Last week, Senators Kerry and Lieberman unveiled the American Power Act, the Senate’s best chance to craft a national energy policy that would put us on the path to energy independence, create millions of clean energy jobs and improve the efficiency (and competitiveness) of our businesses. This bill is only a step towards achieving these ambitious goals, and it is riddled with painful compromises, but it’s a start. And we still have time to improve it in ways that would make it a very promising start indeed.
My colleagues David Doniger and Dan Lashof have already provided initial assessments of the overall bill and the integrity of its environmental objectives, respectively. I’m going to focus on the narrow yet critical issue of consumer impacts. Is this a huge giveaway to polluters? Or will consumers actually see economic as well as environmental benefits?
The short answer is that for the most part, consumers are the winners here and, despite the presence of a fair amount of pork, neither polluters nor traders are going to see ludicrous windfall profits. But Congress is about to miss a huge opportunity to reduce our national energy bill by $1.2 trillion dollars (yes, that’s a T) while creating almost a million new jobs[1] because of its woefully inadequate energy efficiency provisions. Americans should demand those benefits now.
The bill benefits consumers primarily by issuing about 44% of the pollution permits, or allowances, to the utilities, and directing them to transfer 100% of the value of those permits to their customers.[2] This approach will avoid the enormous windfall profits that the European’s witnessed in their Emissions Trading Scheme when they issued free allowances to power plant owners. Why? Because unlike power plants, all utilities are regulated by state utility commissions or governed by municipalities or other public entities that are required to ensure that the value of allowances accrues to utility customers, not shareholders. An excellent fact sheet from the National Association of Regulatory Utility Commissioners sets this out in more detail (and also explains why giving allowances to owners of unregulated power plants does not benefit consumers and does constitute windfall profits; the American Power Act promises 5% of allowances to such plants, at a loss to consumers of about $2 to $5 billion per year, depending on how one defines “windfall”).
But Congress could do much more to reduce costs for consumers and direct investment towards transformative changes in our energy and transportation sectors if it followed the lead of the ten Northeast states’ Regional Greenhouse Gas Initiative (RGGI). As RGGI watchers know, most of the states are auctioning over 97% of their allowances and using almost all of the proceeds for energy efficiency. See the details here and here. The states learned from the Europeans that issuing free allowances to power plants would lead to huge windfall profits. But the states didn’t just want to avoid a crappy program, they wanted to create something that would reduce pollution at the absolute lowest cost for consumers while driving investment in local economies and creating new high quality jobs. They did a huge amount of analysis and determined that the single most important thing they could do to achieve all of these goals was to promote energy efficiency. Lowering consumption reduces the price of electricity and other fuels, and lowers carbon prices, reducing the cost of complying with a cap for all residential, commercial and industrial energy consumers. And shifting our energy dollars from one of the least labor-intensive activities in our economy—operating power plants—towards a set of extremely labor intensive activities—retrofitting existing homes and office buildings and installing high efficiency lighting, equipment and appliances in all of them—creates jobs directly and indirectly, as people begin to realize their energy bill savings and invest it in their local economies. So instead of returning the value of allowances to consumers in the form of simple rebates that lessen energy price increases, as the American Power Act would do, the Northeast states decided to invest in energy efficiency programs that would reduce people’s energy bills by over $100 per year relative to what they would have been with no pollution cap.
The same opportunity to lower energy bills and create jobs is available in every state. According to an analysis by McKinsey & Co, we could reduce our national energy bill $1.2 trillion by 2020 by adopting policies that drive investment in all cost-effective energy efficiency (not including all the savings available in the transportation sector). This would require an investment of $520 billion, for a net savings of $700 billion, all while creating almost 1 million new jobs.
Persistent regulatory and market barriers to efficiency necessitate smart policy fixes. If energy efficiency is so much cheaper than power plants and the opportunities so prevalent, why isn’t everyone already investing in it? The answer is a host of persistent market barriers such as split incentives (e.g. landlord vs. tenant), high internal rates of return, and a lack of information about or access to efficient products. But the primary barrier is regulatory: we don’t buy energy efficiency because no one is in the business of selling it to us, and no one is in the business of selling it to us because most states have adopted a perverse regulatory framework that directly ties utility profits and recovery of fixed costs to how much electricity and natural gas they sell. This makes helping their customers improve efficiency very unattractive to their shareholders, even when doing so is substantially cheaper than generating and delivering electricity and natural gas. A pollution cap makes energy efficiency even more cost-effective, but it does nothing to overcome these barriers.
Congress can unleash the benefits of efficiency with a simple, straightforward policy. While several states and utilities have demonstrated the enormous potential of efficiency to reduce consumer energy bills, the majority have done little or nothing to capture this resource due to the barriers described above. By setting minimum energy efficiency performance standards for utilities as well as for buildings and appliances, Congress can ensure that all residential, commercial and industrial energy consumers reap the benefits of energy efficiency while states retain their traditional authority to customize regulations and programs to meet local needs.
Specifically, Congress should adopt building code and appliance standard provisions at least as rigorous as those included in the Waxman Markey American Clean Energy and Security Act (ACES)[3] and require all utilities to invest in energy efficiency whenever doing so is cheaper than generating or purchasing and delivering electricity or natural gas. This could take the form of an earmark on 20-30% of the utility allowance allocations (as exists for natural gas utilities) or an Energy Efficiency Resource Standard (EERS) of at least 1% per year, increasing to 2 ½% per year by 2020 (for a cumulative total of 20%). Either standard should allow all existing investments in cost-effective efficiency programs to qualify and allow state utility regulators to adjust requirements for utilities that are able to capture all cost-effective efficiency with a lower investment. Such a provision should also direct states to align customer and shareholder interests by making efficiency at least as profitable as other investments, correct perverse regulatory provisions under which efficiency and clean distributed generation erode utility finances, and reward states that do both.[4]
[1] The McKinsey study projects 600,000-900,000 new jobs from energy efficiency alone, excluding jobs in the renewable power and transportation sectors created from a broader set of climate and clean energy policies.
[2] The bill also strives to eliminate any impact on low income consumers by auctioning [14%] of the allowances and delivering the proceeds to people electronically through the same debit card system used to distribute food stamps. See more here. Consumers will also benefit from the (paltry) 2.5% of allowances going to states to support renewable energy and energy efficiency, and they will receive the full value of 9% of the allowances going to the natural gas utilities, once the cap extends to cover them in 2016.
[3] The American Power Act does not include any building code or appliance standard provisions but is expected to adopt those included in the Senate Energy Committee’s stand alone energy bill, which are weaker than those included in ACES. For a more detailed discussion of building codes and appliance standards see my colleague Lane Burt’s switchboard blogs here.
[4] Section 410 of ARRA required all governors to attest that they were initiating proceedings to adopt such reforms in order to receive stimulus funding. Although all governors attested to this, few have undertaken any reform.