’s a waste of money. Paying people to do something they would have done anyways is not a good use of taxpayer, ratepayer or anyone’s money. If there aren’t very many cases (i.e., if the net to gross ratio is high) and it’s the inevitable outcome of an otherwise very successful program, we can live with it. But it’s important to know the net to gross ratio and not just focus on gross savings, so that we know how much money is going to waste.

Beyond this, there could be distributional implications. For example, if low-income consumers are less likely to participate in energy efficiency programs, then their rates are being used to subsidize higher income customers to do something they would have done anyway. That’s not just inefficient use of funds, it’s unfair to the neediest in our society.

So, we need to continue to sharpen our pencils and apply state-of-the-art measurement techniques to energy efficiency programs. It’s critical to know how much bang we get for every energy efficiency buck, especially in a time when the national political winds are likely to push back against government energy efficiency programs. The rest of the world is watching!

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How Would Energy Prices Adjust to the Border Adjustment Tax?

In a recent Saturday Night Live episode, Baldwin-as-Trump is casting about for clever ways to get Mexico to pay for the border wall. But with each attempt, the joke is on him, and Americans are left footing the bill.

snl

Source

The following week, in what could be construed as life-imitates-art, White House Press Secretary Sean Spicer announced a plan to finance the wall: Use the Congressional Republicans’ proposed tax reform “as a means to tax imports from countries that we have a trade deficit from, like Mexico”.

This was a confusing development on many levels. For one thing, it reversed Trump’s earlier opposition to the border adjustment tax proposal on the grounds that it is “too complicated”. Moreover, Trump’s key arguments in favor of the border adjustment (i.e. boosting employment and made-in-the-USA exports) are inconsistent with what the border adjustment is designed to do (raise revenues in a trade-neutral way).

In the wake of this announcement, there’s been much speculation about how this proposal would affect the US economy. Energy markets have been getting lots of attention because the petroleum sector could be particularly impacted. Some analysts and media reports are projecting gasoline prices increases on the order of 30-40 cents per gallon. But proponents of the plan –including some world-class economists– maintain that these price increases are illusory.

Before unpacking these back-and-forth disagreements about what the impacts would/would not be, let’s quickly review what’s being proposed (and why).

A Better Way?

ryan

Source

Republicans are laying the foundations for a major overhaul of the tax code. The Ryan-Brady GOP plan, “A Better Way: Our Vision for a Confident America”, proposes a number of substantial changes in how businesses pay taxes. The current system taxes corporate income – net of costs of goods sold, wages, depreciation, etc.-  at a relatively high marginal rate of 35%. The new proposal would replace this tax, which many view as excessively burdensome, with a ‘destination-based cash-flow tax’ (explained in more detail here). Cash-flows (revenues net of wages and asset purchases which can be written off immediately) are taxed at a lower rate of 20%.

All else equal, this reduction of the corporate tax rate would significantly reduce government revenues. Not good news when you are trying to finance a border wall, increase defense spending by $54 billion, etc. This is where the border adjustment tax (BAT) comes in.

The BAT makes two important ‘adjustments’. First, businesses that import goods and intermediate inputs are not able to deduct these import costs. Second, businesses that export goods to other countries are not required to pay tax on revenues from foreign sales. If the US is running a large trade deficit (as it is now), revenues earned via taxing imports will exceed revenues lost from exempting exports. The Tax Policy Center has estimated that the BAT would raise $1.18 trillion over 2016-2026.

What would BAT do to domestic gas prices?

If you are a big net importer, you are not feeling good about this BAT idea.

refinery

 Chevron (refinery pictured here) is a major importer of foreign crude. Source

A recent report by energy economist Phil Verleger looks in detail at how these proposed changes could impact U.S. markets for petroleum products. On the importing side, Verleger assumes that refiners who rely on foreign-sourced inputs would see a 25% increase in import prices under the BAT. Facing this kind of cost increase, refiners would go looking for domestic sources. But domestic oil producers are under no obligation to supply the domestic market. If domestic revenues are taxed while export revenues are exempt, they will demand a higher price from domestic refineries to compensate for the tax disadvantage of selling at home versus abroad. Taken together, Verleger estimates that the average retail price of gasoline would increase by 13% (approximately 30 cents a gallon). Other industry analysts have reached similar conclusions.

One important thing to note about these kinds of analyses is that, to keep things tractable, they hold some important variables fixed. The Verleger study is careful to note that accounting for all of the various channels the BAT could work through “would be complex and far reaching and would likely differ substantially from the petroleum specific calculations presented in this paper.” But this begs the question: how do projected impacts change if key variables are turned loose?

What gives with this kind of BAT?

On the face of it, it seems like this border adjustment tax should benefit exporters and hurt importers (who will then pass that hurt through to you the consumer). But it’s more complicated than that because the BAT is designed to tax all imports and exempts all exports. Purchasers of our exports finance their purchases by selling us imports. If they sell us less, their purchasing power drops.

In a textbook model of how these pieces fit together, the BAT would trigger a currency adjustment, and the US dollar would appreciate to fully offset any real effects on import and export prices. To see how this works, suppose a US refinery is buying oil from Mexico at a price of 1000 pesos per barrel. Once the BAT is introduced, the 25 percent tax on imports raises this cost to 1250 pesos/barrel (all else equal). But if the dollar appreciates by 25% as some are predicting, prices paid for Mexican imports (in US dollar terms) would be unchanged. In other words, in theory, the BAT would not penalize imports or favor exports. Terms of trade effects would be undone by the currency adjustment.

Paul Ryan has declared it “obvious and mathematical that a currency adjustment would occur”. However, building on our it’s-more-complicated theme, the theory that yields this elegant and mathematical result conditions on some strong assumptions. Federal Reserve Chairwoman Janet Yellen is among those questioning these assumptions, and the real-world considerations that this theory ignores. Examples include factors that limit the pass-through from currency changes into U.S. import prices and the reactions of other countries who can impose their own import taxes in retaliation.

There has to be a better “Better Way”

There are many reasons to think that exchange rate adjustment to the proposed BAT will be slow and incomplete. If this is the case, the prices consumers pay for gas –and imported goods from avocados to zippers– will increase. The economic impacts could be significant and negative.

Reducing corporate taxes will encourage good things like innovation and investment in economic growth. But it would also reduce tax revenues. To make up the shortfall, we need to find something else to tax.  With the GOP Better Way proposal, we run a real risk of penalizing other good things, namely all imported goods and domestic consumption. This would impose real costs on American consumers and the economy as a whole.

Ideally, we would reduce taxes on corporate income and raise needed revenues by penalizing damages versus other goods. Another Republican tax proposal, one that has received relatively less attention than the GOP plan, aims to do just that. The Conservative Case for Carbon Dividends proposes to tax domestic carbon emissions. It would incorporate a different kind of border adjustment, one that is designed to tax the carbon emissions associated with imports (versus the imports themselves).  Under this proposal, some consumer prices (including gas prices) would rise. But these increases would reflect real social costs and trade-offs, versus distortions imposed for the sake of revenue generation. Now that sounds like a better way.

 

 

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What Do We Want From California Climate Policy?

When you listen closely to debates over California climate change policy, it becomes clear that the disagreements are along two dimensions: what is the best approach to meeting the state’s goals and what exactly are those goals. I think the differences are increasingly about different goals, rather than about different methods of achieving those goals.

goalsofclimatepolicy1Setting aside those who think climate change isn’t happening, isn’t man-made, or just isn’t a problem, participants in California’s climate policy debate often speak of four intertwined goals:

A. Reducing California’s GHG emissions to a specific target

B. Demonstrating to the world that a state (or country) can significantly reduce GHG emissions without significant economic cost

C. Creating new knowledge and technologies that lower the cost of reducing GHGs globally

D. Reducing local pollutants, particularly in disadvantaged communities

I wrote about local pollutants in my January blog. I still believe that it is important for both ethical and political reasons to address local pollution at the same time, though not with the same policies, as GHGs. So, I will focus here on A, B and C.

Most of the discussion in Sacramento is around goal A, hitting California’s GHG emissions target, but that is undoubtedly the least important for three reasons:

First, as I’ve talked about before California is just over 1% of global GHG emissions, and global emissions are all that matter for climate change. Climate science does not dictate any one numerical reduction goal that California “must” meet. For the foreseeable future, more reduction is always better, so long as it doesn’t cost too much.

goalsofclimatepolicy2Second, the difficulty of meeting California’s emissions target will depend greatly on a host of unpredictable factors that are unrelated to the state’s emissions reduction policies, such as the growth rate of the state economy and the price of oil, as co-authors and I showed in a study released last August. Advances in low-GHG technologies will also reduce the cost of meeting a numerical goal, and advances in extracting fossil fuels, such as fracking, will increase the difficulty of lowering GHGs.

Third, reducing California’s contribution to climate change requires more than reducing GHG emissions from inside California. We buy all sorts of goods from out of state whose production generates GHGs. With the exception of a very imperfect attempt to account for out-of-state electricity (and, to some extent, transportation fuels), the GHG impact of imported goods are not counted in the state’s reduction goals. Just as with carbon offsets, real change depends on “additionality”, or in this case what might be called “subtractionality”: is a reduction of GHG emissions from one source actually reducing worldwide GHG or is it moving emissions to another location?

Developing and Demonstrating Credible, Scalable Solutions

Subtractionality is also central to goal B, credibly demonstrating that reducing GHGs needn’t significantly harm an economy. It’s clear that outsourcing our GHG emissions to other states or countries isn’t a model that can be scaled up to reduce global GHGs. So, honestly measuring leakage and reshuffling – even in cases where California may not be able to control it or penalize it — will be critical to convincing other governments of California’s success. The demonstration goal also weighs against expensive or non-replicable approaches to GHG reduction, even if they help reach a numerical target.

Demonstrating that other economies can grow on a low-GHG path is also the basis for goal C: innovating to lower the cost of reducing GHGs. Knowledge creation of this sort necessarily means experimentation which, by its very nature, means some disappointments. But knowledge creation is where California has the most to contribute.  The state is known for its innovative and risk-taking knowledge economy.

Knowledge creation and innovation means much more than extending the science of renewable energy and storage technologies, though those are big pieces of the puzzle. It also means figuring out how to operate a reliable grid with a high share of intermittent resources, such as wind and solar. And developing technologies and programs that lower the cost of efficient demand-side participation in electricity markets. And it means creating business models for electric vehicle charging that maximize the value of having EVs on the grid.goalsofclimatepolicy3A Plan of Attack for California Climate Policies

All of that seems like a lot to ask from California’s climate policies, and it would be if we could only deploy one policy. But, California has multiple climate policies, which suggests a plan of attack that could make progress on all three goals.

First, recognize the reality that the state’s emissions goal is a goal, not a line in the sand.  Commit to aggressive policies that are expected to meet targeted emissions levels under the most likely scenarios, but recognize that actual emissions will be higher or lower depending on unpredictable factors. This gives the state’s cap-and-trade program the flexibility to maintain a minimum price when emissions are on track to come in below the cap and enforce a credible ceiling price when emissions are not going to get down to the cap. This would make the cap and trade program both more effective and more politically credible.

Second, create a full-economy consumption-based accounting of California’s GHG emissions. This would include sectors that are not part of the cap and trade program, such as agriculture, as well as out-of-state production in sectors that are under cap and trade, such as oil refining. This measure would include all imports, and would exclude all exports.  It would not be intended to be a device for enforcing policy, but rather a scorecard for honestly assessing how well the state is reducing its overall contribution to climate change. Ideally, such a scorecard would be calculated by an entity that is not politically invested in the answer, the equivalent of a Congressional Budget Office for California’s climate policy. If California is going to demonstrate the ability to reduce emissions without harming the economy, it needs this sort of all-encompassing and independent accounting.

Third, focus complementary policies on the areas where the market mechanism — cap and trade — is least effective, where specific market failures are identified. Probably the most important such case is in developing new knowledge and technologies. “Complementary policies” should include support for basic science to develop new technologies, as well as mandates for using specific technologies, such as the state’s electric vehicle mandate. But, importantly, every dollar spent or mandate enacted should be clearly tied to a need for policy intervention beyond the price in the cap and trade market. By the way, I would include in this knowledge creation policy the experiment that we are now running as the state ramps up the use of intermittent renewables. Complementary policies may also be justified where market prices are shown not to be effective, such as with some energy efficiency programs where buyers of appliances, houses, or other goods do not accurately incorporate energy prices.

As the California legislature discusses how to extend the state’s climate programs beyond 2020, we have an opportunity to learn from the experience so far and adjust policies in order to improve their impact in California and, more importantly, in the rest of the world. Now is the time to make the big changes we need, before we lock in for another decade or more.

I’m still tweeting interesting energy news, research and stats @BorensteinS

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Breaking News! California Electricity Prices are High

In case you missed it, a recent investigative piece in the LA Times unearthed the shocking fact that California retail electricity prices are high,  about 50% higher than the national average. The article’s main focus is on the fact that California has a lot more installed nameplate generation capacity then has historically been the norm. There are several causes identified in the piece.  Deregulation of the market in the late 1990’s is pointed to as a culprit. Somewhat inconsistently, the construction of regulated, rate-based plants also takes much of the blame. One factor that was barely mentioned, however,  was California’s renewable electricity policy.

The story of how California’s electric system got to its current state is indeed a long and gory one going back at least to the 1980’s. The system still suffers from some of the after effects of the 2000 era crisis.  The Long Term Procurement Process (LTPP) put in place in the wake of the crisis, and overseen by the CPUC, has been criticized from many sides.

However, since the power crisis of the early 2000’s settled down, the dominant policy driver in the electricity sector has unquestionably been a focus on developing renewable sources of electricity generation. As is well known (outside of the LA Times apparently), California has one of the country’s most aggressive renewable portfolio standards (RPS).  The RPS requires each firm that sells electricity to end-users to procure an increasing fraction (33% by 2020, 50% by 2030) of the energy they sell from renewable sources.

Desert Solar Array
The Times article’s focus on generation capacity does (a bit unwittingly) provide a nice starting point for a discussion about the cost and implications of this renewable energy policy. The policy, while undoubtedly effective at reducing the carbon intensity of the power sector, has also been quite disruptive to the economics of the sector.  It is forcing a rapid (and early) replacement of conventional sources with renewable, but variable, generation sources such as solar and wind. Since 2010, about 80% of new capacity has come from renewable sources and it’s likely that much of that capacity would not have been built if not for the RPS.  (Much of the remaining 20% has been coming online to replace the retired SONGS nuclear plant or capacity slated for retirement due to environmental issues with their water cooling  processes.)

newcap2010

New Capacity in California ISO by fuel type

Proponents of strong renewable standards have pointed to the fact that new contracts for renewable energy carry price tags that are (at worst) only modestly above those for a new conventional natural gas power plant. However comparing the cost of a brand-new solar plant to that of a brand-new gas plant overlooks two important facts.  First, renewable, variable output sources offer very different operational capabilities than conventional sources.  Second, right now we don’t really need new capacity of any kind, and are in fact struggling to find ways to compensate the generators that are already here.

The renewable portfolio standard provides an interesting contrast to the federal mileage standards on vehicles. Both require the replacement of older legacy, high-carbon sources with newer,  lower-carbon ones. However automobile standards work by requiring people to buy more fuel-efficient cars when they decide to buy a new car. Renewable portfolio standards require utilities to buy low-carbon energy by a certain deadline rather than when they are deciding to “trade-in” their old power plants. In California at least, the result has been a much more rapid turnover of legacy sources to the newer, cleaner ones. Another implication, however is the fact that the system now has a large amount of what can appear to be excess capacity. This is because renewable policies are rapidly forcing new “green” capacity into a market that was more or less fully resourced before the mandates really started taking effect.

I don’t mean to imply that the “replace it now” approach is definitively worse.  Research has shown that standards applied only to new purchases can inefficiently extend the lifetimes of older technology, from cars to power plants.  This can significantly dilute the environmental benefits of a technology mandate.  In contrast, instead of extending the lifetimes of old plants, the RPS is in effect forcing the early mothballing of legacy capacity. This improves the environmental impact, but also increases costs, sometimes in subtle ways. The effect grows larger with stricter mandates. At higher percentages, the RPS starts to displace increasingly newer (and cleaner) sources of generation.  The economic effects can be mitigated by allowing for renewable energy generated elsewhere in the country to count toward RPS compliance, but California has largely rejected such policies.

Largely due to the RPS, we have a surge of new, low marginal cost energy, flooding into a wholesale market that already had enough generic energy, thereby driving down wholesale prices. Since wholesale prices cannot support the cost of this much generation (new and old), increasingly the gap must be  made up through rising margins between wholesale and retail prices.  Utilities and other retailers have to pay  high market prices for new renewables instead of being able to “buy low” on the wholesale market.  Because all retailers face the same regulation, they pass these costs on to end users. And this doesn’t even consider the costs of new transmission, most of which is being added to boost the power system’s ability to access and absorb large amounts of renewable energy. Transmission costs, which are also charged through to electricity end users as part of the retail prices cited in the Times article, will continue to grow in coming years. The Tehachapi transmission project alone is projected to cost over $2 Billion.

The result is the seemingly perverse situation where customer rates are rising while (conventional) generation sources are simultaneously struggling for revenue and threatening to retire. Such conditions are a recurring theme on this blog and are often drivers of significant change. Unfortunately, despite the glut of electrical energy, we will likely still need the conventional capacity to handle the ramping and back-up needs created by the increased reliance on variable sources (wind and solar).

One of the debates lurking in the background is who should be responsible for the cost of these disruptions. Richard Schmalensee has observed that deregulation may make it easier for State policy makers and regulators to ignore wholesale market effects. This is because the assets being stranded today are largely owned by non-utility generation companies in contrast to the late 1990’s when the stranded assets were a joint problem of regulated utilities and their rate payers.

California led the way with developing renewable energy in the 1980’s,  with the deregulation of the power sector in the 1990’s and 2000’s, and now with high-volume renewable mandates since 2010. We are learning a lot about how to physically manage and finance a cleaner energy system. We also need be realistic about the costs of such policies.  When you combine the cost of policies of the past with the aggressive goals for the future, you get retail electricity prices that, yes, continue to be pretty darn high.

 

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Learning to Frack

Technological advances and learning-by-doing have made U.S. shale oil profitable even at $55/barrel.

Just ten years ago shale oil was expensive. Global oil prices spiked to $135/barrel in 2008 but shale oil didn’t and couldn’t respond. Now, at only $55/barrel, U.S. oil producers are going all in, announcing billions of dollars of increased investment, particularly in Texas and North Dakota, and energy experts like Daniel Yergin are expecting U.S. production to increase this year by more than 500,000 barrels per day or about 6%.

This remarkable transformation is a perfect example of learning-by-doing.  Cost reductions in solar, wind, and batteries get a lot of attention.  But fossil fuel producers also learn from experience, and the pace of learning in U.S. shale oil over the last couple of years has been impressive. Recent research by Thom Covert and others help us make sense of what happened, and identify several key lessons for other industries.

Shale Oil Ramps Up, Even at Lower Prices

U.S. oil production in 2015 reached its highest level in decades, driven large increases in production from shale oil.  With shale oil and other forms of “tight oil”, producers drill horizontally and then use hydraulic fracturing to reach oil trapped in low-permeability rock like shale, sandstone, and limestone.  Over the last decade, these technologies have provided access to vast areas of oil reserves that were previously out of reach.  The growth has been particularly dramatic in the Eagle Ford, Permian, and Bakken, but other areas have grown rapidly as well, and shale oil now represents almost half of all U.S. production.

shaleoilNote: After slowing down in 2016, U.S. shale oil is expected to ramp up again in 2017, continuing a decade-long surge. Constructed by Lucas Davis (UC Berkeley) using EIA data.

Production slowed in 2016 as oil prices briefly dipped below $30/barrel.  Companies made severe budget cuts, reduced drilling activities, and U.S. oil production fell 12% between July 2015 and September 2016.  Remarkably though, even at $30/barrel, production still continued at a solid pace.  Despite historically low oil prices, the U.S. still produced almost 9 million barrels per day during 2016.

Now with oil prices at $55/barrel, U.S. producers are pushing their chips to the center of the table.  Hess, one of the biggest producers in North Dakota, just announced a $2.25 billion investment budget for 2017, up 18% from last year.  Noble Energy has said they will spend up to $2.5 billion for 2017, up 67% from last year.   Companies believe these investments will be profitable because U.S. production has become so much more efficient.

Practice Makes Perfect

Economists have long studied learning-by-doing. As a company makes more of a good, it tends to become more efficient at production.  That is, the company learns to make output using fewer resources; or, equivalently, the company learns how to make more output for a given set of inputs.  Leaning-by-doing has been shown to happen in virtually all industries, with some of the best-known studies in economics coming from aircraft, semiconductors, and shipbuilding.

These industries may at first seem quite different from hydraulic fracturing, but there is a key similarity.  In all of these industries, companies are performing a repetitive production process.  Boeing builds hundreds of airplanes.  Chesapeake Energy drills hundreds of wells.  Key to learning is repetition, so industries like this are best suited to learning-by-doing.

rigNote: Oil production in North Dakota’s Bakken shale.  Photo from here.

Tens of thousands of oil wells have been drilled in the United States since 2010.  This repetition has allowed producers to experiment with innovative new approaches to drilling and finishing wells; new combinations of drilling fluids, well depths, and other factors. This trial-and-error over thousands of wells has facilitated learning, pushing new techniques forward and reducing the cost per well.

Not all markets look like this. For example look at building nuclear power plants.  Nukes are such massive projects, undertaken so infrequently, that there is less scope for learning.  Not surprisingly, studies have found only limited learning-by-doing for nuclear power plants.  See here, here, and here.  This is exactly the rationale for small modular reactors – proponents argue that in building much larger numbers of smaller reactors they can benefit from learning-by-doing and decrease costs.

Evidence from the Bakken

In the most comprehensive study to date, University of Chicago economist Thom Covert documents rapid learning-by-doing by shale oil producers in North Dakota’s Bakken Shale.  Covert gathered detailed data from all oil wells drilled in the Bakken over an eight year period, including total oil production as well as information about the sand, water, and other “inputs”.  Covert shows that over just a small number of years, producers learned to make much more profitable choices, squeezing up to three times as much profit out of a given well.

One of the interesting patterns is that over time, producers have learned to be much more aggressive, extending the horizontal section of wells much farther and then using much more water and sand. By the end of the period, producers were using five times (!) as much water and three times as much sand per foot of horizontal length.  This “super-size’’ approach has been adopted successfully with natural gas production as well.  Super-size wells cost more upfront, but yield much larger amounts of oil and gas.

bakken.pngNote: Reproduced with permission from http://home.uchicago.edu/~tcovert/, this map shows the expected returns from using additional water and sand.  The black dots are the locations of actual wells.

It is complicated, however.  Covert shows that the optimal set of inputs varies dramatically across locations. The heat map above shows that some locations are much more suited to super-sizing than others.  Using more water and sand increases production in some places (the red areas), while decreasing production in others (the blue areas).

Global Technology Spillovers

Learning-by-doing in U.S. shale oil is important not only for the United States, but also because of the prospects for global technology spillovers.  The United States is not the only country with shale oil formations, and it would be naive to think these techniques will not quickly spread around the world.

That said, there is an important feature of the U.S. oil and gas market that makes it particularly well-suited for learning. Unlike most other countries, in the United States there is a wealth of publicly-available information.  Regulators and third-parties collect and disseminate detailed data on each and every well drilled in the United States.  Other countries hoping to grow their oil production would do well to adopt similar practices for information disclosure.

Moreover, the United States has private mineral rights.  This makes it possible for many firms, including smaller firms, to enter the market and try new drilling approaches.  In contrast, where mineral rights are government controlled, it can be harder for companies to enter the market and we might expect there to be less experimentation. U.S. oil and gas production has long been characterized by ingenuity, innovation, and risk-taking – all typical of competitive markets.

Still, it seems inevitable that these techniques will quickly spread around the world.  Globally there are already an estimated 400+ billion barrels of tight oil reserves, so there are a lot of places where these techniques could be profitably employed. This means the global supply curve for crude oil will continue to shift outward, applying continued downward pressure on global crude oil prices.

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Have We Peaked?

The heat is on, and climate change will put significant strain on the US power grid – unless we do something about it.

In the absence of any concrete new policy proposals coming out of the not-so-green White House, we figured we would write about something we know even more about – research! Patrick Baylis, Catie Hausman and I have a new paper out today in the Proceedings of the National Academies of Sciences (PNAS), which is of utmost relevance to this blog. It combines Max’s three favorite topics: climate change, electricity and lots of data.

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Humans do not like heat. There is ample evidence that when it’s hot outside, more people die, we are unhappier, air quality decreases, we become more aggressive and violent, less productive and our cognitive ability decreases. In order to offset these effects, we seek cool environments. Lakes, shade and, over the past century, the air conditioned indoor space. Movie theatres these days are so cold, you can just bring a bucket of sugary cream and you’ll have ice cream by the time the trailers are done. Supermarket, shopping malls, server farms, packing plants, and most homes are air conditioned.

In most of the U.S., electricity usage spikes in the summer when it’s really hot outside. Alan Barreca and coauthors have shown that the rollout of air conditioning has led to massive decreases in heat related mortality over the past century.  While we use some electricity to run our heating systems in the winter, in most of the country, air conditioning uses more electricity. And so it’s no surprise that rising temperatures from climate change are expected to lead to increased electricity demand.

The question that arises is just how much. Lucas has a nice paper on residences in Mexico and finds that we expect massive increases there. In the US, the literature has been relatively sparse. There are few papers on the commercial and industrial sectors.

And importantly, producing electricity at peak times is much more expensive than at non-peak times. If we need to expand generating capacity enough to allow for one more large window unit air conditioner to run at the system peak demand, the upfront cost of that additional power plant (or share thereof) in California is roughly $900. That number nearly knocked my air conditioned socks off.

In the PNAS paper released today we impose end of century climate on today’s economy and grid. We highlight that climate change would cause electricity demand to increase disproportionately at times when the grid is already stressed. A lot of the previous research has focused on the impact of climate change on the *typical* day in a year, finding moderate increases in demand over the next 100 years. We show that it’s also important to factor in the impact on the highest-usage days — when we show that electricity demand will increase even more.

Under business-as-usual (= somewhat frightening) RCP8.5 scenario from the climate change literature, we estimate that *average* demand will increase 7.9%. But the increase is substantially larger — 17.6% — on the highest demand (meaning sweltering hot) days of the year (specifically, we look at the 95th percentile of usage). That makes sense, since a bigger percentage of demand is coming from air conditioning on those high-usage days.

The reason this matters is that cost-effective electricity storage is not yet widely available. So we build the grid to meet the highest usage “peak” hour of the year. Over the next 100 years, that grid capacity will need to increase substantially to accommodate climate-change driven demand growth.

What this means is that adaptation to climate change will be costlier than existing models estimating these costs globally estimate. There are a number of adaptation routes — building hundreds more peaker power plants; developing more storage; developing more efficient cooling technologies, or getting customers to change their behavior. But the existing cost calculations for adaptation don’t factor in the need to do these things.

Another implication is that actions to *prevent* climate change are more valuable than what existing models say. If you can lessen climate change, you can avoid some of these adaptation costs. So let’s get to solving this climate change problem, which is neither perpetuated by the Chinese (their plans to solve climate change are more ambitious than what I fear we will do) nor a hoax. It’s real. Let’s get to it.

This blog post was coauthored with Catherine Hausman (Michigan) and Patrick Baylis (Stanford/UBC Vancouver).

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If Trump Is Waging a War on Facts, What Should I Do?

In a single, very personal way, I benefited from Trump’s election victory. It led to an amazing mother-daughter bonding experience last weekend when I took my 14-year-old daughter to the Women’s March on Washington.

My own crowd shot

My own crowd shot from the Women’s March on Washington

It may not surprise blog readers that I voted against Trump in the election. After all, I’m a Californian who thinks deeply about climate change and environmental policy, values facts, cares about social justice, free speech… the list goes on. After the election, I felt an intense maternal instinct to show my daughter that many people were vehemently opposed to the racism, homophobia, Islamophobia, sexism, etc. articulated – if that’s the right verb to describe policymaking by tweet – by our President. And, I was fortunate to have enough frequent flier miles to fund our trip.

In any case, the march, subsequent debates about liberal alliances, and discussions with my colleagues about what the next four years might bring for energy and the environment have led me to do a lot of soul searching about how I spend my days and how much I’m contributing to the common good.

In particular, I’ve written blog posts that highlight problems with existing clean energy or environmental policies. I’ve expressed skepticism of off-grid solar in Africa, some energy efficiency programs, and the benefits of rooftop solar.

I’m wondering, though, if I should hold back in the coming years? In the era of fake news and “alternative facts”, is a reasoned critique of some part of an environmental policy more likely to be used by opponents to kill it entirely?

I’ve contemplated an answer to this question on several levels:

Practical there will be many fewer environmental and clean energy policies to critique in the coming years, so it doesn’t matter what I say.

But, this isn’t a satisfying answer. While it’s very likely true at the federal level, California already seems to be stepping up its game around climate change. And, as a local, it’s in many ways easier for me to engage here.

la-me-pc-jerry-brown-climate-change-republican-president-20150805

So, if California is going to move into even more of a leadership role on climate change and other environmental policies, that’s all the more reason to get it right.

PrincipledI’m an academic and I uncover facts. Facts speak for themselves so I shouldn’t be swayed by politics.

I’m all for this, but it oversimplifies. I have the latitude to pick which projects I spend time on, and I try to prioritize policy-relevant topics. But, the election has changed what’s policy-relevant and the range of potential policy levers. With many treasured energy and environmental policies now on the chopping block, I need to recognize that my research and blogs could be received differently in this new political environment.

Metaphysical – critiques are an inevitable part of life as an energy economist.

24-221s15Almost every economist – from labor to macro – has what I would describe as “cancer research envy.” A number of us have been in situations where we’re vying for attention, say at an event with big campus donors, with a medical researcher who seems to be making progress on something that could help in the fight against cancer. It’s hard to get the crowd riled up about tax policy or a subtle critique of cap-and-trade next to that.

But, at some level, what we are doing is even more basic research than the molecular chemist behind the cancer discoveries. That’s because economists do research that helps all of us understand and ultimately decide how much money goes to cancer researchers instead of diabetes and to medical research instead of more virtual reality video games. What government allocations, philanthropic decisions or tax policies cause cancer researchers to get more or fewer resources? And, why did the creative and driven scientist decide to go into medical research and not investment banking? At the most basic level, economics is about how societies allocate scarce resources.

Economists have a lot in common with my paternal grandmother who was a teenager during the Great Depression. We absolutely hate waste. (My grandmother kept a refrigerator shelf full of the free ketchups from McDonalds.) Rooftop solar may do some good for the environment, but if it’s not the best way to reduce climate change and local pollution, I’m going to write blogs that criticize it.

After all, if we’re spending too much money fighting climate change, that’s money that we could be spending on lots of other things that society values, like cancer research.

images-2So, I think I need to keep uncovering new facts and writing blogs to help fine-tune the policies and decisions on energy and the pic-make-america-great-again_millsenvironment. Just remember, a dollar saved on energy policy is a dollar we can use somewhere else, whether it’s buying yarn to knit a pink pussy hat or buying a “Make America Great Again” hat – whatever suits your fancy.

 

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Will Trump Negotiate a Better Coal Deal for Taxpayers?

It’s here. The first week of the Trump administration. And it promises to be a busy one.

On the energy front, Trump has an ambitious agenda for his first days in office. Some policy changes will take time to execute. Others can happen with the stroke of his pen (and a tweet).

Ending the moratorium on leasing federal land for coal mining – put in place last year by the Obama administration – is one change we can expect very soon. When it happens, it will mark a return to business as usual in the federal coal program.

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Trump Digs Coal: Source

Here’s the problem. Business as usual is broken. The federal coal program is supposed to manage vast federally owned coal reserves, which account for more than 40 percent of U.S. coal production, “for the benefit of current and future generations.” But the program has, for a long time, been criticized for selling taxpayers short. For this and other reasons, new federal leases were put on hold last year until a comprehensive review of the program could be completed.

A follow-up scoping report released earlier this month from the Department of the Interior lays out a blueprint for major reforms that would help taxpayers receive fair compensation and better account for the environmental impacts from coal mining. The outgoing secretary of the interior has argued that “the only responsible next step is to undertake further review and implement these commonsense measures.”

It’s now up to the Trump administration to decide what to do next. Sticking with the status quo will cost taxpayers. It could also have big implications for the environment.

What’s the problem (and how can we fix it)?

If you are an American taxpayer, you are a part owner (in a manner of speaking) of vast coal reserves. In addition to the coal covered by existing leases, which can support production at current levels for 20 years, there’s much more coal in federally owned ground.

 Source: US Geological Survey; Bureau of Land Management; Energy Information Administration

When the government (or, more precisely, the Department of the Interior) auctions leasing rights and collects royalties from the sale of “your” coal, it is supposed to make sure it receives fair compensation on your behalf. But the government is falling short. Critics have convincingly argued that leasing auctions are fundamentally noncompetitive and undervalue the rights to mine federal lands.

Problems with the royalties that mining companies actually pay are well-documented as well. Overall, it’s been estimated that undervaluation of coal could have cost taxpayers as much as US$30 billion in lost revenue over the past 30 years.

For the majority of Americans who are worried about global warming, uncompensated environmental damages should present a much bigger concern. In a recent study, my coauthors and I calculated the climate change-related damages from burning Powder River Basin coal (which accounts for most of federal coal production). We use the monetized climate damages of $44 per ton of CO2 based on the median U.S. government social cost of carbon. We found the estimated climate impacts are about six times the current market price. Royalty payments could be increased to reflect some of these damages.

graph2Authors: Kenneth Gillingham, James Bushnell, Meredith Fowlie, Michael Greenstone, Charles Kolstad, Alan Krupnick, Adele Morris, Richard Schmalensee, James Stock.

The recently released scoping report lays out a series of proposed changes that could address these problems, such as calculating royalties using the private market price of coal and adjusting royalty rates to account for climate change impacts.

Winners and losers under federal coal reform

In our paper, we highlight knowledge gaps that need to be filled before we can definitively assess the impacts of potential coal program reforms. These gaps notwithstanding, there’s a lot we can learn based on information we already have.

In this spirit, economists Jim Stock and Ken Gillingham have been hard at work looking at the likely impacts of increasing the royalties paid per short ton of federal coal sales. They examine how a royalty increase or “adder” would impact future U.S. coal production. To put these royalty adders into perspective, a $20 increase per ton would capture roughly 20 percent of estimated climate change damages in 2030.

The figure below summarizes their 2030 projections. It should come as no surprise that, as federal royalties increase, coal production on federal lands falls. Some of these reductions are offset by increased production at other US coal mines which are not subject to these federal royalties.

graph

Source: Results reported in this paper

A somewhat surprising finding: Increasing federal royalties would increase national mining employment, even as total domestic coal production falls. That’s because the largest projected increases in production are found in Northern Appalachia and the Illinois Basin. Because these regions are relatively labor-intensive, increased employment in these areas more than offsets reductions in employment on federal lands.

Increased royalties would also benefit taxpayers and the environment. Through 2030, Gillingham and Stock estimate that additional royalties under an increase starting at $15.80/ton and ramping up to $20/ton by 2030 for Powder River Basin coal could exceed $35 billion (undiscounted). The higher price for coal would also lead to power sector emissions reductions on the order of three percent in 2030, they found.

Those who stand to lose the most under reform are the handful of companies that have invested in mining federal coal and the services (such as railroads) that serve them. Electricity consumers would see a very small increase in electricity prices. Gillingham and Stock calculated that under the $20 royalty increase, wholesale electricity prices in 2030 increase by approximately 0.1 cents/kWh, which is less than one percent of current average retail prices.

We snooze, we lose

As President Trump took the oath of office last Friday, the White House website was transformed to reflect the arrival of the new administration. References to climate change were removed. During Senate hearings for his Cabinet, there was no indication this administration intends to make action on climate change a priority.

But a refusal to acknowledge the existence of this problem does not make the problem go away. On the contrary, halting progress toward a meaningful policy response just makes it a harder hill to climb when members of a future administration inevitably resolve to roll up their sleeves and deal with the problem.

A Wyoming open mine in the Powder River Basin, where much of the coal  production on U.S. federal land is located. Bureau of Land Management

In the same vein, the time to act on federal coal program reform is now. Momentum has been building behind the “open and honest conversation about modernizing the coal program.” Judging by the hundreds of thousands of comments filed so far on the scoping report, there is broad-based support for meaningful reform.

If the Trump administration decides to turn a deaf ear on this conversation, we will be in a different place when a future administration picks up this ball. More leases will be auctioned in the coming years, and more federal coal will be covered by long-term contracts. Hitting the snooze button will deliver more good deals to the coal companies operating on federal lands, at the expense of taxpayers and the environment.

The Conversation

This blog is available on The Conversation. Read the original article.

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Fight Both Local and Global Pollution, But Separately

Since discussions of California’s cap and trade program for greenhouse gases (GHGs) began more than a decade ago, many environmental justice (EJ) leaders have voiced concerns about the fairness of cap and trade to disadvantaged communities.  Like most environmental economists, my reaction to these concerns was simple or, I would now say, rather simplistic.ejvsghg_1 The standard economist view goes something like this:

  • Greenhouse gases are global pollutants, causing damage everywhere on earth regardless of the point of emission. A cap and trade program for GHGs is not designed to address local pollutants (nitrogen oxides, volatile organic compounds, sulfur dioxide, and sometimes heavy metals, which do most of their damage near their source) that are emitted from major energy-using facilities, such as electricity generators, oil refineries, and cement manufacturers.
  • Emissions of GHGs from these facilities are imperfectly correlated with emissions of local pollutants. More importantly, the change in total GHG emissions when these sources respond to climate policy, is very imperfectly correlated with the change in local pollution.  In fact, lowering one type of emissions could quite possibly raise the other. (More on that below.)
  • So, we should not count on, or expect, GHG policies to control local pollution emissions. We should pursue separate policies to reduce those local pollutants.

My views on these points haven’t changed, but over the last year I’ve realized that the relationship between GHG and local pollution policy is not that simple.   While listening to EJ leaders in the recent debate over extending cap and trade through 2030, two points have persuaded me that in order for California to make real progress on GHG emissions, addressing the effect of local pollution in disadvantaged communities must be part of the process.ejvsghg_2

First, while it is clear there are more direct ways to control local pollution than through GHG regulation, these communities feel that they do not have the political power to achieve those direct measures.  Absent greater political clout, the rational EJ strategy may well be to climb on the GHG-reduction train and try to bend its path towards addressing local pollution.

Second, most of these emitting facilities are not shutting down.  They often generate higher-paying jobs and in some cases are the center of a community’s economy.  But, if they are to continue operating, the surrounding communities deserve detailed public emissions monitoring, reliable scientific analysis of the impact of those emissions, and compensation for the damage that is still done.

Yet, in talking to EJ leaders, academic researchers, managers at emitting facilities, and air quality regulators, I have heard widely divergent claims about the amount of monitoring, level of emissions, and damage from local pollution, an issue Meredith touched on in October.  Agreeing on the current facts is a necessary first step to diagnosing the local pollution problems and reaching equitable solutions.

Besides the obvious public policy imperative to mitigate local pollution, doing so is also critical because the alternatives — which tie local pollution abatement to GHG reduction — would undermine the state’s climate policies.

For instance, one alternative circulating in various forms has been dubbed “cap and tax.”  The idea is to establish GHG caps on existing facilities — no trading allowed, just limits at each facility — and then have them pay a tax for their GHG emissions.  Now I’m all for a GHG tax as I have written previously, but there is no good argument for capping GHGs from particular facilities. It’s a global pollutant.thumb.php

In contrast, there are clearly good arguments for capping local pollutants from a particular facility, and taxing those pollutants that are emitted. And for distributing at least some of that revenue to individuals who may be harmed by the local pollution, particularly when they are already disadvantaged.

Ironically, one of the primary ways facilities that burn fossil fuels reduce their local pollution is by using “scrubbers” that remove the pollutants from the effluent stream. But scrubbers themselves consume substantial energy, so they increase GHGs while lowering local pollution.

If caps on GHGs at specific facilities are binding, they would likely reduce the overall level of operations at those sites, and thus reduce local pollution.  But that would most likely do little or nothing (or less than nothing) to reduce total worldwide GHGs, which is all that matters for climate change.

If, for instance, a California oil refinery has to scale back operations, the overwhelming evidence is that the gasoline and diesel shortfalls will be imported from refineries outside the state.  This “leakage” offsets any in-state GHG reductions, and possibly even increases the total, due to additional shipping.  The same is true for electricity generation, cement production, and other industrial production.

Some advocates of GHG caps respond to the leakage argument by saying that we just need to find lower-GHG ways of providing transportation, electricity generation, and other energy intensive goods and services.  That is surely true, but we are not going to accomplish it by capping GHGs at specific California facilities. California doesn’t — and under the U.S. Constitution California can’t — control trade across its borders.  Reducing in-state supply without reducing demand will just increase imports.

The future of California’s climate policy will be front and center in 2017. As the U.S. federal government steps back from leadership on this challenge (and apparently closer to denying that it exists at all), it is critical that the Golden State presents policies that will have real impact on global GHG emissions, while at the same time treating fairly the most vulnerable in our society.

I’m still tweeting interesting energy news articles, research, and stats @BorensteinS

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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.

fireworks-stand

BUY 1 GET 11 FREE” by Paul Long is licensed under CC BY 2.0

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.

copy-of-map-of-the-united-states-1

States identified as pro-CPP are those supporting the CPP. The states identified as Anti-CPP are those suing the EPA. Created using info from EENews

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.

"Hoover Dam Bypass Bridge Construction 3" by Alan Stark is licensed under CC BY-SA 2.0.

States can continue to build bridges for climate cooperation. “Hoover Dam Bypass Bridge Construction 3” by Alan Stark is licensed under CC BY-SA 2.0.

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.

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