NEWS RELEASE: Study Finds the Hidden—and Uneven—Price of Piecemeal Energy Policies

Tuesday, June 10, 2014
MIT News   (Browse all news)

Vicki Ekstrom
MIT Energy Initiative

MIT researchers compare regulatory policies to a price on greenhouse gases and discover both the national and regional impacts.

When it comes to addressing climate change, market-based policies like a carbon tax and cap-and-trade system have gained little traction in the U.S. Instead, U.S. policies have taken the form of regulations focused on specific technologies and sectors. The recently proposed EPA rule to reduce carbon emissions from the power sector—though a step forward for climate efforts—is no exception, according to two MIT researchers. Their assessment of the costs of different policy approaches is in a special edition of Energy Journal.

“The key to creating cost-effective policies is making them flexible,” says Valerie Karplus, one of the authors and member of the MIT Joint Program on the Science and Policy of Global Change. “A national cap-and-trade system applied to all sectors would limit carbon across the economy and incentivize the cheapest reductions. The EPA rule only applies to the electricity sector, making it less cost-effective. But it is certainly better than traditional piecemeal policies because it allows for some flexibility.” 

Karplus and her co-author Sebastian Rausch, formerly at the MIT Joint Program and now a professor at ETH Zürich, did not specifically analyze the EPA rule in their research. Instead, they compared the costs and effectiveness of traditional regulatory approaches, such as fuel economy standards, to a national cap-and-trade system. Using a U.S. regional modeling tool to assess these approaches across different regions, sectors and income classes, Karplus and Rausch found striking cost differences between the national and sectoral approaches. 

“With a broader policy, like cap-and-trade, the market can distribute the costs across sectors, technologies and time horizons, and find the cheapest solutions. So the market encourages emissions reductions from sectors like electricity and agriculture, and requires reductions from vehicles and electricity at a level that makes economic sense given an emissions target,” Karplus says. “On the other hand, narrow regulations force cuts in ways that are potentially more costly and less effective in reducing emissions.”

For example, fuel economy standards are typically politically attractive because they cut the amount of gasoline used—saving consumers money. But, Karplus says, the technology needed to make vehicles more efficient can be expensive, raising the purchase cost and hiding the true price tag to consumers. Additionally, improved gas mileage encourages consumers to drive more because their fuel costs are lower, says Karplus. Under a cap-and-trade system, which would set a carbon price, these same consumers would have an incentive to conserve fuel.

While significantly more expensive overall at the national level, Karplus and Rausch found that the piecemeal regulations also had more pronounced effects on specific regions and income groups. 

As an example, they tested the economic and welfare impacts of a renewable portfolio standard, which would require states to get a specific percentage of their power supply from renewable energy sources.  They found that regions with dirtier grids and without access to wind resources—like the Mid-Atlantic, Great Lakes and Southeast—experience higher welfare. Meanwhile, regions that already have substantial renewable energy—such as California, the Mountain States, Texas and the Pacific Northwest—would be less affected. 

“Along with spreading reductions across different sectors, an economy-wide cap-and-trade approach would more evenly distribute welfare impacts across regions—allowing for opportunities that make sense locally,” Karplus says. 

While the study suggests that a cap-and-trade system would come at a much lower cost, that hasn’t been enough to pressure on lawmakers to implement such a system. 

“Unfortunately, the most efficient policies are not the most politically feasible,” Karplus says. “Even though a cap-and-trade system would cost less, the costs are very visible to businesses and consumers. The higher price tag of the sectoral policies is also more concentrated and often goes unnoticed by the broader public. So the high costs of our current policies haven’t been obvious enough to remove the political obstacles to implementing a more efficient approach.”

Karplus does hope that as stakeholders recognize the costs of the increasing number of regulatory policies, it will create momentum for a national market-based approach.

See Karplus's previous research on this subject: 
The Case of the Missing Gas Tax: Politics over Economics
Vehicle Efficiency Standards vs. a Carbon Tax: The Costs and Politics

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