Tuesday, May 7, 2019

The High Costs of Renewable Portfolio Standards

A "renewable portfolio standard" is a rule that a certain percentage of electricity generation needs to come from renewable sources.  Such rule have been spreading in popularity. But Michael Greenstone and Ishan Nath argue in "Do Renewable Portfolio Standards Deliver?" that they are an overly costly way of reducing carbon emissions (Becker Friedman Institute, University of Chicago, April 21, 2019). As they explain in the Research Summary (a full working paper is also available at the link):
"29 states and the District of Columbia have been successful in passing Renewable Portfolio Standards (RPS), which require that a percentage of the electricity generation come from renewable sources. These programs currently cover 64 percent of the electricity sold in the United States. 2. Until now, studies have suggested that RPS programs only marginally increase electricity costs, because they have only examined differences in the costs of generation. These studies fail to fully incorporate three key costs that the addition of renewable resources impose on the electricity system: 1) The intermittent nature of renewables means that back-up capacity must be added; 2) Because renewable sources take up a lot of physical space, are geographically dispersed and are frequently located away from population centers, they require the substantial addition of transmission capacity; and 3) In mandating an increase in renewable power, baseload generation is prematurely displaced, which imposes costs on ratepayers and owners of capital."
Their research design is straightforward. They compare states with and without RPS policies, using data over the quarter-century from 1990-2015. They find that the Renewable Portfolio Standards do increase the use of renewables in the generation of electricity, but at a cost.
Seven years after legislation creating an RPS program, retail electricity prices are 11 percent higher on average (1.3 cents per kWh), or about $30 billion annually across the 29 states. Twelve years afterward, prices are 17 percent higher on average (2 cents per kWh). In total, seven years after the start of the programs, consumers in the 29 RPS states paid $125.2 billion more for electricity than they would have in its absence. ... In states with RPS policies, renewables’ share of generation increased about 1.8 percent seven years after passage, and 4.2 percent twelve years afterwards. These figures are net of renewable generation that was already in place at the time an RPS was implemented.
Even the most ardent advocates of reducing carbon emissions should desire to do so at the lowest practical cost. By that standard, the Renewable Portfolio Standards have not been a success. Greenstone and Nath write:
In increasing the share of renewable generation, the states with an RPS policy saved 95 to 175 million tons of carbon emissions seven years after the start of the programs. This was driven by a decrease in the carbon intensity of electricity supply in RPS states. However, this study finds that the cost of reducing carbon emissions through an RPS policy is more than $130 per ton of carbon abated and as much as $460 per ton of carbon abated—significantly higher than conventional estimates of the social and economic costs of carbon emissions. For example, the central estimate of the Social Cost of Carbon (SCC) tallied by the Obama Administration is approximately $50 per ton in today’s dollars. A second point of comparison comes from the cost of abating a metric ton of CO2 in current cap-and-trade markets in the US: it is about $5 in the northeast’s Regional Greenhouse Gas Initiative (RGGI) and $15 in California’s cap-and-trade system.

For the record, because we live in a time when people obsess over the potential bias of researchers, Greenstone has been, among a number of other professional affiliations, "Chief Economist for President Obama’s Council of Economic Advisers, where he co-led the development of the United States Government’s social cost of carbon." Nath is a PhD student at the University of Chicago.

For discussion of cost-effective ways of reducing carbon emissions, a useful starting point is Kenneth Gillingham and James H. Stock. 2018. "The Cost of Reducing Greenhouse Gas Emissions." Journal of Economic Perspectives, 32 (4): 53-72.