by Tom Tietenberg
Not long ago, I participated in a retrospective workshop at Harvard University about the sulfur allowance program.
A Republican idea proposed by President George H.W. Bush and enacted with bipartisan support in Congress, this cap-and-trade program has been widely hailed as a tremendous success.
The evidence gathered by the workshop suggests that it was environmentally effective, and it achieved large emissions reductions.
And the cost was not only much lower than would have been incurred with a comparable traditional regulatory approach, but was even much lower than predicted.
Letting the government define and enforce the goals, while letting markets identify the best means of reaching those goals seem to have produced an effective blending of public and private responsibilities.
Other countries such as Australia and even China and other states such as California have adopted or are about to adopt similar systems to control carbon emissions.
In the United States, however, a national cap-and-trade policy to control climate change has become collateral damage in the partisan debates.
It is portrayed by detractors as posing a huge economic threat to the economy.
What is the evidence for that claim? Several of these programs operate around the world. Are they mirroring the success of the sulfur allowance program or are they dragging the economy down?
Consider the results from our own Regional Greenhouse Gas Initiative . In 2009, 10 states — Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire, New Jersey, New York, Rhode Island and Vermont — launched the first cap-and-trade regulatory program to reduce carbon emissions in the United States. Through RGGI, each participating state caps carbon dioxide — CO2 — emissions from power plants, auctions CO2 emission allowances and invests the proceeds.
Most of the money raised by RGGI is used to promote energy efficiency in existing buildings (e.g. weatherization) and as incentives to investments in new technologies (e.g. more energy-efficient lighting and motors).
Energy efficiency has proved to be the most cost-effective tool for reducing greenhouse gas emissions in this region, and reducing energy costs is a powerful source of increased competitiveness for regional businesses.
In retrospect, this program imposed a rather weak cap, but expectations about tighter caps in the future, coupled with favorable natural gas prices, has led to dramatic declines in emissions.
By the end of 2010, emissions were 27.1 percent lower than the cap and 25.6 percent lower than the year the program was announced (2005).
While the recession played some role in this decline, economic analysis suggests that the main sources of the reduction were fuel substitution, the development of renewable sources of power, the construction of combined heat and power plants and energy efficiency.
Whereas a typical coal-fired plant might operate at 30 percent efficiency, combined heat and power plants can have efficiencies of 75 percent to 90 percent. From 2005 to 2010, electricity generation from residual fuel oil fuel fell 95 percent, while generation from coal decreased 30 percent.
An external review of the first three years of the RGGI program, funded by four foundations, recently demonstrated that in economic terms, even before counting any benefits from carbon reduction, this program benefitted (not dragged down) the economies of the states involved.
RGGI-funded expenditures on energy efficiency caused a decrease in regional electrical demand, power prices and payments for electricity by businesses and households.
This downward pressure on wholesale prices benefitted all energy consumers, but energy users that implemented energy efficiency measures also lowered their overall energy use, providing a double source of decline in their monthly energy bills.
How has this affected Maine?
Maine already has achieved the percent emissions reduction proposed for 2020 by 2010, a decade early.
The lowered energy cost that accompanied those declines has made Maine businesses more competitive, has reduced our dependence on imported energy and has kept those dollars at home where they could create jobs.
What’s not to like?
Tom Tietenberg is the Mitchell family professor of economics, emeritus, at Colby College. He has been designing and evaluating market-based environmental polices since the mid-1970s.