Northeast USA Carbon Pricing Benefits Exceed Costs

By Dana Nuccitelli Environmental Scientist Posted on 3 March 2011 Filed under Carbon Reduction, Governance

The key obstacle to the implementation of carbon pricing in the USA is the fairly widespread myth that it will result in ballooning energy bills and cripple the economy.  These myths perservere despite the fact that as we have previously explored, economic studies consistently conclude that the costs of carbon pricing proposals are very minimal, and the benefits consistently outweigh the costs several times over.

The flaw with these studies is that they're generally based on hypothetical legislation which has not been implemented.  So it's easy for "skeptics" to claim that they contain flawed assumptions and thus dispute their conclusions.  However, in 2008, ten northeastern states in the USA (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont) implemented a carbon cap and trade system which will reduce their carbon dioxide (CO2) emissions from the power sector by 10% by 2018 in the Regional Greenhouse Gas Initiative (RGGI).  The RGGI recently commissioned a study to examine the impacts of the system, and the results are broadly consistent with the economic studies discussed above.

Funds Generated and Invested

All in all, through the first two years of the system, the ten states generated $789 million through the auctioning and direct sale of CO2 emissions allowances.  Each state developed its own plan for investing those funds, but overall, 52% was used for energy efficiency programs, 14% for energy bill payment assistance, including assistance to low-income ratepayers, and 11% to accelerate deployment of renewable energy technologies.  New York, New Hampshire, and New Jersey also diverted some of the funds to reduce their state budget deficits. 

Table 1: Percent of RGGI State Investments By Category

Considering that energy efficiency is by far the most cost-effective way to reduce CO2 emissions, at about 2.5 cents to save a kilawatt-hour (kWh), whereas it costs at least 6 cents per kWh to generate electricity from conventional sources (ACEEE 2009), it's not surprising that the RGGI states chose to invest the majority of the carbon allocation funds on energy efficiency programs.

Benefits Exceeded Costs

A key finding in the report involved the comparison of the RGGI state costs and savings from their carbon fund investments:

"Evaluations of several energy efficiency and renewable energy programs in the RGGI participating states indicate that these programs provide $3-$4 in savings for every dollar invested. When macroeconomic benefits are considered, the benefits are even greater."

Note that this analysis does not include the benefits associated with averting climate change, reducing emissions of co-pollutants, reducing ocean acidification, etc.  Despite this narrow focus, the carbon pricing system resulted in direct benefits exceeding costs several times over.

Job Creation

The RGGI report also found that the program has created jobs.

"A 2010 analysis by Environment Northeast estimates that energy efficiency programs funded with CO2 allowance proceeds through December 2010 are projected to create nearly 18,000 job years – that is, the equivalent of 18,000 full-time jobs that last one year.  Employment benefits result from state program investments and from the reinvestment of consumer energy bill savings in the wider economy. While there has not yet been a similar analysis of RGGI-funded renewable energy programs, data from the Renewable Energy Policy Project shows every $1 million invested in renewable energy systems creates about six full-time manufacturing jobs, as well as additional jobs in construction and facility maintenance."

Reduced Energy Bills

One of the most frequently-used arguments about carbon pricing is that it will result in much higher energy bills, as utilities pass on the price of carbon emissions to consumers.  However, this assumption fails to account for the re-investment of the funds generated through carbon pricing.  For example, as discussed above, the RGGI states invested the majority of the carbon funds (66% combined) into energy efficiency and energy bill payment assistance programs. 

"At the household and business level, energy efficiency investments enhance consumers’ control over their energy use, typically reducing energy bills by 15 to 30 percent."

Unfortunately, while it concluded that individuals who took advantage of energy efficiency programs reduced their energy bills significantly, the RGGI report did not evaluate the impact on residents' average energy bills.

Carbon Pricing Success Story and Step Backwards

Overall, the RGGI program has provided us with a real world example that carbon pricing can be successfully implemented at a minimal cost, and that its benefits can exceed its costs several times over.

Unfortunately, the New Hampshire House of Representatives recently voted to withdraw the state from RGGI.  This despite the fact that New Hampshire used $3.1 million of their carbon allocation funds to reduce their state deficit, and invested another $24.4 million in energy efficency programs.  The state had used those funds to help businesses and schools become more energy efficient, weatherize low-income homes, provide energy efficiency job training for more than 170 workers, and so on.  New Hampshire Speaker William O’Brien justified the state's RGGI withdrawal:

"Eliminating RGGI sends a clear signal to the business community that we are reversing the direction that the state is taking in terms of creating a regulatory environment that is pro-business. That’s critical in terms of sending a strong message that we are open for business and ready to work with employers to help grow our economy and create good, new jobs here."

Apparently O'Brien considers it "pro-business" to eliminate a system which had created loans to help New Hampshire businesses lower energy expenses, and provided energy efficiency job training for hundreds of workers in the state.  Unfortunately, New Hampshire serves as a reminder that myths about the effects of carbon pricing tend to have more impact than reality.

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