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A Real-World Example of Carbon Pricing Benefits Outweighing Costs

Posted on 5 March 2011 by dana1981

NOTE: This article has also been republished on Treehugger

The key obstacle to putting a price on carbon emissions in the USA is the fairly widespread myth that it will result in ballooning energy bills and cripple the economy.  These myths perservere despite the fact that economic studies consistently find that the costs of carbon pricing proposals are very minimal, and the benefits consistently outweigh the costs several times over.

The flaw with these economic studies is that they're generally based on hypothetical legislation which has not been implemented.  So it's easy for individuals who oppose carbon pricing to claim that they contain flawed assumptions, and thus dispute their conclusions.  However, in 2008, ten northeastern states in the USA (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont) implemented a carbon cap and trade system which will reduce their carbon dioxide (CO2) emissions from the power sector by 10% by 2018 in the Regional Greenhouse Gas Initiative (RGGI).  The RGGI recently commissioned a study to examine the impacts of the system, and the results give us a real-world example which is broadly consistent with the economic study predictions of benefits outweighing costs.

All in all, through the first two years of the system, the ten states generated $789 million through the auctioning and direct sale of CO2 emissions allowances.  Each state developed its own plan for investing those funds, but overall, 52% was used for energy efficiency programs, 14% for energy bill payment assistance, including assistance to low-income ratepayers, and 11% to accelerate deployment of renewable energy technologies.  New York, New Hampshire, and New Jersey also diverted some of the funds to reduce their state budget deficits. 

Table 1: Percent of RGGI State Investments By Category

Considering that energy efficiency is by far the most cost-effective way to reduce CO2 emissions, at about 2.5 cents to save a kilowatt-hour (kWh), whereas it costs at least 6 cents per kWh to generate electricity from conventional sources, it's not surprising that the RGGI states chose to invest the majority of the carbon allocation funds on energy efficiency programs. 

The RGGI study provides us with a real-world example which busts the three main myths associated with carbon pricing; that it will (i) cripple the economy, (ii) kill jobs, and (iii) cause energy bills to skyrocket.  The study found that in reality, investing the carbon funds in energy efficiency and renewable energy programs resulted in a net benefit to the states' economies:

"Evaluations of several energy efficiency and renewable energy programs in the RGGI participating states indicate that these programs provide $3-$4 in savings for every dollar invested. When macroeconomic benefits are considered, the benefits are even greater."

Note that this analysis does not include other benefits such as averting climate change or reducing emissions of co-pollutants.  Despite this narrow focus, the carbon pricing system resulted in direct benefits exceeding costs several times over. 

The RGGI report also found that the program has created jobs.

"A 2010 analysis by Environment Northeast estimates that energy efficiency programs funded with CO2 allowance proceeds through December 2010 are projected to create nearly 18,000 job years – that is, the equivalent of 18,000 full-time jobs that last one year.  Employment benefits result from state program investments and from the reinvestment of consumer energy bill savings in the wider economy. While there has not yet been a similar analysis of RGGI-funded renewable energy programs, data from the Renewable Energy Policy Project shows every $1 million invested in renewable energy systems creates about six full-time manufacturing jobs, as well as additional jobs in construction and facility maintenance."

The myth that carbon pricing will result in much higher energy bills is based on the premise that  utilities will pass on the price of carbon emissions to consumers.  However, this assumption fails to account for the re-investment of the funds generated through carbon pricing.  For example, as discussed above, the RGGI states invested two-thirds of their carbon funds into energy efficiency and energy bill payment assistance programs.  As a result, the report found that individuals and businesses which took advantage of these programs saw their energy bills drop: 

"At the household and business level, energy efficiency investments enhance consumers’ control over their energy use, typically reducing energy bills by 15 to 30 percent."

Overall, the RGGI program has provided us with a real-world example that carbon pricing can be successfully implemented at a minimal cost, and that its benefits can exceed its costs several times over.

Unfortunately, the New Hampshire House of Representatives recently voted to withdraw the state from RGGI.  This despite the fact that New Hampshire used $3.1 million of their carbon allocation funds to reduce their state deficit, and invested another $24.4 million in energy efficency programs.  The state had used those funds to help businesses and schools become more energy efficient, weatherize low-income homes, provide energy efficiency job training for more than 170 workers, and so on.  New Hampshire Speaker William O’Brien justified the state's RGGI withdrawal:

"Eliminating RGGI sends a clear signal to the business community that we are reversing the direction that the state is taking in terms of creating a regulatory environment that is pro-business. That’s critical in terms of sending a strong message that we are open for business and ready to work with employers to help grow our economy and create good, new jobs here."

Apparently Mr. O'Brien considers it "pro-business" to eliminate a system which had created loans to help New Hampshire businesses lower energy expenses, and provided energy efficiency job training for hundreds of workers in the state.  Unfortunately, New Hampshire serves as a reminder that myths about the effects of carbon pricing tend to have more impact than reality.

This post was written by Dana Nuccitelli (dana1981) has been incorporated into the Intermediate version of the skeptic argument "CO2 limits will harm the economy". 

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Comments 101 to 110 out of 110:

  1. Gilles #96... If you kept up with this topic (electric cars) you'd understand that pretty much every car company is developing an electric right now. Nissan and Chevy are out in front with the launch of their first new generation EV's. Nissan sold out their entire first year of production in very short order. Tesla has now teamed up with Toyota to reopen the NUMMI plant in Fremont CA to produce their luxury EV. Freaking sweet car! 300 mile range. 0-60 in under 6 secs. Mini has an electric in the works. Smart has an electric in the work... The list is growing very very quickly.
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  2. Thanks all for your answers. As I said, I live in the real world and not in the world of experts and scientific publications (which I read professionally when it is about real science, however). I do not know anybody owning an electric car. I perfectly know that many electric models are proposed on the market, and even that a few hundreds have been sold. I'm just saying it has not changed an inch in the oil consumption - the only visible reduction has been through a massive economic recession , that's all. And the next crisis is about to come with the again climbing to heaven oil prices - you know crisis because of inflation, debts, unemployment, all these dirty things that won't be solved by the nice EV you can see just above, nor by thousands of windmills.
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  3. Gilles wrote : "As I said, I live in the real world and not in the world of experts and scientific publications..." That is surprisingto read, because you seem to be missing out on all those hybrids too : As Gas Prices Rise, Toyota's Hybrid Sales Pass 3 Million As for electric cars, the article linked to above also claims that electric cars will account for 7.3% of all light vehicles sold in 2020. And how about this from last September : The good news is that the electric LEAF seems to be very hot. Nissan was expected to reach 20,000 reservations around the time of launch in December, but interest has been so high that they've reached that milestone 3 months in advance. The bad news is that if you are interested in getting a Nissan LEAF but were indecisive about reserving one, it's now too late. Nissan won't take any new reservations for the LEAF until 2011. I think everything suggests that there are quite a few more than the "few hundreds" out there (even now) than you reckon.
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  4. JMurphy : do you call the Prius an EV ? surprising ... ANd I repeat : I do not take as granted the speculations about 2020. I'm just looking at ordinary people around me. I said a few hundreds of VE have been really delivered. There may be some thousands per year in the coming years, but it won't change anything to the CO2 world production. There are some specific uses for which electric cars may be interesting, but I bet that it will never be a majority of cars - and I maintain that the overall carbon budget is not that interesting : you'd better buy a small ,economic thermal engine car.
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    Moderator Response: [Dikran Marsupial] JMurphy clearly indicated that the Prius was a hybrid.
  5. Gilles, even an HEV has a lower CO2 footprint than a regular vehicle-a fact you seem utterly determined to ignore. If you use an HEV solely for the daily commute, then you probably won't even need to use the petrol-burning component-yet even if you do need to burn petrol, it will still be several times more efficient than in a reciprocating engine-which gets less than 20% thermal efficiency. Why don't you just come clean, Gilles, & admit that your dislike of HEV's & EV's is because you see them as a threat to your Oil Industry shares.
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    Moderator Response: [DB] Please dial back the rhetoric a bit. Whether or not someone has, or hasn't, "oil industry shares" isn't germane to the topic of this post. Thanks!
  6. "And I repeat : I do not take as granted the speculations about 2020. I'm just looking at ordinary people around me." I do so love how some people turn anecdotal evidence into general *fact*. This claim is as utterly pointless, Gilles, as your earlier question to me. Though I do know several people who own either an EV or an HEV, even if they didn't it wouldn't change the basic fact that an both classes of vehicle generate only an average of 13kg of CO2/100km (even if powered entirely from coal) compared to around 25kg of CO2/100km in a standard car run by a reciprocating engine. Of course, even if you ignore the benefits of the reduced CO2 emissions, there is the obvious reduction of benzene, ozone & particulate emissions at the source-which is good for the health of pedestrians & bike-riders who have the share the road with car drivers.
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  7. Marcus, sorry, I don't have any oil (or gas or nuclear or aeolian industry) shares (actually I don't have ANY share, even if it may be surprising for you- only old fashion spare account.) Some years ago, I had some money available from an expired life insurance contract. My banker advised me to invest in stock markets, but you know, at this time , I already read some things about impending crisis and peak oil. It was in 2007. So I preferred to buy gold- more as a game, to test my own confidence in these kinds of predictions, than to really make money. Actually stock markets plunged one year after and gold has gained twice its value. As a physicist, I like empirical tests of the predictive power of theories). Besides i have a little car burning 6l/100 km - 40 miles per gallon, I am heated by a combination of heat pump (very low carbon intensity in France thanks to nuclear energy) and wood in a close chimney ), I try to take public transportation and electric trains as much as possible : well I think there are worse ways of life. so back to the problem. I'm just stating that I don't see any solution in the evolution of car market, even including HEV that do NOT spare much fuel compared to small optimized vehicles , and the ridiculously small proportion of EV planned in the near future. But I'm ready to test this kind of predictions in the near future as well.
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  8. When considering the impact of the requirements for cleaner transport, it's always worth considering how technology evolution really works - and, in this case, a good case study is Horse-Manure The point being, in the case of the car for example, that the technologies can be pretty rubbish and expensive till the market need reaches a sufficient level, after which the best are selected and can really take off. Looking around at what 'people' are doing in the here and now, with relatively niche technologies - like the current gen of electric cars - is meaningless.
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  9. dana1981: You claimed (in #69) that “Californians use less per capita energy than most of the rest of the USA, but our rates aren’t significantly higher than the average.” The U.S. Bureau of labor statistics Report #BLS 11-18, February 17, 2011, says that electricity rates in the Los Angeles area have exceeded the national average for the past 10 years. The report says that electricity rate comparisons for December, 2010, showed that rates in Los Angeles were 62% higher than the national average. Unless Los Angeles is atypical of California as a whole, my original contention that energy conservation causes rates to increase seems valid. Energy conservation causes rates to go up. muoncounter: You astutely pointed out (in #93) an excellent reason why government search for replacement fuel is so slow… that there’s a massively funded lobby against that initiative. The reason industry lobbies for wind, solar, etc. is because “the free (taxpayer) money is too good.” Perhaps the problem with finding the perfect full time energy to replace carbon fuels is that it would vest too much power in one corporation (at the expense of today’s energy cartels and their thousands of carbon fuel jobs). Many people are OK with renewable energy technologies that will only reduce the rate at which mankind emits CO2 into the air. But how do we know whether these reductions will be enough to save humanity? Saving humanity is still the reason for reducing CO2, right? Is there a scientific consensus on what the ideal global temperature should be? Have scientists calculated the maximum amount of USA-made CO2 we can emit without raising global temperatures above the ideal (based on, say, our prorata share of the world’s GDP)? It’s generally conceded that the government has no coherent national energy policy or goal. Neither does it have a plan which shows where wind, solar, etc. will take us toward reaching the maximum CO2 emission target, (the “goal,” whatever that may be). Government throws $billions at companies which produce part time energy devices, creates a few new jobs in the process, and yet has no clue where this will take us toward reducing global temperatures. In the meantime, you guys are OK with wind, solar, etc. You (and the Moderator) cite “studies” which conclude that part time renewables can (one day) replace our need for full time carbon fuels… studies that also say that millions of retired electric car batteries could be hooked to the grid to augment power on cloudy or windless days (I'm skeptical about this). I cannot understand why you guys always shout down anyone willing to “throw the skunk on the table” by asking where we need to go, how we’ll get there, and when we can expect to arrive at our destination… if saving humanity is still what this is all about.
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  10. daisym - LA is atypical of California. Sorry, your premise doesn't hold. I live in (northern) CA, and my electric rates (from the state's largest electric utility, PG&E) are barely higher than the national average. Back on topic, the governor of New Hampshire today vetoed a bill which would have pulled the state out of RGGI.
    "an assessment by the University of New Hampshire found that RGGI’s cumulative impact through 2010 was a net benefit of over $16 million in revenue to New far, the state has invested tens of millions of dollars in new projects for homeowners, schools and municipalities and trained more than 150 workers for new jobs in the energy efficiency field. The cost to ratepayers: 35 cents a month."
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