Friday, 15 April 2011

Renewable Portfolio Standards -- the Californication of Carbon Pricing

Governor Jerry Brown signed into law this week SB X1-2, the California Renewable Portfolio Standard which requires investor-owned utilities and other major electricity service providers to obtain 33% of their electricity from renewable energy sources by 2020. The law is not really much news, as it is just the legislative ratification of Executive Order S-14-08 signed by then-Governor Arnold Schwarzenegger in November of 2008. Admirably, the California Energy Commission's definition of renewable energy does not include large hydro projects, which, as Roberta Mann has written, is a somewhat ironic way to address climate change, given the future water supply issues that climate change will bring.

But although California takes a step in the right direction, it is worth taking a step back and looking at the overall climate change policy landscape in California and like-minded Western jurisdictions. Although a requirement that electricity service providers obtain electricity from renewables does boost the economics of renewable energy -- it forces providers to bid more for renewable energy in order to get their portfolio to 33% -- it doesn't actually do as much as it could. A direct carbon price -- in the form of a carbon tax or from the cap-and-trade program under California's AB 32, now pending a challenge by some environmental justice groups -- will more effectively reduce greenhouse gas (GHG) emissions.

There are a number of problems with the RPS. First, it will not be clear what kind of a price signal electricity consumers will see. Ideally, a consumer should pay in proportion to her GHG emissions, which of course means paying more with greater usage. But cost-recovery plans for the procurement of renewable electricity that are likely to be approved by the California Public Utilities Commission may or may not allow the completely transparent pass-through of emissions. Cost recovery will focus on how electricity providers can recoup the costs of paying more for renewables, which is different from making consumers pay for their emissions. It's a backwards way of pricing GHG emissions. Second, assuming that AB 32 survives the legal challenge, the RPS will distort the cap-and-trade market for permits, and that distortion will have more significance if the Western Climate Initiative's multi-state and -provincial cap-and-trade program comes into effect. Limiting California's energy consumption to 66% will have a profound effect on fossil fuel plants that ordinarily might compete in California's market -- they will be directed to, well, other WCI jurisdictions. This more ready availability of fossil-fuel-fired electricity will depress permit prices. This is potentially a large effect, as California's energy market is big enough to influence cap-and-trade permit prices very significantly. Finally, we need all the technological innovations we can get, at all levels of the energy production and consumption cycle, and an RPS only focuses on the production side. RPS does not directly encourage the search for ways to improve energy efficiency.

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