When President Obama publicly renewed his oath of office on Monday, January 21, he highlighted the urgency of addressing climate change as a priority of his second term. “The path towards sustainable energy sources will be long and sometimes difficult,” he said. “But America cannot resist this transition; we must lead it.” At RMI we agree that the transition will be difficult. We wrote about these challenges in our 2011 book, Reinventing Fire: Bold Business Solutions for the New Energy Era, and we continue to explore strategies to address them as we pursue our vision of a clean energy future.
Decarbonizing the Electricity Sector
Limiting carbon dioxide emissions from the transportation, industrial, buildings, and electricity sectors is critical. These sectors are responsible for the majority of the United States’ anthropogenic CO2 emissions, the primary driving force behind the devastating impacts of climate change. But past lessons point out what is clear: it will not be easy process. Any type of regulation is likely to be very contentious, as we saw with the sulfur dioxide debate of the 1990s. Despite the eventual success of the program—driving innovative market solutions that reduced sulfur dioxide emissions far beyond targets while achieving significant cost savings—businesses and utilities initially vigorously opposed the emissions trading scheme.
Past cap and trade programs, carbon taxes, and hybrid legislative proposals have met with very limited success in reducing carbon emissions across the U.S. From the Senate’s failure to ratify the Kyoto protocol in 1997, to the Climate Stewardship Acts in 2005, to the Waxman Markey Bill in 2009, the nation’s legislative process has yet to advance any major climate legislation. Utilities and other industry stakeholders are concerned that emissions limitations will drive electricity prices up and will be difficult to implement. So while reducing carbon emissions is critical and it is encouraging that President Obama has indicated commitment to do so, it is imperative that business and political leaders find creative strategies that are effective and achievable.
A Market-based Approach to Pricing Carbon
There are myriad options; a recent proposal from the Natural Resources Defense Council (NRDC) highlights how Obama and the Environmental Protection Agency (EPA) can act to limit carbon emissions from existing power plants using a business-led approach and existing authority under the Clean Air Act. Under the proposal, the EPA would set state-by-state carbon emissions reductions standards based on the carbon intensity of each state’s current electricity generation portfolio. Instead of regulating plant-by-plant, both states and utilities that own multiple carbon-emitting power plants can aggregate electricity generation facilities into a fleet when calculating compliance. The proposal offers broad flexibility for meeting emissions reductions standards through technological solutions, such as installing CO2 capture systems; switching to lower- or zero-emitting sources, such as wind and solar; and giving credit for energy efficiency, a low-cost energy resource and emissions reduction option.
As with most any strategy, this approach comes with challenges, but there are a number of implications for business that make this a potentially effective solution:
- Market & Business Leadership: Private-sector collaboration and innovation can yield solutions that are cheaper and more efficient than if command-and-control regulation is used.
- State Leadership: By empowering each state to essentially formulate its own plan, the proposal enables “fast-learning laboratories” where states can collaborate and learn from one another.
- Technology Neutrality Fosters Innovation: By targeting statewide emissions reductions—rather than regulating plant-by-plant or mandating certain technologies—the proposal fosters and rewards innovative market solutions.
- Driving Adoption of Efficiency and Distributed Resources: By giving credit for “negawatts” (energy efficiency) and clean sources, such as distributed wind and solar, the proposal helps drive the business-led decarbonization of the electricity sector.
Moving Beyond Carbon Pricing
Yet, the glacial pace of progress in passing and implementing carbon legislation over the last several years makes it clear that we need to move beyond the limit-carbon-emissions approach of NRDC’s proposal, which may be necessary but not sufficient. In parallel, the country needs to further explore and implement creative strategies to minimize cost impacts and allow for ever-increasing reliance on the adoption of efficiency, renewables, and other distributed demand-side resources. Removing key barriers that are slowing the adoption of efficiency and renewables is critical.
Here are just a few strategies to consider, each of which has the potential to drive change and reduce carbon emissions:
- Strengthen and expand energy efficiency standards: Establishing more efficient building codes and increasing standards for appliances has historically been very effective in driving demand for more efficient options and reducing energy use and customer energy costs.
- Drive down the installed cost of solar photovoltaics: Reducing specific balance of system solar costs through innovative racking designs, streamlined local permitting requirements, and new customer acquisition channels such as retail partnerships and online bid platforms will help make solar energy affordable without subsidies in more places throughout the nation.
- Develop creative financing options: Developing innovative financing options that reduce risk, upfront capital investment requirements, and hassle for the customers and financiers will make efficiency projects more accessible to individual utility customers. Examples include on-bill financing, solar leasing, repayment via property taxes, and community-financed solar projects.
- Level the playing field so that all resources can compete fairly: Allowing distributed resources to participate in wholesale markets and increasing access to relevant information on the functioning of the transmission system and wholesale markets, will level the playing field and allow the economic benefits of renewables and distributed resources to be more accurately recognized.
Looking to the Future
What actions the Obama administration will take remain to be seen. Regardless, there is a tremendous opportunity for business-led innovation to set a price for carbon and help reduce the barriers slowing the adoption of efficiency and renewables. Businesses need not wait for the current administration to make its next move; they can take action today. RMI’s vision is a 158 percent bigger economy by 2050, at a cost savings of $5 trillion compared to business-as-usual, all while weaning the U.S. completely off oil, coal, and significantly reducing natural gas. Whether via a strategy similar to NRDC’s proposal, another proposal, or one of our strategies to increase the adoption of efficiency and renewables, a collaborative government- and business-led push can help bring that future closer today.
As we wrote in Reinventing Fire, “For once both sectors can get what they want: politicians can take credit for trans-ideological appeal and strong results, while business leaders can create enduring value by pursuing private advantage—rather than, as so often in the past, being forced by government mandates to commit unnatural acts in the marketplace.”