Renewable Electricity Standards, Energy Efficiency, and Cost-Effective Climate-Change Policy
Technology Policy Institute Working Paper
21 Pages Posted: 20 Jul 2009
Date Written: June 11, 2009
There is general agreement that cost-effective environmental regulation uses market mechanisms, such as a tax or a cap-and-trade program, in order to leave choices about the least-cost ways of achieving policy goals to individual producers and consumers. A renewable electricity standard (RES) is the opposite of a market-oriented approach, because it prescribes technologies regardless of cost, rather than prescribing a goal and allowing participants to meet it in whatever way is most efficient. Under a cap-and-trade program, an RES is unnecessary and, in fact, counterproductive because it raises the costs of achieving reductions. However, an RES can be made more market-oriented by allowing energy efficiency to count toward the RES requirements. Incorporating energy efficiency into an RES would reduce its costs, particularly because the evidence suggests that the costs of an RES increase sharply for renewable penetration levels in excess of 15 percent. But if energy efficiency is to be incorporated into an RES, it is important to correctly specify the baseline against which reductions in consumption should be measured. If the baseline is not permitted to grow at an appropriate rate over time, the requirements to use renewable generation will be even less flexible than under a pure renewable electricity requirement.
Keywords: climate change, energy, renewable, conservation, cap and trade, carbon tax, portfolio
JEL Classification: Q28, Q48, Q58
Suggested Citation: Suggested Citation