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Toward a New National Energy Policy

Kristin Hayes

 

The call for change in national energy policy isn’t new; it is a concern expressed by generations of American leaders on both sides of the political spectrum. A number of solutions have been proposed—and indeed, a number of important pieces of energy legislation have been passed over the last 40 years. But so far, as a nation we’ve been unable to find the right blend of political consensus and effectiveness to lead us to pass truly comprehensive energy legislation.

Many considered 2009 a turning point in the debate on national energy policy. In June of that year, the House of Representatives narrowly voted in favor of enacting a far-reaching cap-and-trade program to stem carbon dioxide (CO2) emissions in the United States—a program that would have had ripple effects on energy consumption throughout the economy.

Over the next 14 months, the Senate debated its own version of cap-and-trade legislation. By August 2010, however, it was clear that any equivalent to the House’s Waxman-Markey bill was dead. Today, therefore, we’re back to discussion and debate, if not to square one.

So where do we go from here? That is the very question addressed by a recent RFF report—Toward a New National Energy Policy: Assessing the Options. The study was carried out in conjunction with the National Energy Policy Institute with support from the George Kaiser Family Foundation.

We began by asking a variety of questions: What policy options are available on a national scale to help reduce U.S. dependence on oil and curb our CO2 emissions? How successful are those policies in obtaining these reductions? How much do such options truly cost? And how do they compare to each other in terms of cost per barrel of oil reduced, or cost per ton of carbon reduced?

A significant challenge was answering these questions in a consistent fashion across a range of different policies. To do this, we employed one of the study’s distinctive features: the use of a single model (EIA’s National Energy Modeling System, modified by RFF) for examining all policies, allowing for apples-to-apples comparisons. We also focused explicitly on policy instruments (rather than on technologies, as have many previous studies), and employed the concept of welfare costs to examine the true societal cost of policies.

Policies Studied

The study covered about 30 individual policies in a variety of sectors, largely focused on the transportation sector (for reducing oil) and the power sector (for reducing CO2 emissions). Most of the low-cost options for reductions can be found in these two sectors.

Within those broad sectors, we looked at a range of policy instruments, from subsidies to standards to pricing systems. We then combined these individual policies in various ways to illustrate the effect of policy portfolios that work on more than one margin.

Lessons Learned

Pricing is both an effective and cost-effective solution.

The pricing policies we examined—including oil and carbon taxes, gasoline taxes, and cap-and-trade programs—cost the least per ton or barrel reduced, and generally lead to the greatest reductions in oil or CO2. This came as no surprise to the research team, as economic theory suggests that this should be the case. But as is apparent in the contentious debates in the Senate this year over cap-and-trade legislation, pricing policies face significant—and many would say currently insurmountable—political hurdles in the United States. So what other relatively effective options are available to us?

Much of the post-cap-and-trade discussion in Congress has focused on some variety of portfolio standards, which mandate that a certain portion of energy be generated from renewables or other clean energy sources such as nuclear. We modeled a variety of these standards with various stringencies and levels of coverage.

Portfolio standards can be effective, especially if defined broadly.

The broadest standard considered in our report is known as the Clean Energy Portfolio Standard–All, or CEPS–All. Of the individual portfolio standard policies, CEPS–All achieves the greatest aggregate CO2 reductions— 7,632 million tons over the 2010 to 2030 projection period. Nonetheless, this reduction is only 62 percent of that found under our Central Cap-and-Trade policy, because CEPS–All only covers electricity generation and does little to reduce overall electricity demand. CEPS–All is relatively low-cost at $15 per ton of CO2 reduced, but when compared to a cap-and-trade policy scaled to achieve the same level of CO2 reductions, we find that CEPS–All costs are 68 percent higher.

For significant oil reductions, target the least efficient vehicles.

Our research shows that a limited number of policy options make a significant dent in oil consumption; even our Phased Oil Tax and Gasoline Tax policies reduce oil consumption by only 1.5 and 0.8 million barrels per day, respectively, in 2030. One additional option did look promising, however: investing in converting the nation’s heavy-duty trucking fleet to run on liquefied natural gas rather than diesel. Because heavy-duty trucks cover so many miles at such low fuel economy, progressive conversion of the fleet away from diesel can reduce oil consumption by an estimated 2.2 million barrels per day in 2030.

Energy efficiency policies have significant promise but need further study.

Energy efficiency policies are often promoted as the least-cost method for reducing emissions—and some are even touted as free. Under certain assumptions about so-called hidden costs and market failure, many of the energy efficiency policies we examined do actually result in cost savings; at the same time, emissions reductions were small. Nonetheless, we identified some promising, cost-effective options—particularly the use of loans (with subsidies on interest) instead of investment subsidies— for encouraging the adoption of energyefficient technologies.

Finally, policies must be blended in smart, strategic ways.

Our study highlights the fact that not all policies complement each other. For example, we modeled a Hybrid Subsidy combined with a more stringent fuel economy standard and found that the addition of the subsidy did little to reduce CO2 emissions above the increased standard alone, but substantially increased cost.

This lesson was also apparent in the portfolios of policies we examined, which were designed to reduce both oil use and CO2 emissions. Putting together policies that work on different margins results in greater reductions, and can alleviate some of the redundancies and extra costs described above.

For example, in one of our combinations, we blended pricing policies on oil and carbon with tighter energy efficiency standards for vehicles and buildings. The pricing policies encourage reductions in overall consumption, while the efficiency policies maximize utility of the resources that are consumed.

Two of our four combinations met our targeted reduction in CO2 emissions (with another coming very close), and nearly all met the oil target. Welfare cost of these combinations per capita ranges from $48 to $117 per year—a relatively modest amount for a significant reduction in the two commodities we examined.

Where do we go from here? Most signs point to a pause in U.S. comprehensive energy policy over the near term, as the House and Senate focus on other pressing economic and social issues. But the discussion continues on a range of individual policies, several of which may have traction over the next few years. Our report provides a road map for which of those may be most effective and cost-effective, how policy design can maximize that effectiveness, and how policies can be blended in complementary ways.

Further Reading:

Toward a New National Energy Policy

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