Regional Cap-and-Trade Shown to Save Money While Boosting Economy and Cutting Emissions

Two myths consistently being put forward by conservative think-tanks are that government regulation hurts the economy and that efforts to take action on climate change will raise energy prices.

These assertions are primarily put forth through imagined scenarios, rather than actual data. The problem with the scenarios is not that they have too much imagination in them, but rather they often don’t have enough. They tend to look at what impact a certain new rule might have, in a world where the rule takes effect and nothing else changes. They don’t reflect the true vibrancy, adaptability and creativity that exists within our economy.

For example, if a coal plant shuts down, a certain number of jobs are lost there. But that’s not the whole story. That energy will be produced somewhere else, which will create new jobs, while, at the same time, improving our air and water quality. Of course, there will be some winners and losers, but overall, the data shows that the impact of regulation on the economy is small, without even taking into account the huge, costly disasters that tend to occur when regulations are relaxed or not properly enforced. Do the words “Gulf oil spill” ring any bells?

The bigger picture is that the regulations are an effort to steer the economy in a direction that is safer, more equitable and more sustainable. They don’t always work, but that is the intention. Indeed, regulations are one of the few tools available for doing so.

Business people are always looking for opportunities. So, when prices start to go up in one area, it won’t be long before another, cheaper option suddenly appears. That’s the way the economy really works.

Let’s take a look at what’s happened to energy prices in the Northeast once a price on carbon was instituted under the Regional Greenhouse Gas Initiative (RGGI). Organizations like the Institute for Energy Research and the Heritage Foundation have argued against any type of carbon tax or cap-and-trade program, saying that they would “inflict high costs on families.”

What has actually taken place differs widely from these dire predictions. Since its inception across New England and Mid-Atlantic states in 2011, RGGI’s cap-and-trade program has produced an additional $1.3 billion in economic activity while reducing carbon emissions by 15 percent. All of this was achieved while reducing electricity prices by $460 million. That is hardly in line with the disastrous outcome that had been predicted. The nine states all saw benefits from their participation. New Jersey was initially part of the initiative, but under Gov. Chris Christie’s leadership the state withdrew in 2011.

Here’s how it works. Each state is given a cap, which is the total amount of carbon that their utilities can produce each quarter. A number of permits corresponding to the total amount of carbon are then auctioned off. The states use the proceeds raised by the auction to invest in programs that facilitate carbon reduction, such as efficiency retrofits or renewables. Then, the number of permits is gradually reduced each year.

This market-based solution provides a situation where the cleaner a utility is, the fewer permits it needs to buy. It’s simple economics. And if a state has permits left over due to the improvements they’ve made, those permits can be sold or traded to other utilities.

According to Andrea Okie, a report author from the Analysis Group who wrote a recent study on the program, the reinvestments made by the states have been key to both boosting state economies and allowing utilities to meet the targeted reductions. The states have collectively spent 59 percent of the funds on energy efficiency, 15 percent on renewables, and 13 percent on consumer financing and bill-paying assistance. An additional 12 percent went into other greenhouse gas programs and administration, and 1 percent went into clean technology research.

So, how does this reduce prices? In a few words, by reducing demand. One of the biggest costs that utilities bear is maintaining the ability to respond to demand spikes. The most highly responsive forms of generation that are used for this purpose, are among the least efficient. By reducing the need for these so-called “peaker plants,” costs go down for everyone.

Under the EPA’s new Clean Power Plan, which is due to be released next month, all states will be required to reduce the carbon emitted by their electric utilities. While some states will undoubtedly be busily hiring lawyers to fight the rule, the smart ones will take a serious look at a model like this one, which will not only allow them to meet the new EPA standards, but will also reduce costs for consumers and boost their economy at the same time.

Image credit: Christian Jacobsen: Flickr Creative Commons