Assessing Energy Policy Options Portugal

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 wellbeing 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): Lifecycle Energy-Related Activity (fuel type)

Climate Damages (per ton CO2-eq)

@$10

@ $30

@ $100

3.2 cents/kWh

1 cents/kWh

3 cents/kWh

10 cents/kWh

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 1.5 to ~6 cents/VMT cents/VMT

Heat production (natural gas)

11 cents/MCF

70 cents/MCF

210 cents/MCF

Electricity Generation (coal) Electricity Generation (natural gas)

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Non-climate damage

700 cents/MCF

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

Decrease in GDP

Employment 0.9

20.0

0.6

10.0

0.3

2030

2028

2026

2024

2022

2020

2018

2016

2014

0

2012

0.0

-10.0

-0.3

-20.0

-0.6

-30.0

-0.9

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

millions of jobs

Decrease in Consumption

30.0

2010

billion $2007

Welfare Cost

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

RFF-NEPI Study

Alan Krupnick Senior Fellow and Director of the Center for Energy Economics and Policy (CEEP)

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What’s Distinctive • POLICIES (not technologies) • COMPREHENSIVE – 35 (incl. 4 cross-cutting) • CONSISTENCY (apples to apples) (using NEMSRFF 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 19

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NEMS is a simulation model organized by energy producing, consuming, and conversion sectors.

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INDIVIDUAL POLICIES OIL POLICIES TRANSPORTATION ALL Gasoline Tax CAFE Feebate Hybrid Subsidies LNG Trucks mandate

Oil Tax

CO2 POLICIES POWER Renewable Portfolio Standards Clean Energy Portfolio Standards Nuclear Loan Guarantees

CONSERVATION Building Codes Subsidies for Geothermal heat pumps

Crosscutting combinations

ALL Cap and trade (C&T) Carbon Tax

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 costeffective. 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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Are vehicle subsidies a good idea?

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

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010

2020

2030

Baseline

2020

2030

2020

Optimistic battery costs

2030

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 manufacturers When 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 lightduty 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

Goldman Sachs - Cost of Supply vs. Production 1500

Cost of Supply vs. Production Higher production contribution Lower mimimum required gas price

Higher production contribution Higher mimimum required gas price

Haynesville

1300

Average Production (MCFD)

1100

900 Lower production contribution Lower mimimum required gas price

Lower production contribution Higher mimimum required gas price

Barnett

700 Marcellus Fayetteville

500

Conventional S. Texas

Conventional Midcontinent

Pinedale Anticline

300

Cana Woodford

Arkom a Woodford

Granite Wash - Vertical

Conventional E. Texas Groesbeck Vertical

Granite Wash - Horizontal

Eagle Ford

Carthage Horizontal

100 Natural Buttes Appalachia Tight Gas

-100 4.50

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5.00

Piceance Basin

Conv. Appalachia Vertical

Pi単on

Groesbeck Horizontal Wattenberg - Others Carthage Vertical

5.50

6.00

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

West Tavaputs

6.50

Yellow Jacket

7.00

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?