This editorial originally appeared in the newsletter California Energy Markets (CEM). It is republished here with permission.

In the “Bottom Lines” column of CEM No. 1335, the usual author, Chris Raphael, argued the case for raising the Renewables Portfolio Standard (RPS) to 50%. Among other points, he remarked that, “the chief reason for pursuing a higher RPS is that the regulatory mechanisms… are already in place… It’s a lot easier to keep it around rather than build an entirely new toolbox.”

On this point, I agree entirely. However, Chris neglects to consider another well-established regulatory mechanism for reducing greenhouses gases: California’s cap and trade market. I find amusing the lengths to which Chris waxed and waned on the question of how to allow maximum flexibility and minimize cost within the framework of the RPS. The overwhelming consensus among economists is that a market-based system that places an explicit price on GHG emissions offers the most flexibility to reduce emissions at minimum cost. To the extent that it is a climate policy, the RPS is wholly redundant. The very same result deployment of renewables can be achieved with an adequate carbon price.

Of course, the RPS is not “merely” a climate policy. This was argued in the ARB’s initial AB32 Scoping Plan as an excuse to brush aside the fact that the RPS carried the highest abatement cost (a steep $133/ton) out of all of California’s GHG reduction strategies. The typical defense of the RPS rests upon the claim that we should carve out a niche in the electricity market for immature technologies to gain commercial experience and economies of scale, leading to cost reductions.

Now that we are contemplating a 50% RPS, this defense is no longer valid. As renewable energy advocates never cease to remind us, the capital costs of wind turbines and PV solar panels have dramatically plummeted to (allegedly) competitive levels since the turn of the millennium. They are quite confident that this downward trajectory will continue. Why, then, is the RPS any longer necessary?

But the RPS is not merely unnecessary for achieving California’s emission reductions goals – it is destructively counterproductive. By mandating a particular approach to GHG reduction with a command & control policy like the RPS, California restricts the extent to which the electricity sector may purchase emissions permits in the cap & trade market as an alternative method of compliance. This drives down the demand for permits, and thereby depresses the economy-wide price on carbon. What are the consequences of an artificially low carbon price? I’m glad you asked:

Businesses that generate offsets, such as by reforestation or destruction of potent industrial gases, face less of incentive to supply offsets.

Petroleum transportation fuels remain cheaper than if they price reflected the social cost of carbon, making it harder for mass transit and alternative vehicles fueled by electricity, hydrogen, or biofuels to gain market share.

Consumers of natural gas face less of an incentive to conserve or electrify, while natural gas utilities face less of an incentive to supply a low carbon alternative to their current fossil product.

Fossil-energy-derived CO2 is not the only enemy of a healthy climate. Without a strong GHG price, farmers face less of an incentive to capture methane from livestock manure and improve soil management to avoid nitrous oxide emissions.

Electricity storage loses an edge against natural gas peaker plants in supplying reliable capacity for those times when the sun doesn’t shine and the wind does blow.

Carbon capture and sequestration (CCS) is almost certainly untenable without a large price on carbon. While many revile the technology as an inefficient and wasteful Hail Mary to preserve fossil fuel market share in a low-carbon future, it must be acknowledged that CCS in tandem with sustainable bioenergy can roll back the clock on humanity’s long legacy of unabated emissions. It would unwise to disregard this option.

A low carbon price distorts the cost-benefit analysis of renewing Diablo Canyon’s license and future investment in new reactors, including those which reduce, reuse, and recycle long-lived, high-level nuclear waste. (If you regard this as a desirable side-effect of the RPS, then I question your sincerity in advocating for the RPS qua climate policy.)



To be clear, it is not my contention that we can simply set a cap on emissions, and leave the rest to the market. While the RPS is redundant for pricing negative climate externalities, policies which address separate market failures can be genuinely complementary to cap & trade. For example, extensive research in behavioral economics provides ample justification for California’s world-renowned energy efficiency policies, regardless of the price of carbon. Additionally, public investment in clean energy R&D is warranted in recognition of the economy-wide knowledge spillover that no single innovative firm can exclusively capture as profits.



In CEM No. 1330, it was reported that “TURN attorney Matt Freedman said the RPS case [before the CPUC] should not turn into a ‘mega-proceeding’ aimed at determining the best GHG emissions-reduction strategies.” I couldn’t agree more. Yet California’s politicians – in their infinite wisdom – seem poised to determine that ratcheting up the RPS is the best GHG emission-reduction strategy for the electricity sector. It is a grave disappointment that they do not appreciate the power of the invisible hand to lift much of the burden of social planning off their shoulders.

