Renewable electricity: A backup plan with cap-and-trade size costs

Nicolas Loris Heritage Foundation
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There’s a good reason the carbon emissions fell by a record 7 percent in 2009: The trade off for reduced carbon dioxide emissions is reduced economic activity. Senator John Kerry (D-Mass.) admitted as much last year, and today he and colleague Joe Lieberman (I-Conn.) will unveil a Senate cap-and-trade bill that will call for the same draconian cuts in CO2 as the House version passed last year.

But big costs can come in small packages, too. If cap-and-trade fails, Senator Harry Reid (D-NV) told Spanish television network Univision, “I can do a smaller energy bill,” with the key provision likely being a renewable electricity standard. Make no mistake; this is nothing more than a federal mandate for pricier, less reliable electricity that would be harmful to American families, American businesses and the American economy.

A renewable electricity standard (RES) requires that a growing percentage of electricity would have to be produced by government-approved renewable energy sources, most notably wind and solar. Twenty-nine states have versions of an RES, but Washington is considering a nationwide standard. It’s common sense that an RES would raise electricity prices. If electricity created by wind and other renewables were cost competitive, a federal law to force consumption would not be necessary. Though the source of wind and solar energy is free, power delivered from these sources is very expensive.

Just how expensive?

According to a new Heritage Foundation study, household electricity prices will jump 36 percent and industry prices will increase by 60 percent by 2035. Higher prices force cutbacks in consumption that reach 23 percent below baseline (no RES in place) in 2035. In effect, it is the opposite of the Payless shoe store slogan, “Expect more, pay less.” With an RES it is, “Pay more, get less.” The net impact in 2035 is that industrial users will pay out 21 percent more dollars for 23 percent less electricity than if there were no renewable electricity mandate.

Higher energy prices have rippling effects throughout the economy. More expensive electric bills force businesses to make production cuts and reduce labor. From 2012-2035, the timeline for the Heritage analysis, there will be 1 million fewer people working on average with the RES in effect than if there were no RES. And as the mandated level of renewable energy rises over time, so do the losses imposed on the economy. Summing up the impacts for 2012 to 2035 yields a total loss of $5.2 trillion.

Furthermore, our growing national debt problem gets worse. Falling incomes and rising unemployment squeeze government finances from two sides: Tax revenues fall and expenditures on such things as unemployment insurance rise. These two responses cause federal deficits to grow even faster than they are already projected to grow. The RES will add nearly $11,000 to a family of four’s share of the national debt by 2035.

Those in favor of preferential treatment for wind and solar argue that these are new sources of energy and need subsidies and mandates to play catch up. But solar and wind have been around for decades and receive subsidies of over $23/Mwh compared with the $0.44/Mwh for conventional coal and $0.25/Mwh for natural gas. The Energy Information Administration crunched these numbers before the passage of the stimulus bill that allocated billions more for clean energy production. At any rate, the desirable policy is to strip subsidies for all energy sources rather than add layer on top of layer.

Opponents of carbon capping legislation may believe they’ve won a major battle if cap-and-trade does not become law and proponents have to “settle” for an RES. But there are no winners here, except for high-priced lobbyists and well-connected corporations. Just like cap-and-trade, RES won’t have an impact on the Earth’s temperature, and just like cap-and-trade, the deadweight loss is devastating. Though renewable energy standards apply only to the power sector, they provide less flexibility in meeting the goals than does cap-and-trade and can lead to losses of the same order of magnitude as the more comprehensive cap-and-trade regulations.

For those concerned about higher energy prices and a weaker economy, fighting cap-and-trade should remain a priority. But don’t sleep on an RES bill. It’s like Batman defeating the Joker then forgetting about the Riddler.

Nicolas Loris is a Researcher at The Heritage Foundation’s Roe Institute for Economic Policy Studies.