Hearing on Building a 100 Percent Clean Economy: Solutions for the Power Sector

This testimony will begin at 10:30 a.m. ET on October 30, 2019. Watch the testimony below or on the committee website.

Chairman Rush, Ranking Member Upton, and distinguished members of the Subcommittee:

Thank you for the opportunity to provide testimony to the Energy Subcommittee as part of the Committee’s exploration of policy pathways to lead to a 100% net zero emission US economy in 2050.

My name is Karen Palmer, and I am a Senior Fellow and Director of the Future of Power Initiative at Resources for the Future (RFF). RFF is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy. While RFF researchers are encouraged to offer their expertise to inform policy decisions, the views expressed here are my own and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative or regulatory proposals.

This hearing is timely and takes place against the backdrop of a rapidly evolving power sector, shaped both by policy activities at the state and federal levels as well as market forces. States have continued to lead the way with increasing ambition, putting in place renewable and clean energy standards, cap-and-trade programs, and even ambitious legislative requirements to reach net-zero emissions by 2050. The costs of natural gas have decreased significantly as a result of improved extraction techniques, and the continued cost declines of utility-scale solar and wind along with storage have made them competitive without subsidy with coal and natural gas in some markets. Emissions from the power sector, as a result, are down 27% from 2005 levels. [1]

Clearly there is momentum in the power sector towards a future with decreased emissions. However, the pace of the transformation is insufficient to meet the pace of reductions from the power sector required to keep US emissions reductions on a trajectory consistent with limiting global warming to 1.5 degrees Celsius. [2] Without further policy intervention, the vast majority of economic models indicate that the power sector will fall far short of the 100% net zero emission goal by 2050 put forward by Committee leadership that is consistent with this target.

In this testimony I offer three primary contributions. The first is a suggested set of criteria that the Committee consider in its evaluation of the merits of different policy options. The second is a discussion and comparison of a set of policy options that could be implemented to reduce power sector emissions or decarbonize it entirely. The options I discuss include carbon pricing, clean and renewable electricity standards, energy tax incentives, and clarification of existing regulatory authority. Finally, I highlight several potential challenges that are likely to need to be addressed to fully eliminate greenhouse gas emissions from electricity production.

Criteria for Evaluating Policy Approaches

As the Committee considers climate policy approaches, I suggest several criteria for the evaluation of such policies. The first criterion is the level and pace of emissions reductions, given the primary rationale of reducing US greenhouse gas emissions. The cost of the policy is important not only for the strength of the economy, but also because achieving reductions at less cost can allow for more ambitious policies. Equity and environmental justice considerations should assume a central place in climate policy conversations and include planning for a just transition for workers affected by a transforming energy system. International concerns, including both the need to maintain or improve international competitiveness and to leverage actions in other nations are vitally important. Technological innovation is a crucial policy outcome, not only to reduce US emissions but also to support reductions internationally. Finally, durability and adaptability should be incorporated into policy design, to help ensure that future policies can withstand changing economic circumstances and political winds.

Summary of Policy Options

Carbon Pricing

Economic theory, as well as experience, has shown that the most cost-efficient policy solutions are those that introduce a direct price on carbon emissions, for example through a carbon tax or a cap-and-trade program. An economy-wide price on carbon changes the relative cost of fuels by making fuels that have relatively greater emissions more expensive than those with relatively lower emissions, sending an economic signal that percolates through the entire economy. This signal provides an incentive for all decision makers in the economy to look for ways to reduce emissions and provides them the flexibility to make decisions based on their own information and circumstances.

When applied to the electricity sector, either as part of an economy-wide policy or on its own, an important attribute of carbon pricing is that all emissions are priced consistently. Electricity generators of all types and efficiencies are therefore given an incentive to reduce their emissions in whatever manner makes economic sense, allowing significant flexibility for the power sector overall to reduce its emissions. In comparing climate policy options, with all else being equal, the greater the number of available options to reduce emissions, the lower the overall costs of the policy will be. Importantly, existing product markets, including wholesale electricity markets, can seamlessly incorporate changes in the relative prices of electricity generation alternatives driven by carbon pricing.

Carbon pricing policies can raise considerable revenue and how such revenue is used has a strong effect on the overall outcomes driven by the policy. Policy decisions made with respect to the use of carbon pricing revenues involve tradeoffs between, among other metrics, pure economic efficiency, overall emission reductions, and distributional outcomes, for example, how the costs of the policy are distributed across geographic regions, socioeconomic class, and economic sector.

Renewable Portfolio Standards

Renewable portfolio standards (RPS), which require retail electricity providers to sell a certain percentage of their electricity from renewable sources each year, have been widely deployed at the state level and have played an important role in deploying renewables and driving cost reductions. Most such policies currently in place have set relatively modest targets, but an RPS could be expanded to achieve net zero emissions by 2050 by requiring 100% renewable electricity. In comparison to more technology-inclusive and flexible policy requirements, however, renewables-only policies can be expected to have higher costs for the same level of emissions reductions. Extremely high levels of renewables penetration could also be expected to exacerbate some of the challenges I discuss later in my testimony.

Clean Energy Standards

An alternative policy approach that builds on the structure of a traditional renewable portfolio standard but is more technology-inclusive, is a clean energy standard (CES). A clean energy standard requires that a certain percentage of electricity sales be met through “clean” zero- or low-carbon resources, such as renewables, nuclear energy, coal or natural gas fitted with carbon capture, and other technologies. RFF modeling of proposed CES policies has shown that a CES can put the power sector well on its way to full decarbonization with modest effects on nationally averaged electricity rates.

Provided it is well-designed, a clean energy standard can provide a very similar set of relative incentives for power generation as carbon pricing and can approach its economic efficiency. Unlike carbon pricing, however, clean energy standards typically do not raise revenue. Economic modeling and theory have also shown that clean energy standards will increase retail electricity rates by less than an equivalent carbon pricing policy that does not use its revenue for electricity rate reduction. An important effect of the application of both renewable and clean energy standards is that they may depress the clearing prices in wholesale electricity markets, with implications for the profitability of generators not receiving clean energy credits.

Tax Incentives

The myriad of tax incentives available to various forms of clean energy are, individually and collectively, far less efficient at reducing emissions than carbon pricing, but have still played an important role in deploying clean electricity projects and bringing down the costs of renewables. There are opportunities to improve upon the existing ad-hoc nature of the credits by rationalizing such tax incentives to become technology-neutral and long-lasting, providing greater certainty for investment in current and developing technologies.

Regulatory Authority

The federal government, under the Clean Air Act, is required to regulate greenhouse gas emissions from both stationary and mobile sources, though the full suite of regulatory tools by which it can do so are in dispute. An alternative to specifying in legislation the details of any of the above policy mechanisms would be for Congress to specify more broadly the level of emission reductions to be achieved, reaffirm that the Clean Air Act is a mechanism that can be used, and clarify both the relevant sections of the statute and that carbon pricing and other market mechanisms would constitute valid approaches.

Challenges to Electricity Sector Decarbonization

Decarbonizing the electricity sector raises some challenges to traditional approaches to electricity system operations and wholesale electricity markets that will need to be addressed as part of the transition to a fully decarbonized system. These challenges are not insurmountable and potential solutions have institutional, technical and regulatory components.

Among the potential challenges, is that a high penetration of renewables can be expected to drive wholesale energy prices to zero in many hours of the day, reducing incentives for investment in new generation. Markets may need to be altered in order to promote new investment while delivering power reliably and at low cost to consumers. In addition, maintaining a reliable grid with a high penetration of intermittent renewables will likely require a build-out of bulk energy storage and more flexible electricity demand activated by greater time varying prices, which will require changes in retail electricity rate design. Newly electrified loads may be a particularly amenable source of flexible demand that can help with renewables integration due to their distributed energy storage potential. However, targeting electricity sector emissions in isolation from the rest of the economy could discourage electrification of other sectors, which is considered a viable decarbonization method for transportation and buildings. Simultaneous efforts to address carbon emissions from these other sectors can make a clean electricity sector more viable.

[1] Energy Information Administration (2019). Monthly Energy Review Table 11.6. Available at: https://www.eia.gov/totalenergy/data/browser/xls.php?tbl=T11.06&freq=m

[2] IPCC (2018). Special Report: Global Warming of 1.5°C. https://www.ipcc.ch/sr15/

For Full Testimony, please download the PDF (see above).