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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The Future Is at Stake

An orange or a green planet? That is the question.

I like my politics. A lot. Usually, election time is my favorite time of every other year. I became a US citizen in 2008 and recall casting my first vote for president with our newborn baby boy strapped to my chest. This year, however, I would like for someone to knock me out and wake me up when it’s over.

The spectacular implosion of the Republican Party over the past six years comes at a precarious point in our planet’s history. And this has grave consequences for energy and environmental policy locally, nationally and globally. Tomorrow’s choice for president is portrayed in many places as win-or-lose choice by both sides. I would argue that the environment is likely going to lose no matter who wins the presidential race. The question is how bad things are going to get.


Let’s back up for a second. The past eight years of the Obama presidency have brought monumental change for the better in the environmental and energy arena. We have made significant progress on fuel economy standards, emissions standards for power plants, the introduction of a real social cost of carbon into federal rulemaking, the rapidly increasing penetration of renewables on people’s roofs and on the people’s plains and in their valleys. President Obama will go into the history books as the first African American president. I would argue that he will be remembered by many future generations as the Greenest president this country has ever had.

Many of the recent regulations are being passed in the form of command and control with significant flexibility built in. Still, these are not the economists’ preferred choice. Yet, team Obama got it done. He had great counsel during his eight years in office, helping design programs that built in flexibility where possible. Joe Aldy, Ann Wolverton,  Nat Keohane, Billy Pizer, Michael Greenstone, Arik Levinson, Matt Kotchen, Glenn Sheriff, Sheila Olmstead, Gilbert Metcalf, and Kenny Gillingham are just a few of the brilliant environmental economists that spent time in the White House and at Treasury helping design and implement smarter and more efficient policies. I do note a curious absence of Berkeley environmental economists, but maybe Secretary Clinton will deck the halls with Berkeley folks if elected. We’re here for you Madam Secretary.

Maybe the most significant achievement and point of departure is the signing of the Paris accord. No previous administration has managed to credibly commit the US to meaningful greenhouse gas emissions reductions. Clinton (Bill, President) signed the Kyoto agreement, knowing full well that Congress would never ratify it. Under Obama, we signed an agreement that does not need to be ratified by Congress as the reductions can be achieved through agency actions. And this is where the trouble begins.


If Tuesday results in a Trump presidency, we would probably get Dennis Rodman as Secretary of Energy, Tila Tequila as EPA Administrator and Peter Thiel as Secretary of Treasury. Ted Nugent at Interior would be another obvious appointment. All jokes aside, a Trump administration could significantly harm federal regulation by simply gutting the agencies in charge of implementing and enforcing them. I am not a lawyer, but the amount of damage that could be done to regulations, which are only a first step in themselves towards “solving” the climate problem, could be massive under a Trump presidency. I doubt that the majority of Americans could identify the EPA administrator or Secretary of Energy, but a lot is riding on these four shoulders.

But all will not be fine if Secretary Clinton becomes President Elect Clinton on Tuesday. If the obstructionist behavior on the Supreme Court nomination is any indication, there is a good chance that the opposition in Congress will lay down thorns on the path to a greener least cost regulatory path to solving our energy and environmental problems. The Republican Party, which embraced Milton Friedman’s ideals of markets, through obstruction would leave President Clinton little choice other than pursuing command and control regulations in the same way president Obama has. This is going to be costly. Marginal abatement cost curves are upward sloping, meaning that some approaches to abatement will cost a lot more than others.   It is critical that the world find the lowest-cost ways to reduce greenhouse gas emissions so that all economies, especially those in the developing world, can continue to grow.

The climate folks tell us that we have to head into a largely carbon free future fast: 80% emissions reductions in a bit over 30 years. That is a revolution not an evolution of the energy system. Doing this via command and control is economically reckless and irresponsible, in the same way that doing nothing about the problem is.

I realize that academic economists know as much about passing and implementing actual environmental policies as Albert Einstein knew about running a large Hadron Collider. It takes a village of lawyers, policy wonks and coalition builders to get things done. But there is no arguing with the basics: price-based policies are the least cost way of reducing pollution. Your political views are as relevant to that statement as they are to whether gravity exists. This is science, not faith.

So, where do we go? If the GOP is smart in a Clinton presidency, it reinvents itself and reclaims its territory, which should be market-based regulation. Once one accepts that environmental and climate regulation is here to stay, their push should be on efficiency. Continuing to obstruct at the federal level will surely amplify the polarization of the American people. In order to solve the significant problems facing us, which are broader than those at the heart of this blog, we need smart federal action. Leaving environmental policy up to the states will be costly (see Lucas’ blog on the fate of market based policies on the west coast), deeply flawed (recognizing that all regulation is imperfect), and wholly inadequate for addressing global problems like climate change.

This economist is worried about what happens on Tuesday. We have much work to do to solve the problems facing us. And we can only do it if we come together and engage in a smart, civil and engaged fashion.


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Why Aren’t Environmentalists Supporting a Carbon Tax in Washington State?

I used to live in Washington state. I’m no longer registered to vote there, but if I were, I would vote “Yes” on Nov. 8 for the Washington Carbon Emission Tax and Sales Tax Reduction, also known as Initiative 732, or I-732.

I-732 would make Washington the first U.S. state to have a carbon tax. The tax would be levied on refineries and utilities, who would then pass the tax on to consumers in the form of higher gasoline, electricity and natural gas prices. The tax would start at US$15 per ton of carbon dioxide in July 2017, increase to $25 after one year, then rise with inflation plus 3.5 percent in each subsequent year.

Carbon Tax WashingtonStacks at the Nucor Steel plant – one of the types of manufacturing sites that would be affected by a carbon tax – in front of the Space Needle in Seattle. AP Photo/Elaine Thompson

Similar to British Columbia’s carbon tax, I-732 is designed to be revenue-neutral. That is, all of the tax revenue would be returned to households by lowering other taxes. Specifically, I-732 would decrease Washington’s sales tax by one percentage point, fund a tax credit of up to $1,500 annually for low-income households, and effectively eliminate a business tax on manufacturers.

I-732 addresses one of the major concerns of a carbon tax – that it would hurt low-income households. But it also exposes the difficult and complex politics of environmental policymaking: a number of environmental groups have failed to get behind the measure, potentially derailing an opportunity for Washington to lead on climate.

Economist’s Dream

Like most economists, I’m in favor of a carbon tax. In a survey of top economists, 90 percent said they would prefer a carbon tax over alternative policies for reducing carbon dioxide emissions. “Totally basic economics!” according to Stanford economist Robert Hall. A carbon tax would discourage carbon-intensive activities like producing electricity with fossil fuels and burning gasoline in vehicles, and encourage low-carbon alternatives like renewables and energy efficiency.

Carbon tax revenue from Initiative 732, which needed some 270,000 signatures to get on the ballot in November, would be offset by tax cuts in other areas and be used to finance tax credits for low-income households. Steve Bloom/The Olympian via AP

I also like the plan to make I-732 revenue-neutral. This idea of “revenue recycling” has long been recognized by environmental economists as one of the key benefits from taxing externalities, or side effects of economic activities. Decreasing the sales tax would make Washington state consumers better off and make the Washington state economy more efficient.

Moreover, the low-income tax credits would help prevent I-732 from hurting Washington state’s neediest households. Critics of carbon taxes often argue that they are regressive, pointing to the fact that lower-income Americans spend a high fraction of their income on energy. With these tax credits, however, I-732 would be sharply progressive, making low-income households significantly better off.

This is an important point, not just for I-732, but for carbon policy more generally. In a recent paper, Maryland economist Rob Williams and coauthors examined a national carbon tax for which revenue would be returned in equal, lump-sum payments to all households. They showed that these lump-sum payments would exceed average expenditure on the tax for households earning less than $70,000 per year, so these households would be net winners. I-732 is potentially even more progressive because the tax credits would be targeted to low-income households.

Unlikely Opponents

Environmental groups enthusiastically support I-732, right? Er… no. In fact, neither the Sierra Club, nor the Washington Environmental Council, nor Washington Conservation Voters support the measure. It is baffling to me that an environmental group could stand in the way of a carbon tax. Putting a price on carbon dioxide is the single most efficient way to fight climate change, and it strikes me as irresponsible for these groups to have failed to get behind I-732.

Washington state is well-known for strong environmental groups, yet most of these groups are failing to support I-732. U.S. Fish and Wildlife Service, CC BY

The primary concern seems to be that I-732 doesn’t raise revenue for pro-environmental causes. Washington state has no state income tax and struggles to raise government revenue, so some groups see this as the last good opportunity to raise funds for renewables subsidies, public transportation and the like. For instance, in its official position, the Sierra Club said members “expressed deep concerns that the initiative does not include all that is needed for an equitable climate policy and just transition to a clean energy economy.”

This is conflating two issues, however. I understand why a group would want to see more pro-environmental spending, but there is no economic reason why all this needs to happen in the same piece of legislation.

Critics of I-732 should also be careful what they wish for. Opponents from environmental advocacy groups are intensely concerned about potential impacts on low-income and other vulnerable populations. But in research here at the University of California Berkeley we’ve shown that pro-environmental spending tends to be regressive, benefiting high-income households disproportionately. If your goal is to help low-income households, it is hard to envision a better policy than a $1,500 tax credit.

It is notable that so much of the discussion about I-732 has been about the revenue rather than about the tax itself. This fascinating article details the myriad different points of view in Washington state on how to spend the money. We are seeing this dynamic in California as well, as environmental justice groups argue that more of the revenues from California’s carbon trading system should be used for addressing equity. These fights about revenue are likely to be a central part of carbon politics moving forward.

Bottom Line

I-732 is an opportunity for my former home state, Washington, to lead on climate. By demonstrating that this can be done at scale, Washington state can lead other states, or even the U.S. federal government, to adopt similar policies. It would be fitting that a state so rich in natural beauty would take a stand for preserving the planet for future generations.

Environmental groups are opposing the carbon tax because some feel it doesn’t do enough to promote renewable energy and environmental justice. amitp/flickr, CC BY

It won’t be easy. This is a local solution to a global problem. The costs would be borne locally, while most of the benefits – mitigating climate change – would be experienced globally. But if Washington state can spur others to action, they will have played a key step in moving climate policy forward.

“For me, supporting I-732 is the way I can look my children in the eye,” said Audubon Washington’s Gail Gatton, in a recent Seattle Times op-ed, “and tell them I have done everything possible to ensure a stable climate for their future.” Your move, Washington state.

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Mickey Mouse Mitigation Measures

Throughout the Presidential campaign, we’ve been bombarded with catchphrases, such as “Trumped-up trickle-down economics” and “Get ‘em out.”

I’ve decided to coin my own catchphrase – “Mickey Mouse mitigation measures.” 

Mickey Mouse shaped solar farm in Orlando, FL

Mickey Mouse shaped solar farm in Orlando, FL

Let me start with an example. Over the summer, the New York Times ran a front-page article about a small town in the UK – Ashton Hayes, population 1,000 – that had reduced its carbon emissions by 24%. The article is light on details about what the town’s residents are doing to reduce their carbon emissions, though it does mention triple-pane windows and solar panels. Set aside questions about whether the residents are accurately accounting for everything (are they counting the carbon emitted to manufacture their solar panels?), there are several features of their efforts that make them a prime example of Mickey Mouse climate mitigation:

  • They are fun! But, they are based on a fantasy version of the real world, which includes a talking mouse. The article describes how the town is “adopting the apolitical, voluntary, fun method.” For example, residents are opting to take fewer trips, possibly vacationing in the UK rather than flying to a tropical island.

And, they are taking these actions themselves without policies or politicians. In fact, the town has forbidden politicians from speaking at meetings.

Volunteers in Ashton Hayes, England assess viability of a micro grid (Source:

Volunteers in Ashton Hayes, England assess viability of a micro grid (Source:

There’s no way that the whole world will achieve the ambitious carbon reductions that scientists suggest are needed (e.g., 80% reductions by 2050) with voluntary, individual actions. The vast majority of CO2 emissions come from economic activities that people will not volunteer to give up. We need to focus on decarbonizing transportation of goods and people, decarbonizing the production of things like steel and cement – essential for our bridges, hospitals and apartment buildings – the list goes on. Decarbonizing vacations is not enough.

I don’t want to disparage the efforts of the residents of this town – if they’re having fun with this, they should go for it. But, I will disparage the New York Times editorial team for heralding the town on the front page as a climate “leader.”

  • They are expensive, so something only the rich will do. It costs a lot to get into Disneyland to meet Mickey. Similarly, most sources conclude that triple-pane windows are too expensive to be a good investment, with payback periods of at least several decades. Solar panels in cloudy England don’t seem like a great investment, either.

Maybe upper-middle class Brits are able to shell out extra money to reduce GHG emissions, but it won’t work well for the rest of the world. Since projections suggest that most of the growth in energy use and associated CO2 emissions will come from the developing world, we need to focus on climate solutions that will work in China, India and Sub-Saharan Africa without inhibiting economic growth. 

  • They have no relevance to the majority of the world population. With 1,000 people, Ashton Hayes represents 0.000014% of the world’s population. Not only that, the lifestyles, building stock, institutions, etc. of upper-middle class Brits are different from the rest of the world. Even if triple-pane windows were hugely cost-effective, figuring out how to retrofit 500 year-old British farmhouses with them does not teach us much of relevance to the new apartment buildings in the growing urban centers of China, India and Sub-Saharan Africa.

Disney’s Mickey Mouse-shaped solar farm seems to be the corporate version of Mickey Mouse mitigation. I’m guessing it was somebody’s idea of fun, in the corporate, public relations sense. (This article speculates that the farm will serve a tiny fraction of Disneyworld’s total consumption.) Also, engineering the iconic shape probably cost a bit extra, and incurring that additional cost won’t help us lower emissions in the developing world.

Why should I bother ranting about this? I fear that by paying attention to Mickey Mouse mitigation measures, we’re lulling ourselves into a false sense of achievement and diverting attention from real solutions. Greenhouse gases are different from most environmental problems we have dealt with so far because they are global pollutants. We can fight the local spread of mosquito-borne diseases if everyone does their part and covers outdoor standing water, but climate change is too big to rely on local, voluntary actions.

Are we doing Mickey Mouse mitigation in California?

So, here’s a question. To what extent is California – after all, the home of the original Disneyland – engaging in Mickey Mouse mitigation? I focus on California because it’s my home state, but also because we seem to be the birthplace of many environmental policies that are subsequently adopted around the world.

Unfortunately, I fear that we’re paying an awful lot of attention to some Mickey Mouse approaches.

Take Community Choice Aggregators (CCAs), which a lot of Californians have been talking about recently. Many of these organizations, with names like “Marin Clean Energy” (now MCE), advertise themselves as alternatives to the utility for people interested in getting a higher share of their electricity from renewable sources. Severin’s blog post earlier this year raises important question about whether CCAs can actually reduce emissions and how their costs might compare to utilities’ costs.

My concern is that they’re relying on customers volunteering to get more renewable electricity, and, so far, it’s been largely richer Californians who have made that choice – two of the Mickey Mouse characteristics.

The maps below show a fair amount of overlap between the counties that have embraced CCAs and the counties with higher median household incomes. For example, the median household income in the purple counties, where CCAs are currently serving customers, is almost $80,000 while the median household income in the blue counties, without CCA activity, is $48,000.

Again, I don’t want to disparage people who opt to join CCAs, but let’s not get too excited about their potential to help the whole world fight climate change. We can’t expect the poor or even the rising middle classes in China, India and Sub-Saharan Africa to volunteer to pay more for renewable electricity.

CCA Activity Today in PG&E’s Service Territory


Median Household Income by County, 2009-13


Thomas Friedman, in the book, Hot, Flat and Crowded, has a chapter that criticizes easy, symbolic actions. The chapter is titled, “205 Easy Ways to Save the Earth.” My point is a little different, as even some more difficult actions, like expecting people to voluntarily pay more for clean energy, are not scalable to the rest of the world.

Here’s something that would not be Mickey Mouse: recent leaks suggest the Clinton campaign contemplated a $42 per ton carbon tax, and Washington state has a good-sized carbon tax proposed in a ballot initiative. These policies could be enacted everywhere, so it would be great to gain some experience with them. Plus, putting a price on carbon in the developed world could help spur innovations that could be transferred to the developing world.

We need to keep our eyes on the ball. We need climate change solutions that have a chance of working in the developing world. Before you pat yourself on the back for installing solar panels on your roof or switching to the CCA, ask yourself how this will help mitigate climate change for people who may never hear of Mickey Mouse in their lifetimes.

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Proposals to Eliminate Natural Gas from the Fuel Mix Are Premature

Natural gas is commonly called a “bridge” to a low carbon future. Why this metaphor?

A bridge crosses over an obstacle, like a river or canyon. The metaphor suggests that transitioning from coal to natural gas for electric generation is one of the most cost-effective and scalable opportunities for cutting greenhouse gases on our way to the promised shore of even lower emissions. This is especially true in the US, which has plentiful low-cost natural gas resources. The idea is that natural gas can carry the US economy in the short term while higher impact carbon mitigation solutions are still too expensive on a large scale. At some point, though, we need to reach the other side of the natural gas bridge so we can continue our journey with even lower carbon solutions like renewable energy, next-generation nuclear, or carbon capture and sequestration.

Politico Morning Energy recently reported that a major environmental group, the Sierra Club, doesn’t want to cross the natural gas bridge at all. They are organizing an aggressive campaign to stop the construction of natural gas power plants and pipelines. In the Sierra Club’s view there’s no river or canyon in our way. The US just needs to make the leap directly to a low carbon future, abandoning fossil fuels as quickly as possible. The Sierra Club believes that if the US and other countries cross the natural gas bridge, the world is headed toward a climate catastrophe.

With the impending turnover in the US executive branch, and possible changes in the legislative and judicial branches, policymakers need to critically evaluate these two visions of the future. Is natural gas a bridge to a low carbon future that should be supported? Or will natural gas take us somewhere we don’t want to go – a greenhouse gas point of no return?

Argument 1: We’re Already on the Natural Gas Bridge

MIT’s 2010 Future of Natural Gas report illustrates how the natural gas bridge could work. The authors, led by now-Secretary of Energy Ernest Moniz, developed several scenarios of future energy supply and demand out to 2050. One scenario assumed that price-based policies are used to achieve a 50% reduction in US greenhouse gas emissions by 2050 relative to 2005 levels. This scenario found that natural gas demand would increase through 2040, then begin to slowly decline.

The shift from coal to natural gas has already pushed down US energy-related carbon dioxide emissions by 12% between 2005 and 2015, as Lucas Davis discussed in a recent blog. We’re already on the natural gas bridge.

Changes in the relative market prices of coal and natural gas, driven by the shale gas revolution, provide much of the explanation. However, policy is also influencing the competitive standing of natural gas generation. As evidence, the EIA reports that 30% of the nation’s coal capacity that closed in 2015, shut down in April. That was the month that the EPA’s Mercury and Air Toxics Standards went into effect.

Would the two major presidential candidates continue over the natural gas bridge?

For Donald Trump the concept is moot, since he has no interest in moving to a low carbon future.

Hillary Clinton, on the other hand, supports policies that would take the US further across the natural gas bridge. In particular she wants to implement the Clean Power Plan (CPP). Trump wants to kill it.

Modeling by the EIA estimates that the CPP’s greenhouse gas reduction requirements would boost natural gas generation by 10% by 2040 relative to a scenario with no CPP.

Source: Duke Energy, HF Lee Energy Complex; combined-cycle plant; generating station; power plant; Goldsboro, NC.

Source: Duke Energy, HF Lee Energy Complex; combined-cycle plant; generating station; power plant; Goldsboro, NC.

The Sierra Club, however, wants to take a different path altogether. They enthuse about Clinton’s aggressive renewable goals, such as her pledge that half a billion solar panels will be installed by the end of her first term.

Their preferred path is more consistent with the Deep Decarbonization Pathways laid out in a study conducted by Energy and Environmental Economics (E3), Lawrence Berkeley National Laboratory and Pacific Northwest National Laboratory. This study models reducing US emissions to 80% below 1990 levels by 2050. The study includes four scenarios. In two, natural gas is all but gone from the electricity mix in 2050. In another scenario the market share of gas is cut in half. In the final scenario, natural gas remains important, but only with carbon capture and sequestration.

Proponents point to California as evidence that a rapid transition away from natural gas is realistic. Natural gas consumption for electric generation in California decreased by 3% between 2014 and 2015. This drop occurred despite the state’s drought, which led to a 16% drop in hydroelectric generation. The growth in renewable generation provides much of the explanation.

If the US is headed down one of these paths then the Sierra Club’s strategy to stop the construction of new natural gas power plants and pipelines could save society money. It’s worth considering because it would mean we’re potentially wasting billions of dollars to build a natural gas bridge headed to the wrong place.

Reality: Stopping Natural Gas Could Benefit Coal

I find the Sierra Club strategy troubling.

The displacement of coal generation by natural gas generation is a highly cost effective way to reduce greenhouse gas emissions. Even without a nationwide carbon policy, the US is seeing widespread replacement of coal with natural gas.

Recent research looking at the period from June 2008 to the end of 2012 found that the degree to which natural gas replaced coal varied by region. In areas where more natural gas power plants had been built during the prior five years, greenhouse gases from power generation dropped more since there was more natural gas capacity available to come on-line and compete with coal. The Sierra Club’s “Beyond Natural Gas” strategy would retard the continued displacement of coal by natural gas.

I am also skeptical that the California example is relevant to the US as a whole. The nation is much more reliant on coal than California. California also has unusually attractive solar, wind, and geothermal resources. I expect replicating California’s move away from natural gas would be much less cost-effective elsewhere. Also, electricity intensive industry in other states would strongly oppose policies that pushed electric rates up toward California levels.

Rather that categorically declaring natural gas a loser, the US should stick to market-based policies that prioritize the most cost-effective climate solutions. In the near-term, that likely means the US needs to continue its way across the natural gas bridge. Anyone who suggests otherwise is trying to sell us a … well, you know.

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Is Cap and Trade Failing Low Income and Minority Communities?

Pollution – like income- is unequally distributed. In fact, pollution exposure is more unequally distributed than income in the U.S. for some pollutants.wilm

Refinery in Wilmington, CA. Credit: Luis Sinco/LA Times

Exposure to pollution-related health risks, accumulated over a lifetime, can have real impacts on outcomes that matter (such as health, education, productivity, and income). So neighborhoods that are more exposed to these risks are disadvantaged in more ways than one.

California has made it a priority to ensure that new environmental regulations improve conditions in these communities.  But a new report from the USC Program for Environmental and Regional Equity (PERE) suggests that these efforts might not be working as far as the state’s greenhouse gas (GHG) emissions trading program is concerned. The report emphasizes the preliminary nature of the findings and stops short of definitive conclusions. But in media coverage, op-eds, blogs, and press releases, some provocative implications are being drawn. For example, the California Environmental Justice Alliance concludes:

“(this report) demonstrates that polluters using the cap and trade system are adversely impacting environmental justice (EJ) communities. The system is not delivering public health or air quality benefits, not achieving local emissions reductions, and it is exporting our climate benefits out of state.”

When the stakes are so high, and when preliminary evidence appears incriminating, it’s tempting to conclude we should change course. But it’s important to keep in mind that these are preliminary findings, and that the GHG policy under fire is not intended to regulate the kinds of pollutants that cause local damages.

How are EJ communities faring under cap and trade?

Economists like cap and trade programs because they harness market forces to seek out the most low cost emissions reductions. Environmental justice advocates are quick to point out that cost-minimizing outcome need not be equity-maximizing outcome. Who wins and who loses will really depend on how the program is implemented and where the lowest cost pollution reductions can be found.

Against this backdrop, a careful assessment of how low income and minority communities are being impacted by California’s emissions regulations is important. But it’s also complicated.  Here are three issues I think we need to get a handle on before we can address this question:

(1) Cap and trade compared to what?  To figure out whether low income communities are faring better or worse under cap and trade, we need a clear sense of what we are comparing against. Researchers looking at the very same data can reach very different conclusions depending on their benchmark.

Research assessing the equity of impacts under cap and trade programs often uses more traditional, prescriptive regulation as a basis for comparison. For example, some co-authors and I looked at emissions under Southern California’s RECLAIM trading program, a regional cap and trade program for criteria pollutants. We compared emissions across all RECLAIM facilities in the first five years of the program against a matched group of facilities that remained under the prescriptive regulations that RECLAIM replaced.  We find that RECLAIM delivered significant emissions reductions which appear to be equitably distributed over this time period. A recent working paper extends our analysis to more carefully account for pollution dispersion patterns. These authors find that RECLAIM may have disproportionately benefited some minority households. Analysis of other cap and trade programs have found similar results, such as this study which documents an equitable distribution of net benefits under the SO2 emissions trading program.

Getting back to California’s GHG emissions trading, the PERE study compares in-state GHG emissions at regulated facilities during the first two years of the program (2013-2014) against emissions at those same facilities in the years preceding (2011-2012).  The figure below shows the average change in emissions by sector. Positive emissions indicate higher emissions, on average, during the post-policy implementation period.


     Change in Emitter Covered GHG Emissions by Industry Sector (N=314 facilities)

Large covered facilities in these sectors are disproportionately located in disadvantaged neighborhoods.  So apparent increases in emissions in some sectors, together with the purchase of offsets, are  being used to support the claim that California’s cap and trade program is making things worse in disadvantaged communities.

Before reaching this conclusion, it’s important to remember that these kinds of pre-post comparisons can confuse the effects of a policy change with the effects of other factors that are also changing over time. For example, the graph below shows annual growth in GSP (gross state product) for California (gold) and all US states (blue). The graph shows how the rate of growth in California’s economic production increased as the GHG CAT program took effect in 2013 (in absolute terms and relative to the rest of the country).  With this increased industrial production comes increased emissions.


The PERE study highlights an in-state emissions increase at regulated sources as the state economy continued to recover. But before we can draw meaningful conclusions about the impacts of GHG emissions trading versus other factors, we need credible estimates of what emissions would have looked like under some plausible policy alternative.

(2) Cap and trade as a means to what end?  So far we’ve been focusing on GHG emissions from regulated sources. But what we ultimately care about is the damages caused by this pollution.

In the case of GHGs, the link between regulated cause and local health effect is indirect. In contrast to criteria pollutants, GHG emissions have no direct, local health impacts. Climate change damages depend on global concentrations.  Importantly, it’s the damages from local “co-pollutants” that EJ communities are concerned about. In other words, the current debate about the injustice of GHG emissions trading is fundamentally concerned with the adequacy of other policies that regulate other (local) pollutants.

The PERE study does not estimate how changes in GHG emissions at covered sources have translated into local exposure to co-pollutants and associated health impacts. It also sidesteps a key question: why are we using GHG regulations to tackle local pollution problems?

(3) Cap and trade… and transfer:  Unlike prescriptive emissions regulations, cap and trade programs can generate revenues through the sale of tradable emissions permits. These revenues can be redistributed in a way that addresses equity concerns. Under California’s GHG emissions trading system, some revenues are used to improve health and economic opportunity in disadvantaged communities. As of December 2015, 51 percent ($469 million) of the California Climate Investments had been allocated to projects that provide benefits to disadvantaged communities. And it is anticipated that the energy bills paid by low income consumers should fall, on average, thanks to climate credits and low-income energy assistance.

These transfers are not accounted for in the PERE analysis, but they should factor into an assessment of whether disadvantaged communities would be better off or worse off under cap and trade as compared to more prescriptive policy alternatives.

Barking up the wrong tree?

A defining advantage of market-based regulations is the cost savings they can deliver over more prescriptive regulations. A defining EJ concern is that the market – versus the regulator –  determines where emissions reductions will happen. California’s cap and trade (and transfer) approach is trying to strike a balance between sending price signals that reflect GHG emissions costs and improving conditions in disadvantaged communities.

The PERE report highlights trends in in-state emissions and the use of offsets which warrant further investigation. But it does not provide a basis for foreclosing on cap and trade in favor of direct regulation as some have suggested. We need more studies using better data and clearly defined benchmarks to understand how climate change policies are impacting outcomes we care about. Perhaps more importantly, we need to confront the question of whether inequalities in exposure to local emissions should be addressed by distorting climate change policy, or strengthening regulations of local pollutants.





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