Would the most important climate policy in the Reconciliation Bill be an effective and efficient way to reduce greenhouse gas emissions?
Introduction
The “Clean Electricity Payment Program” (CEPP) was introduced this month as the most important climate policy in the reconciliation bill now taking shape in Congress. But so far we know little more than that the federal government would pay utilities for increasing their use of renewables and fine them for not doing so. Without details on how it would actually function and an analysis of its likely results, it is currently impossible for ordinary citizens or their elected representatives to rationally decide whether to support this plan. Before they can do that we need answers to the same fundamental questions as for any climate proposal:
- How much would it reduce greenhouse gas emissions?
- How much will it cost per ton of reduction?
- Are there alternative policies that would reduce emissions more, cost less, or both?
More information is urgently needed so that climate scientists and economists can quickly analyze the Clean Electricity Payment Program and disseminate their conclusions quickly enough to influence voters and Congress, which unfortunately means within a week or two. This requires compromising on traditional standards of academic work but a more careful analysis released after the reconciliation bill has been passed (or rejected) in the second half of September will have little value. At that point we may already be committed to ten years of a climate policy that won’t reduce emissions enough, will be needlessly expensive, or both. Or, even worse, have passed no significant climate policy at all. The individuals and institutions that rise to the occasion to complete this analysis should establish a durable framework for such real time “carbon/climate scoring” for all future climate policy proposals, just as proposed bills are subject to the Congressional Budget Office’s budget scoring.
Bipartisan Infrastructure Bill and Reconciliation Bill
The bipartisan infrastructure deal, which passed the Senate 69-30 with 19 Republican votes on August 10, invests in public transit, passenger and freight rail, EV charging stations and electric buses, the electric grid, and capping gas and oil wells, all of which will reduce greenhouse gas emissions. But it allocates even larger sums for improving our roads, airports, and ports, funded from general revenues rather than from the fuel taxes or other user fees that would reduce driving, flying, or shipping. Emissions will therefore increase from all three forms of transport—as well as from all the concrete pouring—perhaps by more than the green investments in the bill reduce them.
The reconciliation bill thus becomes the only chance this year for action large enough put us on track for net zero by 2050. And realistically, Congress is unlikely to do anything in an election year it won’t do in a non-election year. Furthermore, the midterm election could flip the majority in either or both Houses, so the reconciliation bill may be the only hope for climate policy during this presidential term. Is it up to the task?
Origin of Clean Electricity Payment Program
Although there are currently five carbon pricing bills before Congress, one of which has 80 cosponsors, the climate portions of the reconciliation bill currently rely almost exclusively on standards, regulations, subsidies, and government investments. The most important of these was to be a “clean energy (or electricity, both work for the initials) standard” (CES) similar to the Obama administration’s Clean Power Plan, which was killed before implementation by the Trump administration. However, the arcane rules of reconciliation prohibit policies that do not directly affect the budget, including mandates to use a certain percentage of renewable energy. Democrats therefore came up with the Clean Electricity Payment Program, whose subsidies (and, apparently to a much lesser extent, fines) would affect the budget. In combination with tax credits for producers of renewable energy, it’s claimed that the Clean Electricity Payment Program will increase renewables’ share of electricity generation to 80% by 2030 and be the main tool for reducing total emissions by almost 50% by the same year.
Drawbacks of Clean Energy Standards
Although the Clean Electricity Payment Program is not technically a clean energy standard, it shares three big drawbacks common to such plans, which in combination make them a less effective and more costly way to reduce emissions than a simple carbon tax:
- It covers only electricity generation, leaving three-quarters of emissions unaffected, while a carbon tax can cover emissions throughout the entire economy.
- It is much more complicated and expensive to administer than a carbon tax.
- It treats renewables and other low-carbon power sources (including nuclear, geothermal, and clean hydrogen) as zero emission, when in fact even solar and wind power rely on mining and manufacturing processes that emit significant amounts of carbon. A carbon tax automatically incentivizes also reducing those emissions.
Worse, the Clean Electricity Payment Program appears to have three additional serious faults:
- The scheme will treat each utility differently: “Recognizing that each supplier has a different starting point, the CEPP provides incentives for all suppliers to increase their total clean electricity share each year at an equitable pace” (Clean Air Task Force [CATF] summary). While this may sound fair to some, it may also offer opportunities for political influence (one regulator’s “equitable” may be a senator’s constituent “unfairly” losing payments), gaming the system (large utilities with multiple subsidiaries may be able to assign renewables wherever they generate the largest payments), or outright fraud, as with any system that makes or requires payments based on statements that are difficult or expensive to verify (e.g., self-reported income taxes, Medicare and Medicaid provider payments, and the PPP). The CATF summary is alert to one such possibility: “Clean megawatt-hours generated from any given clean electricity resource may only be counted once” but doesn’t say how this will be enforced or mention that every utility will have an incentive to artificially reduce clean energy use in its baseline period so as to generate larger payments for “increasing” renewable use when the subsidies start. More generally, there is no way to distinguish a kilowatt hour produced from burning coal from one produced from wind, never mind to know when the windmill came on line. In a political environment that has consistently underfinanced tax enforcement, it seems risky to rely on adequate auditing to prevent fraud when any perpetrator of the fraud will potentially have two senators and at least one member of the House as defenders. This possibility may be stronger in the many states with large fossil fuel (or renewable) industries. Fraud would result in wasted money, potentially higher emissions, and a loss of public support for climate action.
- Apparently by design, the CEPP provides zero incentive for households or businesses to conserve energy: “To protect electricity customers, performance payments (coupled with clean electricity tax credits for generators) shift the cost of this once-in-a-generation transition to the more progressive federal tax base” (CATF summary). This is another major disadvantage compared with a simple carbon tax since reducing total energy use obviously reduces the total amount of renewable energy necessary to achieve zero emissions. For at least the next decade or two, low carbon energy is going to be scarce and therefore extremely valuable. Not making anyone pay its true cost will make net zero emissions much harder to achieve. As for the argument about progressivity, rebating some or all of the revenues of a carbon tax to households, as proposed by most of the carbon pricing bills before Congress, would actually make poor households, which use less energy than average, come out ahead economically relative to the status quo, which CEPP only claims to preserve.
- The World Trade Organization is unlikely to approve a border carbon adjustment (called a “polluter import fee” in the reconciliation bill) if we do not impose an explicit carbon price on our own manufacturers through either a carbon tax or a cap-and-trade system. Even the standard clean energy standard would be a tough sell to the WTO, though it might have some chance of approval since it would raise the price of electricity. But the CEPP would not have any chance of satisfying the WTO since it would not increase a U.S. manufacturer’s cost of energy in any way. Without any increase in energy prices, U.S. industries would not be at a competitive disadvantage because of the disallowance of the “polluter import fee” but the U.S. would lose an important lever to incentivize large exporters (and emitters) such as China and India to impose their own carbon fee to avoid paying a border carbon adjustment at our border. The United States currently accounts for about 20% of global emissions. Any policy that doesn’t address the other 80% won’t help much.
Questions to Answer
Emission reduction claims:
Senator Schumer wrote on August 25 that the reconciliation bill and bipartisan infrastructure bill would together “put our country on a path to meet President Biden’s climate change goals of 80% clean energy and 50% economy-wide carbon emission by 2030 [vs. 2005].” Since total U.S. emissions are already down 20% from 2005, this means reducing them another 38% by 2030 (using 100 for 2005, by 30 of the remaining 80). Later in his letter he adds that 5% of this reduction will come from administration action by the federal government and the states, meaning the two bills will reduce total emissions by 45%, not 50% (again, from 2005 levels, or 25/80 = 31%). The CEPP and clean energy tax credits are to account for 42% of this 31%. So the two subsidy programs are to reduce total emissions by 13% (.42 x .31) from current levels in 9 years. Is this plausible when electricity generation makes up a quarter of total emissions?
Methods:
How do the federal government’s payments to utilities work? The CATF summary says:
“Suppliers of retail electricity are encouraged through a system of payments to meet annual performance goals, measured as a percentage point increase in the share of clean electricity used to supply their customers. Electricity suppliers that increase their share of clean electricity beyond a designated annual threshold receive federal performance payments for each additional MWh of clean electricity delivered.”
Which raises two obvious questions:
Are the incentives continuous or discrete ( “a percentage point increase” and “beyond a designated annual threshold” hint at discrete)? If the latter, then the subsidy for renewable energy would vary and allow for utilities to tweak their use of renewables to maximize the subsidy per unit of increase in renewables, reducing the efficiency of the incentives.
Are all increases in “share of clean electricity” rewarded equally or are they adjusted for the type of fossil fuel that is being replaced? For example, does a switch from coal to solar generate the same payment as a switch from natural gas to solar, even though the former means twice as large a reduction in emissions as the latter (since burning coal produces about double the CO2 as burning natural gas to generate a given amount of energy)?
What to do?
If you share any or all of these reservations about the Clean Electricity Payment Program and think replacing it in the reconciliation bill with a carbon fee would be better for everyone living on earth twenty, fifty, or one hundred years from now, as well as for the jobs and finances of most of us today, call and email your Congressperson and both your U.S. Senators to let them know. Contact the White House too. The reconciliation bill is currently only an outline that can–and will–be modified in response to political pressure. It’s just a question of what kind of pressure is applied. But it’s got to be soon–this will likely be wrapped up in a month.
Any climate policy that includes carbon pricing is probably better than any climate policy that does not, so while there are differences between the five bills before Congress, those interested in fighting climate change as effectively as possible should favor replacing the Clean Electricity Payment Program in the reconciliation bill with any one of them.
Please also contact reporters and pundits and encourage them to learn more about the Clean Electricity Payment Program and subject it to the same skepticism they apply to other topics.
If you’d like to learn more about pricing carbon:
https://www.econstatement.org/
Carbon pricing compared with clean electricity standards:
Click on box in upper left corner for comparison of CEPP with carbon fee.
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Originally posted August 19, 2021. Please check back for updates.
Comments, corrections, questions? Email: Comment at CleanElectricityPaymentProgram dot com.
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