Common Tragedies

Thoughts on Environmental Economics

Assuming we cap carbon emissions, what’s the added benefit of enacting a federal RPS?

Posted by Rich Sweeney on February 26, 2009

I’ve been really busy since I got back from Thailand, which is why I haven’t been posting. Now I’ve got a cold and don’t really have the mental energy to come up with anything coherent or insightful. So I figure I’ll take this opportunity to ask CT readers a question, the one in the title.

I’ve been confused about this for a long time and am hoping someone can explain it to me.  There’s been a lot of chatter recently about Obama’s apparent attempt to sneak a cap and trade program in through the back door of the budget. However, I’ve heard from multiple sources that the House Dems want a national renewable portfolio standard in place before a carbon cap is implemented.

As far as I know, the reason we want to promote renewable electricity is to reduce our carbon emissions. Since simply enacting an RPS will not guarantee that we reduce emission to the desired level, some sort of carbon price will be necessary anyways. If the RPS is less than or equal to the percentage of renewable electricity generated after carbon policy is in place, then the renewable credit price (REC) will go to zero, and the whole program will have contributed nothing more than red tape.

On the other hand, if the RPS still binds after we cap carbon, it will have the effect of increasing electricity prices without further reducing carbon emissions. Unless the CO2 permit price goes to zero (EIA estimates of L-W were in the $20 range), the emissions cap acts as both a floor and a ceiling on emissions.

So my question is, simply, why do we want an RPS if we know we need to price carbon anyways?

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5 Responses to “Assuming we cap carbon emissions, what’s the added benefit of enacting a federal RPS?”

  1. Thom said

    maybe its a protectionist/domestic development play – is it possible that an RPS guarantees the development of domestic renewable sources in a way that cap’n’trade doesn’t? after all, one “possible” outcome of cap’n’trade is that we just consume less without a significant shift to renewables. an even more likely cap’n’trade outcome is a big substitution from coal to gas (at least in the short to medium term) without a ton of natural demand for renewables. however, an RPS requires that some fraction of electricity (or motor vehicle fuel, pick your poison) come from renewable sources. you can attain this either by dramatically cutting back production by non-renewables (so that you are in compliance with existing renewable capital stock) or by building more renewables.

  2. Pedro Linares said

    I think these are two different objectives (although they interact significatively). I would say you still need an RPS if you want:
    – to become more energy-independent (with all the associated discussion) in the power sector
    – to have more stable electricity prices
    – to be able to keep ahead of the European renewable technology companies if you (correctly) expect the renewable technology market to expand in the future.

    A cap-and-trade system will of course help with emissions, but not with renewables (there are much cheaper options to reduce carbon emissions). Of course, another issue is if you prefer an RPS to a feed-in tariff system…

    As for the interactions between the cap-and-trade and the RPS, you may be interested to look at this: http://www.iit.upcomillas.es/~pedrol/documents/cp08.pdf

  3. Carlos Ferreira said

    Maybe it’s a political decision: people love when command-and-control is enacted in someone else. Also, it might serve until the cap-and-trade is in place, and indeed diminish the impact of cap-and-trade in companies’ revenue when it does come.

  4. Matthew said

    Wow, I was impressed with some of this blog until I read this post. This is sheer ignorance. My parting shot, before I erase this blog from the bookmarks:

    Cap and trade purists don’t seem to understand that there is something out here in the real world called an electricity market, and that under any politically viable national cap, coal use is barely touched. You need an RPS AND decoupling AND building codes AND fuel switching AND a cap to get to CO2e concentrations that even begin to resemble a habitable planet. That RFF’s best and brightest don’t understand this is horrifying, but I’ll put you in the camp of DC insiders who love the fishbowl, and can’t seem to understand why there’s all that dry-looking water outside of it.

    So long …

  5. [...] Caps Are Coming, Why Mandate Renewables?“, and reports some of the responses he received.  Rich Sweeny asked the same question at Common Tragedies a while back.  In both cases it appears to be the case that proponents of [...]

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