Assessing Energy Policy Options

Alan Krupnick, Director, Center for Energy Economics and Policy, Resources for the Future, Portugal, 2011

Resources for the Future

• Since 1952 in Washington, DC

• Academic quality economic research on

environmental and energy issues

communicated to policymakers

• 80 people, 30 PhD economists

• President: Phil Sharp, former U.S.

Congressman and professor at Harvard’s

Kennedy School of Public Policy

Center for Energy Economics and Policy

CEEP Themes:

� Understanding the Present (policies and markets)

� Shaping the Future

� International Dimension

Major completed projects:

� Assessing U.S. Energy Policy Options

� Implications of Abundant Shale Gas Resources

� Policy response to the Macondo well oil spill

Future � Designing Clean Energy Standards, Shale gas risk reductions, Heavy-duty vehicle fuel economy standards, Natural gas vehicles

Outline

• Justification for government policy intervention

• Importance of “true” or social costs

• Evaluation of energy policy instruments� The RFF study

• Policy in the real world: Portugal/EU and the U.S.

• Shale gas – the game changer

• Some issues for Portugal

Policies and market failures

• Market forces on their own will not address

externalities (3rd party effects), such as

pollution

• Government intervention in the market

justified to “internalize” externalities, i.e.,

get prices right.

Goal of Policy

• Maximize social well-being (efficiency: max value of output given scarce resources). Market transactions yield good measures of social well-being for market goods.

• Many “goods” are non-tradable (health, environment) � creates measurement challenges covered by field of “non-market valuation”

• Then costs and benefits of alternative policies and stringencies can be estimated and compared.

• Of course, efficiency is only one criterion for policy

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Failure to internalize the

externalities

• Inadequate assessment of risks

• Lack of policies to internalize those risks

Combing Non-Climate and Climate Change

Damage Estimates (2005): LifecycleEnergy-Related Activity (fuel type)

Non-climate damage

Climate Damages (per ton CO2-eq)

@$10

@ $30

@ $100

Electricity Generation (coal)

3.2 cents/kWh

1 cents/kWh

3 cents/kWh

10 cents/kWh

Electricity Generation (natural gas)

0.16 cents/kWh

0.5 cents/kWh

1.5 cents/kWh

5 cents/kWh

Transportation

1.1 to ~1.7 cents/VMT

0.15 to ~0.65 cents/VMT

0.45 to ~2 cents/VMT

1.5 to ~6 cents/VMT

Heat production (natural gas)

11 cents/MCF

70 cents/MCF

210 cents/MCF

700 cents/MCF

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Table X – Summary of estimates from four external cost studies ($2010)

mills/kWh Coal Peat Oil Gas Nuclear Biomass Hydro PV Wind

RFF/ORNL 2.3 - 0.35-2.11 0.35 0.53 3 - - -

Rowe et al. 1.3-4.1 - 2.2 0.33 0.18 4.8 - - 0.02

ExternE 27-202 27-67 40.3-148 13.4-53.8 3.4-9.4 0-67 0-13 8.1 0-3.4

NRC 2-126 - - 0.01-5.78 - - - - -

Cents/kWh

ExternE 3-20 3-7 4-15 1-5 0.3-0.9 0-7 0-2 0.8 0-0.4

Wide Choice of Instruments• Broad-based taxes

• Cap and trade systems

• Taxes on individual fuels (e.g., coal), electricity use, vehicles

• Incentives for renewables

• Emissions per kWh standards for power generation

• Energy efficiency standards

• Combinations of different instruments

Multiple Criteria for Energy

Policy Evaluation

• Cost effectiveness

• Effectiveness

• Ability to deal with uncertainty

• Distributional impacts

• Promotion of clean technology

development and deployment

Cost Effectiveness

Welfare costs/unit effectiveness

• Metric used in cost-benefit analysis by governments around the world

• Money metric of well-being given income, e.g., willingness to pay for a good

• Not GDP

• Not jobs

Figure 5.1 Central C&T Macroeconomic Time Profile relative to Reference Case

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Welfare Cost Decrease in Consumption

Decrease in GDP Employment

Broad-based instruments

• Comprehensive cap and trade and

environmental taxes widely regarded as best

instruments from efficiency perspective.

• Follow rule of “one price,” operate on all

margins of behavior (e.g., tax on fuel affects

vehicle choice, driving, car chosen to drive)

• Narrower tax or C&T policies generally

don’t take advantage of all low-cost options

Cost-Effectiveness

• For cap-and-trade systems to be cost effective, allowances need to be auctioned

• If revenues from pollution taxes/allowance auctions used to reduce other distortionary taxes, this can substantially reduce overall policy costs.

Cost Effectiveness

Regulatory policies• can perform poorly, if they force all firms to

meet the same standard

• to promote cost-effectiveness, extensive credit trading provisions required, including credit trading across sectors (to establish a single emissions price)

• Regulatory policies tend to have a weaker effect on energy prices and overall economic activity – which is good

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RFF-NEPI Study

Alan Krupnick

Senior Fellow and

Director of the Center for

Energy Economics and

Policy (CEEP)

What’s Distinctive

• POLICIES (not technologies)

• COMPREHENSIVE – 35 (incl. 4 cross-cutting)

• CONSISTENCY (apples to apples) (using NEMS-RFF model across all policies)

• WELFARE COSTS (not GDP or expenditures)

• BOUNDING ASSUMPTIONS FOR MARKET FAILURE (no, partial, complete)• Energy Efficiency Paradox: hidden costs vs market

failure

• TARGET REDUCTIONS FOR OIL AND CO2

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NEMS is a simulation model organized by energy

producing, consuming, and conversion sectors.

INDIVIDUAL POLICIES

OIL POLICIES

TRANSPORTATION� Gasoline Tax� CAFE � Feebate� Hybrid Subsidies� LNG Trucks mandate

ALL� Oil Tax

CO2 POLICIES

POWER� Renewable Portfolio Standards � Clean Energy Portfolio Standards� Nuclear Loan Guarantees

CONSERVATION� Building Codes� Subsidies for Geothermal heat pumps

ALL� Cap and trade (C&T)� Carbon Tax

Crosscutting combinations

Individual Oil Reduction Policy Ideas

• Power of Pricing: Taxes for reducing oil

• Affects all aspects of consumer and business decisions

• Recycle revenues for political palatability. But take care

• Liquefied natural gas (LNG) heavy-duty trucks

� 18-wheelers can travel 125,000 miles/yr @ 5 miles/gallon diesel

� LNG for range

� Operation in Port of Los Angeles

� ~ $70,000 more expensive investment

� Cheaper to operate on natural gas ($1.50/dge)

� Payback under these conditions � ~3 years

� Infrastructure issue: hub and spoke system becoming more

common

� Safety issues

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Individual CO2 Policy Ideas

• C&T/Carbon Tax is most effective and cost-

effective. Works on all “margins”�investment,

operation, innovation

• Clean Energy Portfolio Standard (all but coal) does

relatively well if pricing is not an option.

• Subsidizing loans “better” than subsidizing

investment costs for energy efficient investments

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In almost all cases, subsidy has a strong effect on hybrid penetration of the

fleet….

Are vehicle subsidies a good idea?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2020 2030 2020 2030 2020 2030

Baseline Optimistic battery

costs

Optimistic

battery costs,

subsidies

Conventional Gasoline Electric-Gasoline Hybrid

Plug-in HEV10 Plug-in HEV40

Results

• But little effect on oil use and GHG emissions.

• Reason is that CAFE is binding for the

manufacturersWhen there are more hybrids purchased, it is easier to meet

CAFE

• Subsidies, any policy picking winners, are

generally not recommended.

Change energy investment behavior

• Consumers and businesses demand

unrealistic rates of return

� As high as 40%

� 2-year payback periods

• Eliminate fixed costs: have utility finance

investments, which get paid back on utility

bill

• Use devices to make energy savings

real/visible

CO2 Policy:

Europe vs. U.S.• EU Emissions Trading System (ETS):

� Phase I – Too many allowances made available

to too few sectors

� Phase II – Lack of harmonization of policies

across EU countries becomes stumbling block

� Phase III – To tighten allowances, auction then,

encourage harmonization, broaden scope

• At least you have a policy! The “curse” of

cheap coal

Why can’t the U.S. get its act

together?

• Public opinion

• Linkage of opinion to party position

• Recession

• Perceived lack of vulnerability

• Current situation: Clean Energy Standard,

EPA CO2 standards and other standards

affecting coal plants under the Clean Air

Act

Renewables

Portugal: large increase in renewables (45%

of electricity generation in 2010). Financed

by consumers (feed-in tariffs). Government

purchase of grid to modernize

U.S.: Many states have renewable portfolio

standards; discussions about a federal policy.

Episodic tax credits. Old grid. But half the

electricity prices!!

Oil--Transportation

• Both countries dependent on oil (EU more diesel for light-

duty vehicles (LDVs))

• U.S. subsidies for hybrid-electrics finished; pilot charging

stations for all-electrics. Biofuels mandate being missed

• Portugal: CO2 tax component, tax rebate for vehicle

turnover, electric vehicle subsidy; building charging

stations

• EU biofuels focus

• Natural gas trucks, LDVs?

639 tcf

Cost of Supply vs. Production

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Goldman Sachs - Cost of Supply vs. Production

-100

100

300

500

700

900

1100

1300

1500

4.50 5.00 5.50 6.00 6.50 7.00

Henry Hub price required for 15% IRR ($/MMBtu)

Avera

ge P

rod

uctio

n (M

CF

D)

Marcellus

Granite Wash - Horizontal

Higher production contribution

Lower mimimum required gas price

Higher production contribution

Higher mimimum required gas price

Lower production contribution

Higher mimimum required gas price

Lower production contribution

Lower mimimum required gas price

Natural Buttes

Appalachia Tight Gas

Pinedale Anticline

Cana Woodford

Eagle Ford

Piñon

Barnett

Wattenberg - Others

Fayetteville

Haynesville

Groesbeck Horizontal

Arkoma Woodford

Carthage Horizontal

Conventional S. Texas

Conv. Appalachia Vertical

Carthage Vertical West Tavaputs

Granite Wash - VerticalConventional E. Texas

Conventional Midcontinent

Groesbeck Vertical

Yellow Jacket

Piceance Basin

December 2012 Projected (Chesapeake Energy website)

Some Issues for Portugal

• Will/should cheap shale gas replace renewables?

• Is EU 20-20 goal realistic/fair/economic for

Portugal?

• Are externalities fully (or more than fully)

internalized? ETS and CO2 and renewable/fossil

price differential. Plus feed-in tariffs

• Are electric vehicles the way to go?