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.


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.


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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Does Anyone Really Know How Much Electricity Goes into Cars?

There are lots of government policies that economists like to roll their collective eyes about and use as examples of bad incentives in economics textbooks. In many cases these policies are well intentioned, and may even be the best option in a second (or third, or fourth) best policy world, but we just can’t let it go.   For many environmental economists, the Low Carbon Fuel Standard (LCFS) provides just such a target-rich environment.   A wide list of criticisms have been made by Holland, Hughes, Knittel and others, but these high-level concerns can at times seem abstract.

symbol_electric_vehicle_charging_stationsPeriodically, however, one comes across details about the implementation of a policy that can take you through-the-looking-glass and starkly illustrate what economists have been complaining about.   One such case is the relationship between two of economist’s favorite boogeymen: the LCFS and incentives to drive electric cars.

The LCFS is intended to transition an economy from petroleum-based transportation fuels to alternative fuels that have a lower carbon-intensity (CI). One criticism of the LCFS is that it targets only one element of transportation-based carbon emissions; the CI of the fuel.   It doesn’t reward driving a more fuel-efficient vehicle. It doesn’t reward driving less. In fact, in some cases it can reward driving a less efficient vehicle more often.

The LCFS works by charging firms for selling high CI fuels (fuels whose carbon content is above the standard) and using those funds to reward firms who sell lower CI fuels (whose carbon content is below the standard).   In theory, competition would force sellers to pass this value on to customers in the form of lower fuel prices, thereby increasing demand for lower CI fuels and the vehicles that can use them.

Gasoline is a high carbon fuel. Electricity is a low-carbon fuel, but only when it is used in vehicles.   Firms that sell gasoline pay a surcharge for LCFS compliance. Firms that sell electricity earn credits, when the juice goes to transportation. This is where the trouble starts.   For most EV owners who charge at home, no one actually knows how much electricity goes to transportation. Most homes have just one electric meter, and it is costly to put in a separate service dedicated to vehicle charging.


This Benier cartoon appeared in the Sydney Daily Mirror in October, 1977

Despite this lack of information, LCFS credits are being awarded every year to electricity distribution companies. PG&E just held an auction to sell off 65,000 of them. How does the State know how many credits PG&E should get? It appears that it assumes that the juice used by the handful of vehicles that do have their own meter is the same, on average, as that used by each of the other EVs.   If you take the average daily charging of the metered vehicles, and multiply that by the number of vehicles in a distribution company region, then you get the amount of electricity that is assumed to be distributed for the purposes of home EV charging.

All sorts of potential problems can result. The metered vehicles are not a random sample. EV owners who do the most home charging have the most incentive to pony up for faster charging units and dedicated meters. And utilities may have an incentive to put the heavy charging vehicles on meters and keep the lighter ones off them. What if the metered vehicles are all long-range Teslas and the non-metered ones are all less-used Leafs? Or what if the metered vehicles do all their charging at home, and others utilize remote charging far more often?   This system could also subtly disadvantage commercial EV charging operations, whose output is fully measured and (I would hope) isn’t going into DVRs.

Now, a reader may be tempted to say that EVs are still a small share of the transportation market, and a small fudge of the accounting can’t matter that much in the big scheme of things.  Even if this overstates the value of EVs, this can help accelerate their adoption.  If those arguments sound familiar, it’s because they were (and continue to be) made in defense of net-metering of residential solar systems.  Those small fudges have grown to the point that we now talk about the uncertain financial future of distribution utilities.

How much money are we talking about?  A Leaf, driven 12,ooo miles, uses about 3600 KWh per year, a Tesla probably about 4500 KWh per year.  At a $100 LCFS price, the subsidy amounts to 8 cents/KWh.  This, by the way, is about the marginal cost of electricity in California.   If California reaches its goal of 1.5 Million EVs by 2025, that could mean upwards of $500 million in LCFS credits going to EV “fuel” that is poorly measured and possibly manipulable.   Maybe EV credits for distribution utilities constitute a regulatory  “make-up call” for net metering.

The only way to really know how much juice is going into the vehicles would be to either require separate meters in every home with an EV, or (my preference) have each EV submit to an onboard computer meter-read once a year.  One could get an odometer reading off every vehicle, but not all miles travelled use the same amount of juice.  The differences can be large.  However, even if we can establish a system that accurately measures the juice going into a car, that may not guarantee that this would measure the juice going to driving.  If there is enough of a rate difference, folks could get very creative with the home appliances they run through their car.

What this discussion illustrates are two of the shortcomings of the LCFS.  First it applies only to one sector (transportation) and only the fuels content of that sector.  Second, it subsidizes the consumption of carbon-creating energy, if that energy is used in transportation.  Electricity used for plasma televisions is bad, creates carbon, and is discouraged by CA policy.  The same electricity used for driving a quarter mile up the block for milk, with the AC blasting and the windows open is good, and rewarded by CA policy.

These inconsistencies may be tolerable at small scales, but as the transportation system integrates with the electricity and natural gas systems, regulating the same energy in different ways depending upon its usage will be untenable.  If only there were policies that could reward and penalize fuel sources consistently, no matter what their use was…..

[Thanks to Nick Bowden from the TTP program at UC Davis for collecting a lot of the policy details in this post, any errors are my own.]

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Top 10 Most Read Blog Posts of All Time

This has been a record-breaking year for the Energy Institute at Haas Blog as readership has continued to grow. We’re proud that so many of you have come back week after week.

We publish fresh, timely content to start each week, but in many cases the content stays relevant for years. This year a New York Times column by Eduardo Porter referenced a 2013 post by Catherine and pushed it to #1 in our rankings.

We’re looking forward to engaging with you even more in 2017. Many nations are committing to tackle climate change like never before. Meanwhile, we face unprecedented uncertainty and potential reversals in US energy and climate policy. Thoughtful, independent economic research and analysis will be more important than ever. Through the Energy Institute at Haas Blog we strive to bring that kind of insight directly to practitioners and researchers like you.

Please keep spreading the word through social media and old-fashioned in-person discussions. New followers can sign up to receive the blog through our home page. Thanks to all of you for helping to make this blog a success.

And now, here’s the countdown of all-time top 10 Energy Institute blog posts.

#10 “Real” Electricity Still Comes from the Grid
Home solar users in Kenya have not leapfrogged the grid.
by Catherine Wolfram
January 19, 2016


6222453924_7492197980_b#9 It Just Doesn’t Add Up
Why not building Keystone XL will likely leave a billion barrels worth of bitumen in the ground.
by Maximilian Auffhammer
March 24, 2014


Three converted Prius Plug-In Hybrids charging at San Francisco City Hall#8 The Economics of EV Charging Stations
We need more charging stations and electricity that is not free.
by Maximilian Auffhammer
March 16, 2015


19360685906_178744fce3_b#7 The Politics of Renewable Energy
Where facts are arguments and arguments are facts.
by James Bushnell
January 26, 2014


duck_curve#6 The Duck has Landed
Renewables integration strengthens the case for regional coordination.
by Meredith Fowlie
May 2, 2016



Solar_panels_on_house_roof_winter_view#5 Rationalizing California’s Residential Electricity Rates
It’s time to ditch bad pricing policy from the California electricity crisis.
by Severin Borenstein
September 29, 2014


china#4 Air Conditioning and Global Energy Demand
Rising global incomes will drive increased adoption of air conditioning and electricity consumption.
by Lucas Davis
April 27, 2015


SmartMeter2#3 What’s So Great about Fixed Charges?
All fixed costs don’t justify fixed charges.
By Severin Borenstein
November 3, 2014


TopazSolarFarm#2 Is the Future of Electricity Generation Really Distributed?
Incentives that are tied to real benefits will let us find out.
By Severin Borenstein
May 4, 2015



#1 What’s the Point of an Electricity Storage Mandate?
Why look to electricity storage before giving incentives for load shifting?
By Catherine Wolfram
July 29, 2013

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Policy Uncertainty Discourages Innovation and Hurts the Environment

Large-scale changes are anticipated for U.S. environmental policies heading into 2017. The new administration has promised a “comprehensive review of all federal regulations,” which include policies aimed at carbon dioxide emissions from power plants, fuel economy standards, oil and gas production, and tax credits for solar panels, wind turbines and electric cars.

Exactly what form these changes will take is unknown. Some believe that most of these policies will be dismantled, while others argue that most of the policies will remain in place. But this is all speculation.

Oklahoma Attorney General Scott Pruitt has been nominated to be the next EPA administrator, a move widely perceived to indicate large changes ahead. gageskidmore/flickr, CC BY

What the discussion over what may or may not happen has missed, however, is that this uncertainty in itself is costly. Not knowing what the future holds, companies are less likely to invest in new technologies. To address today’s environmental problems, we need breakthrough technologies that can be widely adopted and exported to the rest of the world. Economists have shown, using both theory and data, that policy uncertainty makes this type of innovation less likely to happen.

Automakers’ Dilemma

Perhaps in no other sector is there as much uncertainty as automobiles. U.S. fuel economy standards have been around since the 1970s, but new rules introduced in 2012 mandate a steep climb toward 50+ miles per gallon (mpg) in 2025. There are real questions, however, about whether these rules will be relaxed and, if so, by how much.

The sheer complexity of U.S. fuel economy standards leaves policymakers with lots of options for policy changes. In a new working paper, fellow economist Chris Knittel and I review the complicated requirements imposed on automakers. Different-sized vehicles are treated differently, trucks are treated differently than cars, and alternative-fuel vehicles receive special credits and exemptions. Any or all of these rules could change.

Innovation companies, including Tesla Motors, were founded during a time when federal policy placed a clear emphasis on fuel efficiency. Will that continue?  Wikipedia, CC BY

This uncertainty puts automakers in a difficult position. Do you assume that standards will remain in place, and invest in producing high-mpg vehicles? Do you assume standards will be relaxed, and move toward lower-mpg vehicles? Or do you lie back and make little new investment, waiting to see what will happen?

Irreversible Investments and ‘Option Value’

Economists have long written about exactly this type of decision-making under uncertainty. There is broad evidence, based on both theoretical models and empirical evidence, that companies invest less when they face uncertainty. Using data from the United States and 11 other countries, a new paper by economists Scott Baker, Nick Bloom and Steven Davis, for example, shows a robust negative impact of uncertainty on investment. Companies in the health care and financial sectors are particularly affected by uncertainty, and cut not only investment but also production and employment.

Economist Steven Davis, founder of the Economic Policy Uncertainty Index, presenting his work on the effect of uncertainty on investment earlier this month. Bosse Johansson, Author provided

Why? The idea is simple. When there is uncertainty, there is “option value” to delaying irreversible investments. In other words, it is often better to wait and see what happens, rather than to make a costly mistake. R&D investments are particularly affected by uncertainty, because the return on these investments is sensitive to what happens with policy.

This literature has clear implications for current U.S. environmental policy. By any measure, there is today an unusually large amount of policy uncertainty, which creates an incentive for companies to delay investments. Why invest today in a new alternative fuel vehicle if fuel economy standards are uncertain? Why invest today in a new technology for producing solar panels, if federal support for renewable energy is in flux?

The Aluminum F-150

Will Ford regret investing in the new aluminum F-150, for example?

Ford just spent US$1 billion over six years to develop a new F-150 truck, with a lighter aluminum-based body and smaller, more fuel-efficient engine. The new truck was built to meet the new fuel economy standards. But if the standards are substantially weakened, Ford could be stuck with a $1 billion mistake.

Ford has invested about $1 billion in making an aluminum truck to improve fuel efficiency based on the assumption that regulations will remain in place. Sarah Larson, CC BY

Investments like Ford’s new F-150 are particularly sensitive to uncertainty because of the long time horizon. It takes many years for an automaker to develop a new vehicle model, so companies must be particularly careful when pulling the trigger. Today’s policy uncertainty makes it less likely that other companies will follow Ford’s footsteps with large investments in innovative new technologies.

Breakthrough Technologies

Perhaps most at risk from policy uncertainty are breakthrough technologies. In energy, in particular, companies often need a long time and lot of money to develop their technologies before coming to market – the so-called valley of death – and uncertainty over government policies can be the difference between success and failure.

Trump’s administration and Congress plan to roll back environmental regulations with the goal of improving corporate profits but the questions around the changes – which regulations will be rescinded and how, for instance – will depress investment in clean energy innovations. Tony Webster/flickr, CC BY-SA

Imagine trying to convince a venture capital firm to invest in your clean-tech start-up given today’s uncertainty. Sure, you can point to state-level policies in California and elsewhere (although there is uncertainty here too), but the questions around federal policy looms large.

If you are concerned about climate change, like I am, then this delay in the pace of innovation is deeply troubling. With carbon dioxide concentrations continuing to climb, small incremental changes are not going to be enough to address global climate change. We need big, game-changing technologies that can be widely adopted and exported to the rest of the world. And, unfortunately, today’s uncertainty makes this type of innovation less likely to happen.

The Conversation

This blog post is available on The Conversation.

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Milton Friedman Is Dead,

… and really misunderstood.

Many of my colleagues are trying to find a silver lining in the outcome of the election, but for those of us concerned with energy and the environment I am afraid all we’re going find is a used Kentucky Fried Chicken napkin. There are two distinctly different, yet connected, things at immediate risk: policy and scientific research. Let’s start with policy.


Maximizing Welfare Requires Regulation, but Key Policies Under Threat

The GOP has long prayed at the temple of Milton Friedman. Friedman, who was one of the most brilliant thinkers of this past century (and my neighbor in San Francisco, albeit in a much nicer apartment), was at the forefront of arguments that markets are incredibly effective at allocating scarce resources. At the heart of (t)his argument lies the assumption that markets are “perfectly competitive”. This means that everyone has perfect information, no individual firm or person can influence price, transactions costs are low, there is no public goods or externality problem and the list goes on. If such a unicorn market is left alone, agents in it will maximize social welfare, so there is no need for government intervention.


Well, the problem is that perfectly competitive markets are about as common as Susan B. Anthony coins. Most markets are in fact not perfectly competitive, which Milton Friedman of course acknowledged. Market failures abound. The key question is whether the costs of intervening in the markets to address the failure outweigh the benefits.

The classic case of a market failure is an externality. If a power plant emits a pollutant, which causes kids in a neighboring city to fall ill, the absence of government intervention will lead to an inefficiently large amount of pollution.

Government should intervene to maximize welfare at the output level where the marginal benefit from emitting the last unit of pollution is equal to the marginal damage it causes. That amount in most cases is not zero, which upsets many folks in the environmental community, but this is economics 101. If the government does not intervene, however, the power plant produces more than the optimal amount of pollution, thereby sort of “stealing” welfare from the kids downwind.

This point is undisputed by scientists. Yes, economics done well is science. The archbishop (=department chair) in the church of Milton Friedman is …. an environmental economist! The holder of the Milton Friedman chair in economics at the University of Chicago Economics department is … an environmental economist: Michael Greenstone. Michael was a top economic advisor to President Obama and just last week was singing the praises of environmental regulation on NPR.  To top this, last week he was also named head the University of Chicago’s Becker-Friedman Institute for Research in Economics, named for two conservative Nobel Prize winning economists who spent their careers there. See what I’m getting at here? The world’s top economists at conservative departments *do not* believe in laissez faire all the time. This, you would think, should make it more palatable for the GOP leadership to support sensible environmental regulation.

If the Trump administration is going to increase efficiency of environmental regulation by replacing costly standards with more efficient incentive based regulations, you will see me dance a Schuhplattler. I’ll post a video on this blog for you.

But no matter where you look, there is almost obsessive talk of “government overreach”. My excessive consumption of media coverage leads me to believe that the plan may more likely be a gutting of regulation instead. While killing off the Clean Power Plan will not bring coal back from the dead, it will certainly significantly hamper the necessary progress on the rollout of renewables and energy efficiency required to make progress towards the scientifically determined targets to avoid the worst consequences from climate change. The possible abandonment of the Paris Agreement will surely result in a higher emissions path for the US and possibly the rest of the world. (China and India only signed on because the US did.) Further, we have recently learned that the Social Cost of Carbon in federal rulemaking is at risk. The Social Cost of Carbon is a number used in federal benefit cost analysis, to incorporate the global damages from greenhouse gas emissions. The president could, for example, instruct agencies to use a domestic cost of carbon, which is a fraction of the true damages from carbon emissions. This would further increase emissions.

Finally, agencies interpret rules and I am afraid that there will be some very lax interpretations of regulations to protect the environment. I am most worried about the National Environmental Policy Act (NEPA) and the Endangered Species Act (ESA). While president elect Trump has said he likes clean air and water, his appointments would suggest that this is just hot air. Which leads me to the second point.

Purging Climate Experts from the Federal Government Would Harm Future Generations

When there is a party switch in presidents, it is normal for political appointees to go from liberal to conservative or vice versa. I have no problem with that. One would hope that appointees would have experience relevant to their charge, but even if they do not, they are, well, political appointees. I am really worried about the appointments – economists and regular people – to EPA and DOE for reasons discussed elsewhere.

But running a federal agency is tricky business as you are charged with running an organization made up of hundreds and in many cases thousands of federal staffers. These are not political appointees but instead have multi-decade careers at these agencies, working for administrations from both political parties. The staffers provide the institutional memory and know how “things work”. Many economists and statisticians at federal agencies are fellows of my profession’s most distinguished academic societies, publish in our leading journals, push science and policy forwards and do this at a fraction of the wage they would command in the private sector or the cushy bosom of academia (hey, free coffee!). On Friday, we learned  that the incoming administration’s transition team is requesting names of staffers, who have worked on climate regulation at the department of energy. While there is no evidence that this questionnaire will result in these folks being fired or benched, this is alarming news.

The Nobel laureate economist Bob Solow has noted that one way to severely hinder economic growth is to damage capital and slow down the growth rate of its productivity. These staffers represent the productive capital of the federal government. NASA’s climate research branch, DOE and its national labs, EPA, NOAA, Interior, State all have staff conducting research on climate and the environment. These research and policy groups have produced models, tools and insight that have pushed forward our understanding of the environment and how to write policies that increase global welfare.

While we do not know how the Trump administration will use the information It requested, gutting these agencies of their climate, energy and environmental staff would represent an irreparable and irresponsible setback, robbing current and future generations of welfare that is rightfully theirs. Neither side of the aisle condones theft.

I have said this before. The GOP is the party of markets. Most environmental and energy economists love nothing better than a good market based regulation. I hope that the GOP and Trump administration will relearn what free market economics is all about. It’s not about the absences of regulation. It’s about sensible regulation. We have no right to steal from our fellow humans alive now or in the future. That said, I’m not optimistic. I will now go back to breathing into my paper bag.



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2016 Energy Books: What’s Good, What’s Not

This is the third year I’ve done a post on energy books, and this year I’m focusing on books that have been published since last year’s post. The most expensive part of reading a book is not the $29.95 you pay at the register but the opportunity cost of your time. So, in order to help prevent you from wasting this most precious resource, here are some reviews. Please let me know in the comments if there are other books you think should be on the list and whether you agree or disagree with my assessments.

  1. The Grid: The Fraying Wires Between Americans and Our Energy Future, by Gretchen Bakke. This is by far the most obvious selection for this year’s list. It’s received a lot of 9781608196104_p0_v4_s192x300attention, including a feature on NPR’s Fresh Air and a largely favorable review in the Wall Street Journal. And, the grid is one of my personal favorite topics – it’s part of what makes electricity a uniquely fascinating product to study.

I have mixed feelings about this book. On the one hand, I’m thrilled that Bakke is bringing well-deserved attention to a topic that I’m guessing makes most publicists wince. The book is very readable, and it’s based on a sensible narrative arc, tracing the beginning of electrification with individual lighting systems to net metering debates in the West.

Like most readers of this blog, I have more knowledge of the topic than the typical Fresh Air listener, but I still felt like I was learning something, for instance, about Samuel Insull’s efforts to market to industrial customers in order to improve his company’s load shape.

Bakke’s basic thesis is that the grid was a miracle of 20th century engineering, but is not keeping up with current demands for environmentally friendly, reliable, and unobtrusive electricity. She doesn’t necessarily articulate an alternative, although she clearly supports rooftop solar and other distributed solutions.

But, the book frustrates me on several levels. There are a number of inaccuracies, from her claims that the California investor-owned utilities tried to prevent behind the meter solar from counting for the state’s renewable portfolio standard (they were in fact in favor of it), to her reporting that “finding a good way to control peak demand would offer the possibility of continued plant retirement, easing coal ever more thoroughly out of the number one spot for American electricity production.” Coal-fired power plants are very rarely used exclusively to meet peak demand.

There are also inconsistencies. For example, the first time she introduces Enron, she acknowledges that energy trading did not lead to their bankruptcy. Later, though, she cites Enron’s bankruptcy as foreshadowing doom for other large companies in the electricity sector without explaining why this would be the case.

Some of the most frustrating inconsistencies for me were around energy economics. (Bakke is a cultural anthropologist.) On several occasions, she clearly articulates the economies of scale brought by adding customers with diverse demand patterns, i.e., that multiple customers can share the same generation if their electricity needs are not perfectly correlated. Yet the author ignores the diseconomies of scale associated with the distributed and off-grid solutions that she praises.

I also found her characterization of some of the issues cartoonish. For example, she obviously has no love or respect for the investor-owned utilities. She refers to them as “leviathans,” claims they hire the bottom of the graduating classes, compares them to street gangs, describes the emergence of the current system of regulated monopolies as a power grab, and always puts quotation marks around the term “natural” monopolies. (This is an economics term that captures the scale economies I just described.) Utilities may not be the most agile or innovative companies, but it’s become too easy to vilify them in this day and age. We need a more evidence-based treatment.

Ahmad Faruqui, a consultant who focuses on the customer side of the industry, reviewed The Grid in Public Utilities Fortnightly with the subtitle, “Sweeping Generalizations, Unsupported Statements, Conjecture, Speculation.” He focuses on inaccuracies in her characterization of smart meters, his area of expertise, which makes me want to double check any of the book’s examples before I cite them.

  1. Thirst for Power: Energy, Water and Human Survival, by Michael Webber. The water-energy nexus is another timely topic that deserves more attention. I’m particularly interested in it given California’s recent drought.

Like Bakke, Webber weaves together technical details (explaining the first and second laws of thermodynamics in lay terms) and historical context (noting that the first steam engine was employed to pull water out of a coal mine, an early example of the nexus) on both the energy and water industries. His main aim seems to be to educate us all on how central they are to our food, health and very survival. He describes the current and future challenges and concludes by articulating several technical (harvesting graywater to flush toilets, which would reduce freshwater needs and save the energy required to treat potable water) and nontechnical (investing in more R&D) solutions.

Unlike The Grid, I did not find a single inaccuracy or inconsistency in this book. But, it is also less entertaining. In fact, I only skimmed the second half. Perhaps that’s why it’s less popular than Bakke’s book: The Grid is ranked #78,196 in the Kindle Store and Thirst for Power is at #132,314.

Given the current political climate, I’ve been thinking a lot about what captures the public’s attention. Why is the Carrier plant’s decision to leave approximately 1,000 jobs in Indiana getting so many headlines, while many voters (2+ million shy of the plurality, to be specific) seemed un-phased by Trump’s factual lapses?

Thomas Friedman, in his new book, Thank You for Being Late, describes meeting an Ethiopian parking attendant who asks him for blogging advice. Friedman emphasizes the importance of talking about people, noting that, “the columns that get the most responses are almost always the ones about people, not numbers.” Bakke is a lot better than Webber at weaving in personal stories, for example, about a couple who live in a part of Oregon that is prone to outages and the ways they’ve developed to make hot coffee without electricity. I suspect this accounts for a lot of her book’s appeal.

  1. David Brower: The Making of the Environmental Movement, by Tom Turner. I’m going to let this books slip onto the list even though it was published in late 2015 because I want to include at least one book that I can heartily recommend. It’s a biography of the former executive director of the Sierra Club that includes descriptions of a lot of important issues in the history of the energy industry, such as environmentalists’ opposition to dams and coal plants in the Southwest and nuclear plants in California.

I haven’t read it yet, but based on the number of times my husband chuckled or exclaimed out loud while reading the book, it’s one of the best books he’s read in 2016. He describes it as an engaging biography of one of the founders of the modern environmental movement, which has had a huge impact on the energy industry. (Plus, he liked the vignettes about Brower’s childhood in Berkeley.)

Anything else you would like to add for 2016? Has anyone read a good book on cars?

It looks like 2017 might be a banner year. Russell Gold, author of The Boom, is working on a new book, and, the author I mentioned last year, Nicola Twilley, who is working on a book about refrigeration appears to be wrapping up soon.

A bit further afield, I was delighted to see that the fourth episode of the new Netflix series, imagesThe Crown, revolved around the Great Smog in London. This was a period in December 1952 when weather conditions trapped noxious sulfur dioxide emissions from coal, leading to 12,000 fatalities and many more illnesses.

How often are environmental issues the main plot driver on a popular series?!? One of the characters describes Churchill encouraging the country to keep burning coal to “give the illusion of a solid economy.” I’m currently doing research on the link between energy consumption and economic prosperity.

My husband and I are about halfway through the first season of The Crown and really like the show. The pace is a bit slower than Downtown Abbey (I just started Season 6, so that’s still my go-to), but the acting is terrific and the history lessons are fun.

Happy reading!

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Climate Change and the Post-Election Blues

I am living in a very blue state. The graph below charts Google searches for “stages of grief”. The spike in grief-stricken web/soul searching corresponds with- you guessed it- the 2016 election. The map shows where, in the days following the election, these searches were happening. Not surprisingly, post-election blues show up disproportionately in blue states.

graphGraph: Generated by Google trends (search term = “stages of grief”, region = United States). The numbers represent search interest (by week) relative to the highest point over the past 5 years. A value of 100 is the peak popularity for the term.


Map:  Also generated by Google trends, measures search term popularity as a fraction of total searches in that state.  Deeper blue indicates higher popularity of Trump grief in the week following the election.

Many of us who are feeling blue about what a Trump presidency could usher in (or throw away) have been seeking comfort in other like-minded blue folks who share our perspective. I don’t see anything wrong with retreating to ideological safe spaces for a time. But we can’t stay here for good. On several fronts, including energy and climate change policy, it’s critical to get past politics and find some common principles (this may sound like Berkeley Kumbaya talk, but I stole this line from Glen Beck).

Trump has taken what was already a polarized policy debate about energy and environmental policy to an extreme. Obama’s energy policies are “death by a thousand cuts”.  Environmental regulations have “destroyed millions of jobs”. Proposed regulations and environmental restrictions “will cost the economy over $5 trillion”.  Scrapping these regulations is “all upside”. Climate change is a “hoax”.

This rhetoric appeals to raw emotions and fear. It exaggerates the economic impacts of environmental policies while ignoring or dismissing the substantive benefits. It misrepresents research results and contradicts the consensus views of the scientific community. But there are kernels of truth that resonate with people who fear more stringent environmental regulation will take their economic situation from bad to worse.

It’s true that the impacts of Obama’s emissions policies on manufacturing jobs, energy prices, and the economy have been misrepresented and/or grossly overstated by Trump. But it’s also true that energy prices will increase and some jobs will be lost (while others will be gained) in the transition to a low-carbon economy.  If there is common ground to be found, it will need to seriously address the costs of climate change policies, in addition to the formidable costs of doing nothing.

From rhetoric to reality

How blue should we be about this campaign rhetoric?  Reading the Trumpean tea leaves is hard- this is a man who prides himself in being unpredictable. As far as Trump’s energy and climate change policy are concerned, some outcomes are predictable. Others not so much.

One likely outcome is that Trump will fail to deliver on his promise to bring back the domestic coal industry. The industry’s biggest problem right now is not federal emissions regulations, but competition from other fuel sources. Natural gas, which has come to dominate electricity generation in the U.S., will likely continue to out-compete coal under an administration that has promised to accelerate permitting of new pipelines and drilling operations. Levelized costs of utility-scale wind are coming in under new coal, even before accounting for federal subsidies (although new coal costs reflect environmental compliance costs which may not apply going forward). Solar PV is still relatively expensive, but prices continue to fall. All of this competition from less carbon-intensive fuels is good news for climate change, but bad news for coal country hoping to see jobs come back.

Promises to scrap Obama’s environmental regulations have been particularly focused on the Clean Power Plan (CPP).  Another predictable outcome is that Trump will hit some roadblocks if he tries to rescind this rule outright. But it seems very likely that Trump will undermine the CPP one way or another. This will please some Trump supporters and antagonize the environmental opposition. But it should not have a dramatic impact on emissions trajectories in the near term.


Source: EIA AEO 2016 Early Release

The figure shows EIA projections with and without the CPP. Projected electricity sector emissions hold fairly steady without the CPP. In this sense, we wouldn’t be losing much ground, particularly over the next four years. But to mitigate the damaging impacts of climate change, we need to be gaining ground. And scrapping the CPP pushes us off this path.

In the near term, I think the most discouraging impact that Trump will have on climate change mitigation is not the immediate emissions impacts, but the change in trajectory and intent. The withdrawal of the world’s second largest emitter from global climate change mitigation efforts at this critical point could cripple the momentum that’s been building since the Paris Agreement. To pick up some of this slack in climate leadership at the federal level, many are pinning their hopes on the (grieving blue) states.

Channeling those post-election blues

From my vantage point in one of the bluest of blue states (California), the transition from the denial phase of grief into the anger phase is pretty much complete.  Cue wrestling with the question of how to channel this anger for good.  The Governor is wisely advising us to “stay true to our basic principles” and to “confront” devastating climate change. But what basic principles should guide this confrontation?

With the federal pendulum swinging so far to one extreme, there’s an emotional and immediate temptation among some environmentalists to overcompensate and pursue reductions in the GHG emissions we can control at all costs. Wrong principle, I think. California accounts for about 1% of global GHG emissions. If we are going to get any traction in this climate change confrontation, we need other states and jurisdictions to follow our lead. So a first order guiding principle should be to pursue climate change policies and support the development of clean technologies that can find broader appeal/acceptance.

Post-election, there appear to be groups on the right and left who are genuinely interested in searching for common ground across a range of issues. If the blue/green states can demonstrate policies that (1) deliver real GHG emissions reduction (versus reallocation), (2) minimize emissions abatement costs to the extent possible, and (3) mitigate impacts on those who bear costs disproportionately, the case for climate change policy gets easier to make across a broader base.  Admittedly, this slow consensus building falls far short of the progress on climate change policy many of us had envisioned for the next four years. But it’s better than the alternatives. Including retreating to -and never making it out of – our blue states.

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Looking for Environmental Certainty in All the Wrong Places

What will be the fate of California’s cap and trade system for GHG? This is an issue that has been flying under the radar nationally, given the hullabaloo about carbon taxes in Washington State, the potential addition of Ontario to the California cap and trade system, and, umm, other stuff.

The California Air Resources Board last Monday unveiled three potential plans for addressing the state’s new climate goals that were set in CA Senate Bill SB 32. In addition to “plan A” which involves tightening the carbon cap down to 2030 target levels, there is an alternative that scraps the cap and instead identifies an expanded set of “specified” reductions, and also an alternative that replaces the cap with a carbon tax.

While in a vacuum, many economists support a carbon tax, it is for a different set of reasons than the ones causing its popularity in west-coast policy circles today.   The carbon tax is starting to be seen less as a mechanism to induce innovative ways to reduce emissions, and more as a means to fund specific abatement programs.

The ARB’s alternative plans are a response to the growing disillusion with California’s cap and trade program. This disillusion stems in part from frustration that it’s not producing the revenues once projected, and in part from some anecdotal evidence that it may not be delivering reductions in local pollutants in disadvantaged communities. Policy makers are now scrambling for policies that they believe can deliver what they consider to be more reliable benefits.

In fact none of the alternative climate policies gives us any guarantees over the emissions of either GHG or local pollutants.   Choices between policy instruments amount to trading off more uncertainty in meeting some goals in exchange for more assurance in meeting others.  For example, to pretend that we can estimate a specific tax level that will hit anything close to a reliable carbon reduction amount is to deny everything we know about what we don’t know.


California ARB Reference Scenario Emissions and reductions called for under SB 32.

My previous work with Severin Borenstein, Frank Wolak, and Matt Zaragoza-Watkins (BBWZ)  documented just how much volatility there is in “business as usual” GHG emissions. The top figure on the left shows how much abatement we would need from the baseline (ARB’s reference scenario). The lower figure (from BBWZ) shows one forecast of the range of BAU emissions (these are emissions under the cap so not exactly the same thing).  The comparison shows just how volatile the ARB’s baseline can be.   That’s even before accounting for the uncertainty in planned reductions, some of which are speculative at best.


Forecast Variability of Business as Usual Emissions through 2020 (from Borenstein, et al, 2016).

The only way to truly have some kind of confidence of hitting a specific carbon reduction target with a tax is to be willing to continually adjust that tax based upon updated valuation of how close or far we are from the carbon target. Such a floating carbon tax would re-introduce the same uncertainty over the cost (and revenue generation) of our policy that has drawn so much complaint about the cap and trade program.

Concern about uncertainty has led to an embrace of plans that focus more on so-called specified measures. These measures appear to specifically identify the sources of the reductions that we will achieve. However to view these policies as giving any more certainty than a carbon tax is to again ignore the vast gaps between our goals and what we know about how to achieve them.

Many of the reductions identified in the California Air Resources Board’s recent alternative scoping plan (the route that scraps cap-and-trade) are better labeled as aspirations than programs.  For instance, there is a goal of reducing GHG emissions at refineries by 30% but no specific policy or technological solutions identified as to how exactly to achieve such a goal. There is also no current sense of how much such reductions may cost. There are similar goals associated with emissions from freight traffic, passenger travel, rooftop solar, and short lived climate pollutants (SLCP). None of these have any degree of certitude or confidence about them. If these reductions don’t materialize as hoped for, or cost much more than anticipated, there would be no cap to back-fill the shortfall.


How much abatement can we count on? These are ARB scenarios assuming different effectiveness of specified programs

Both carbon taxes and cap and trade suffer from an image problem. These policies are intentionally designed for a world in which we don’t know exactly what is going to happen. If energy efficiency programs don’t yield enough savings, then we try something else. This adjustment happens automatically under a cap.  Yet the policy process seems to demand that specific sources of reductions be identified ex ante. Unfortunately such lists of policies can create only the illusion of certainty. Developing a potentially attractive list of sectors to draw GHG reductions from doesn’t address the large uncertainty about how to actually achieve those reductions.

In reality, an approach that relies upon rigidly enforced specific measures creates more uncertainty than either of the other approaches. We generally frame the choice between taxes and caps as one of choosing between more certainty over pollution levels on the one hand or more confidence about the costs on the other.   A plan that would rigidly adhere to a set of specific reduction policies, about which we have very little confidence over the costs or the actual resulting abatement, represents the worst of both worlds. We would have very little sense of how much actual carbon (or local pollutants) we will be producing in 2030 while also committing to a set of policies that could turn out to be quite costly, ineffective, or both.  Isn’t it better to have a firm commitment to an abatement strategy (be it a cap or a tax) without knowing exactly where those reductions will come from, than a firm commitment to try one specific approach without knowing whether it will actually work?

So, how should we balance the goals of carbon reductions and costs to industry and consumers? Well using the tools we already have is a pretty good place to start.  We have a cap on GHG emissions. It has its flaws but is one of the most effective GHG reduction mechanisms in the world (a somewhat low bar these days).  It also has cost containment mechanisms, a restraint on the upper and lower limits of allowance price, that while also imperfect, has helped to support GHG prices even in the face of lower than expected emissions.

Of course, some have argued that a rigid GHG cap for just California makes little sense, given that it would in isolation provide few climate benefits. This camp would support a carbon tax because of the innovation and abatement activity it would inspire, rather than as a means to achieve any set number. However, that is not the direction California committed to earlier this year when it passed SB 32. If we truly want more control over revenues and abatement, working within the existing cap-and-trade structure is much more likely to provide it than blowing it up and starting from scratch.

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Electricity Rate Design for the Real World

For decades economists have bemoaned the fact that retail electricity prices don’t adjust to reflect the volatile cost of providing energy.  Because electricity is not storable, the wholesale cost can change by a factor of five or more within a single day, but the price to most end-use customers remains constant.  It’s the equivalent of the price at the gas pump being held fixed while the world oil price ranges between $20 and $140 a barrel…only compressed in time.

Time-varying electricity pricing offers benefits both now and for the future.  The immediate benefit is that raising prices at peak times (when producing each extra kilowatt-hour is most expensive) and lowering them at off-peak times would move some consumption off the peak and reduce the need to build additional “peaker” power plants. In the longer run, sending such time-varying price signals would allow us to better synchronize consumption with electricity production from intermittent resources, such as solar and wind.ratedesignfortherealworldfig1

A lot of research has attempted to estimate how much time-varying pricing causes customers to reduce or shift their demand, while some theoretical and simulation work has focused on what the “best” pricing structure would be. A new Energy Institute working paper contains elements of both of these approaches, but it also takes a third tack that is likely to be more helpful to policymakers.

In “Making the Best of the Second-Best: Welfare Consequences of Time-Varying Electricity Pricing,” Josh Blonz (a researcher at the Energy Institute who is finishing his PhD this spring) first estimates the impact of a critical peak pricing (CPP) program, under which the utility more than triples the retail price of electricity on up to 15 hot weekday afternoons of the summer, and lowers the price slightly at all other times.

Next, he compares the CPP pricing to the “gold standard,”  real-time retail pricing (RTP), under which the retail price would change every hour of the year to reflect changing wholesale prices.   Josh shows that while the CPP program is cost effective, it is capturing less than half the benefits of RTP.  But the paper doesn’t stop there.  Josh shows that some simple and intuitive adjustments to the CPP program could greatly increase the benefits it yields, thus offering policymakers not just analysis of what has been done, but also practical steps for future improvements.ratedesignfortherealworldfig2

The study examines Pacific Gas & Electric’s (PG&E’s) CPP program for small commercial and industrial (C&I) customers, which is itself a bit of an innovation. The vast majority of CPP studies look at residential programs, despite the fact that C&I customers consume two-thirds of the electricity and nearly all of the demand that faces time-varying prices in the U.S.

How Much Does Price Variation Change Consumption?

If you read this blog regularly, you already know that empirical economists are obsessed with sorting out causality from mere correlation.  In this case, we want to know how much raising price on hot summer afternoons causes customers to consume less by comparing the customers on CPP to another group who are otherwise virtually identical, but are not on the program.   The gold standard is a randomized control trial (RCT) as is done in many medical studies (and as Catherine and Meredith, along with four other co-authors, have done in a study of CPP implementation by Sacramento Municipal Utilities District).

If you can’t do an RCT, a clever alternative takes advantage of thresholds or cutoffs in eligibility criteria for the program, such that the subjects who just barely meet the criteria for participation are virtually identical (as a group) to the subjects who just barely miss the criteria.  Lucas and Judd Boomhower, for instance, used this approach in a study of the energy savings from a refrigerator and air-conditioner replacement program in Mexico.  Josh takes this path, comparing those who just barely met with those who just barely missed eligibility for the CPP program based on the date their smart meters were installed.

He finds that when PG&E calls a CPP day on hot summer afternoons, C&I customers in the inland (hot) part of their territory cut their consumption by an average of 13%.  Customers on the coast may reduce their usage a bit, but it is likely not much and statistically indiscernible. The study points out that this is probably because temperatures on the coast are still very moderate on CPP days (averaging around 70 degrees during the CPP call hours in the two sample years), so the most effective price response action — raising air-conditioning setpoints — is less available to coastal customers.  In fact, in the inland areas the study finds that CPP-driven savings rise as the temperature increases.

The inland businesses that save the most on CPP days, Josh shows, are the “non-customer-facing”: offices, manufacturing, warehousing, etc. The “customer facing” businesses — retail, restaurants, movie theaters, etc. — don’t seem to respond, which makes sense since part of what they are selling is a pleasant, air-conditioned atmosphere. Plus, it is much more practical for a business to warn its employees to dress for a warm day at work than it is for a retail store to give the same warning to potential customers.

The primary value when these businesses do reduce their demand on hot summer afternoons is that less generation capacity needs to be built.  The study unpacks the regulatory process that determines these capacity requirements in order to evaluate how much money the CPP program saves due to reduced capacity building.  To evaluate the program fully, however, one has to also take into account the loss of value customers suffer from not consuming as much electricity, such as setting the A/C temp a bit higher than they normally would.  Josh does this and finds that the benefits of the CPP program well outweigh the costs.

Sharpening a Blunt Tariff Design

Of course, CPP is a blunt instrument: The number of days that can be called each summer is in a fixed range, the hours it is in effect are the same for all such days, and likewise the price increase is the same for all such days.  Economists have long argued for more flexible pricing that changes hourly – real-time pricing — but have met with stiff opposition from regulators and some consumer groups, due to perceived complexity and fairness concerns. Josh shows that even though this CPP program has to be considered a success, it is still producing only about 43% of the benefits of full-on RTP.

So, the study asks, if RTP is not feasible, can the CPP program still be improved?  The answer is an emphatic yes. Since the benefits are primarily from reducing usage on just the few hottest days of the year, the paper looks at lowering the total number of CPP days called, while increasing the price more on the days where it is called. The paper finds that cutting the number of CPP days nearly in half, but charging a price that is more than 50% higher on those fewer days, greatly increases the net benefits of the program.

Even with weather uncertainty and having to call the CPP event a day in advance, cutting back to 8 CPP days per summer still makes it very likely the utility can hit the 2 or 3 summer days that actually strain capacity. And raising the price by a greater amount on those days means that more capacity gets saved.  At the same time, eliminating up to 7 CPP days per summer when capacity wasn’t going to be strained means that customers aren’t losing the benefits of the extra electricity consumption on those days. Josh’s proposal doesn’t get to the perfectly efficient outcome, but working within the real-world constraints of regulation and political feasibility, it turns out to nearly double the net benefits of the program.

It’s unusual for an academic research paper to have a punchline that can be so easily appreciated and implemented by regulators.  This isn’t pie-in-the-sky thinking about fixing all the flaws in electricity rate design, but first-rate research on a good pricing policy and insight about how to make it much better.

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