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Cutting Carbon Emissions: What’s the Most Efficient Approach?

 

Raising the true price of carbon is the most efficient way to reduce emissions of it, RFF Fellows Carolyn Fischer and Richard Newell conclude in a new paper. At the same time, they say, subsidizing the use of renewable energy sources, or research into the use of renewables alone, are the least efficient methods.


Carbon dioxide – the most important of the greenhouse gases generated by human activity – is produced chiefly by burning fossil fuels. Governments around the world are struggling to find an equitable, efficient approach to reducing carbon emissions.

One popular remedy is greater use of renewable energy sources. They now account for about 6 percent of the energy supply in the industrialized countries, but the European Union has set a target of 12 percent by 2010.

“A renewables production subsidy, to generate the same emissions reductions as an emissions tax, must be substantially larger the size of a fossil output tax,since electricity consumption is not reduced,” Fischer and Newell write.

Link to RFF Discussion Paper
Environmental and Technology Policies for Climate Change
and Renewable Energy
 
RFF DP 04-05
April 2004

An emissions tax is more effective than the alternatives because it simultaneously puts pressures on consumers to conserve, on producers to employ technologies that get more energy for every ton of carbon emitted, and on renewables to expand production because they are untaxed. But emissions taxes are unpopular because they raise the cost of power to consumers, and governments worry that the taxes will slow economic growth. Subsidies to renewable energy avoid burdening consumers, but they tend to be costly in terms of tax revenues foregone, and they can be significantly less effective when the goal is reducing carbon.

In many of the economic models used to analyze energy policy, prominence is given to the way that technological advances are achieved – from the bottom up, through learning by doing, or from the top down, through formal research and development. Fischer and Newell found that the distinction does not significantly affect their conclusions.

Their paper compared six emissions control policies that are in use or are being considered by various governments:

  • Raising the price of carbon emissions, such as by implementing an emissions cap with tradable permits.
  • Subsidizing the use of renewable sources of electricity generation such as wind, solar, biofuels, or ocean tides.
  • Subsidizing research and development in renewable energy.
  • Raising the price of fossil fuels with taxes.
  • Setting a tradable performance standard – that is, a required ratio of energy output for every ton of carbon dioxide emitted, coupled with a provision that highly efficient companies could sell permits to their less efficient competitors.
  • Imposing a portfolio standard that requires power companies to produce a certain percentage of their output from renewable sources. In this country, various kinds of portfolio standards for electricity generation are in effect in 19 states.

These policy options have differing combinations of incentives, the authors write, with differing consequences for the size and distribution of the burden of meeting an emissions reduction target.

“For example, a renewable energy portfolio standard creates an implicit tax on fossil energy in the form of the mandate to buy green certificates, which then funds a subsidy to renewable energy through the certificate value,” they observe. “The combination raises the total price received by the renewable energy sector and encourages more renewable energy output and R&D than a tradable emissions performance standard or a fossil fuel tax, but at a greater welfare cost.”

Fischer and Newell note that in their analysis they have made some simplifying assumptions, one of which is that advances in technical knowledge will become generally available. If that's not true and access to new technology were to become an issue, they write, the optimal policy would be a combination of a tax on carbon emissions and subsidization of progress in energy technology generally, whether by formal R&D or by learning-by-doing.

 

 

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