Wishful thinking

The state's energy policy oversells the benefits of renewable power and conservation efforts

the traditional focus of energy policy was on ensuring inexpensive and reliable supplies, but now, driven by concerns about anthropogenic climate change, there is pressure to rein in emissions of greenhouse gases, especially carbon dioxide.

The problem is that existing measures to address carbon dioxide emissions are ad hoc and incoherent, and so are more expensive, less effective, and more unfair than they should be. The tragedy is that it need not be so. Introducing a tax on carbon in return for lower taxes on income, coupled with sweeping away the patchwork of existing emissions-reduction measures, would represent a huge improvement. This is not merely the idealistic vision of an academic scribbler: British Columbia has introduced a robust version of this idea, and Sweden and Finland have had carbon taxes for almost two decades.

Where does Massachusetts energy policy go wrong? The Renewable Portfolio Standard (RPS) requires a rising proportion—currently 5 percent —of electricity to be derived from “new renewable sources.” Utilities currently pay about 2 cents more per kilowatt hour for new renewables than they do for conventional energy, a market-driven premium that is capped at 6.1 cents. Beyond this, the Commonwealth’s major electricity utilities are being pressured to sign long-term contracts with renewable producers such as Cape Wind, which recently negotiated an initial contract price of 20.7 cents per kilowatt hour. These numbers are not as benign as they look: The wholesale cost of conventional electricity in Massachusetts in the year through March 2010 was 5.1 cents per kilowatt hour. So new renewable supplies are substantially more expensive, and power from Cape Wind is more than three times as expensive as conventional sources.

The relevant question is whether subsidies of this magnitude are justified. In a recent study of wind power in Massachusetts, I argue that, given the under-pricing of fossil fuels and the low emissions produced by wind turbine generators, a ratepayer subsidy of about 1.1 cents per kilowatt hour for wind is appropriate. The implicit subsidy to Cape Wind is over 10 times as high, and it represents a cost of more than $700 per ton of carbon emissions averted, an astonishingly costly way to mitigate climate change.

but there is worse. In January 2010, the Massa­chusetts Department of Energy Resources (DOER) unveiled a program touting energy efficiency as “our first fuel.” We are promised that “a cadre of energy specialists, HVAC contractors, weatherizing experts, and other technicians will deliver dramatic improvements in building performance and comfort across the state,” using “a tried and true approach” that is nonetheless “new, un­precedented,” and “groundbreaking,” and “is designed to yield unparalleled savings for consumers” via energy savings, or “negawatts.” We are asked to believe that $2.1 billion in costs in­curred between 2010 and 2012 will yield savings of $6 billion.

This is wishful thinking; returns this large would attract a rush of entrepreneurs and would not require a helping hand from the state. The problem is that DOER’s diagnosis is wrong: It turns out that energy savings do not come cheap. As early as 1992, Paul Joskow and Donald Marron, in a paper titled “What Does a Negawatt Really Cost?” that appeared in the Energy Journal, showed convincingly that the actual electricity savings from utility conservation programs were no more than 30 percent to 40 percent of the projected, engineering-based savings. Their words still ring true: “the free banquet with caviar and champagne that the public is often promised is not likely to be achievable with current practices.” This is especially true now that most of the low-hanging fruit of energy conservation have been picked.

Federal policy is no better. In the name of promoting renewable energy, the federal government provided $4 billion in biofuel subsidies in 2008 in the form of a tax credit. As a result, a quarter of the US corn crop in 2009 was used to produce ethanol—pushing up food prices while replacing just 2 percent of the gasoline used in the country. Given that corn-based ethanol uses four units of energy for every five units it delivers, this represents a cost of about $1,800 per ton of carbon emissions avoided. Congress may now be having second thoughts; it has yet to renew the tax credit, which expired at the end of 2009.
The case for carbon tax may be stronger in principle than in practice.
Grassroots actions, however well-meaning, can also be silly. Some activists are calculating “food miles”—the distance food has to travel from producer to dinner plate—and are urging us to go locavore. Unfortunately, this analysis is incomplete, because it ignores production costs. Remarkably, it takes less energy to raise sheep in New Zealand and ship the meat to England than to raise the sheep in England.

In short, we are over-subsidizing wind power, under-charging for fossil fuels, and overselling the benefits of conservation.

With a carbon tax in place, there will be no further reason to subsidize wind power or weatherization or solar panels or biofuels—or to introduce CAFE or other regulatory standards. Such measures are redundant if fossil fuels are correctly priced. Then, if Cape Wind still cannot compete with electricity from (taxed) coal and gas, it should not operate, because it would represent an expensive way to reduce greenhouse gas emissions. And if the Massachusetts DOER cannot persuade households and businesses to pay for its advice on how to save energy, it should get out of that business.

The case for a carbon tax may be stronger in principle than in practice. The biggest operational difficulty is determining how large the tax should be. William Nordhaus, an economist at Yale University, makes a strong case that the optimal tax would be about $33 per ton of carbon—equivalent to 8.8 cents per gallon of gasoline—rising to $48 by 2020. There is, of course, enormous uncertainty in these estimates. We do not know how quickly atmospheric concentrations of carbon dioxide will continue to rise, the degree to which this will lead to global warming, or the extent to which global warming will even cause harm.

Yet practical policymaking cannot wait for scientific certainty. Finland led the way when it introduced a carbon tax in 1990; it is currently levied at a rate of $26 per ton of carbon dioxide. The tax in Sweden now stands at $150 per ton of carbon, although a rate half this high is applied to fuel used by industry.

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Perhaps of more interest to Massachusetts is the case of British Columbia, which introduced a carbon tax in 2008 at a rate of $38 per ton of carbon. The rate is set to rise gradually until 2010, at which point it will be equivalent to 28 cents per gallon of gasoline. All of the carbon tax revenue is being used to reduce provincial income taxes.

A carbon tax in Massachusetts would impel us to economize on the use of fossil fuels, while the benefits would accrue almost entirely to free riders in the rest of the world. But perhaps others in the herd will follow if we take a lead. Even if they do not, a transparent and simple carbon tax would be a coherent and efficient replacement for our current crazy-quilt of energy policy measures.  

Jonathan Haughton is a professor of economics at Suffolk University and a senior economist at the Beacon Hill Institute of Suffolk University.