Common Tragedies

Thoughts on Environmental Economics

RECs ‘n Effects

Posted by Rich Sweeney on October 24, 2007

Much of the global warming debate in DC of late has focussed on taxing or capping carbon. Yet, in addition to this, it’s become increasingly clear that Washington is going to take an even more active role in greening up our nation’s energy mix by ennacting some sort Renewable Portfolio Standard (RPS). An RPS encourages clean energy by forcing utilities to generate a certain percentage of their electricity from renewable sources. All of the leading Democratic presidential candidates have proposed RPS’s, of either 20% by 2020 or 25% by 2025. The current House version of the energy bill has a fairly timid RPS of 15% by 2020 with lots of rural exemptions and loopholes. The Republicans successfully blocked an RPS from being included in the Senate energy bill.

So far all of the action on the RPS front has occurred at the state level. For a really good overview of RPS in general and of the states’ RPS experience to date, see this paper from the folks at EIA, published in the May 2007 issue of The Electricity Journal.

Today 21 states and the District of Columbia (representing over 40% of the US electrical load) have mandatory RPS obligations. This is both a good and a bad thing. As has been the case in much of the US global warming debate, leadership and action at the state level have certainly expedited the issue in Washington. Moreover, one of the oft quoted benefits of federalism is that the states can act as policy laboratories, testing out different approaches to an issue before it goes national. However, for many states, a self contained RPS doesn’t make much sense, mainly because they don’t have much renewable energy potential (ie the rain in Spain stays mainly in the plain). Similar to a carbon cap and trade system, an RPS encourages the most efficient satisfaction of renewable demand by creating Renewable Energy Credits (RECs) that can be bought by utilities to meet their regulatory commitments. If you look at table 4 in the paper above you’ll see that there are large difference in the price of RECs for the same exact point in time. What this means is that even if every state were to enact the same exact RPS, it wouldn’t be as efficient as a national standard unless there was perfect trading across each program. Such trading, along with the necessary compliance monitoring, would require significant oversight and cross-border coordination. Given this, it appears to be very costly to leave RPS up to the states.

Of course this assumes that RPS is a good idea in the first place. I haven’t thought about this all that much yet, but it seems like a second-best approach to the issue. If we taxed or capped carbon tightly enough wouldn’t renewable generators simply enter the market on their own and compete on price? Is this just another example of the lengths to which we will go in this country to keep our taxes and subsidies hidden?

One Response to “RECs ‘n Effects”

  1. Climateer said

    Re: “seems like a second-best approach to the issue”
    That would be a bingo.

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