Renewable Portfolio Standards: State Variation at its Finest or Worst?
May 04, 2015
States have long been considered the laboratories of the American democracy. Many successful federal policies have emerged after demonstrating success at the state or local level. The Affordable Care Act certainly springs to mind as a notable example of a national policy that was born out of a state law. More generally, heterogeneity in state policies can be studied for insights into the relative effectiveness of different policies. Energy policy represents a policy area where state approaches have varied considerably to reflect a diverse set of economic, political, and environmental considerations. In part, variation at the state level is a product of a federal policy that in recent years in particular, has deferred a substantial degree of decision-making to the states. Last year, President Obama introduced his administration’s Clean Power Plan, which, through the Environmental Protection Agency, will enforce carbon emission standards for power plants to reduce national carbon emissions by roughly 30% by 2030. The ambitious plan set forth targets and conditions that must be met in reducing carbon emissions, but it did not mandate a single, universal approach for achieving said targets, opening the door for states to select individualized policies to hit targets. Similarly, a cohesive national policy framework for the recent boom in hydraulic fracturing has not been set forth, allowing states to take very divergent paths with regards to “fracking” (New York bans fracking; while Pennysylvania embraces fracking).
There has been considerable interest in policies to promote the development of renewable sources of energy at all levels of government. Renewable energy is still a nascent sector of the US energy ecosystem, providing for just 10% of total US energy consumption and 13% of US electricity. However, even the 10% figure from the Energy Information Administration is slightly misleading because the EIA renewable energy definition is more inclusive than popular notions of renewable energy. The high-profile renewable industries of wind, solar, and hydroelectric make up just a combined 4.8% of total energy consumption. The benefits of renewable energy appear to be both environmental and economic. Renewables contribute less carbon emissions than many other traditional fuel sources, while at the same time offering a possible bridge to sustainable energy independence and the promise of economic growth amidst vibrant technological advancement. In light of these benefits, the renewable sector is experiencing considerable growth, and here, we consider a policy approach that is being undertaken by many states to further catalyze this growth.
An Overview of Renewable Portfolio Standards
Renewable Portfolio Standards (RPS) have been used by a wide array of states to motivate growth in the renewable energy sector. Broadly defined, RPS may refer to any policy that seeks to set a mandated level of renewable energy production in the statewide energy portfolio. Typically, a statewide RPS will set a minimum threshold renewable energy share of total energy production for energy providing institutions. Renewable energy credits can often then be traded by companies and institutions to achieve minimum renewable energy levels. However, there is substantial heterogeneity in RPS policies across states. For instance, Texas mandates an absolute level of renewable energy generation (10,000 MW by 2015) instead of requiring a minimum share of total energy production. Many states require different levels of renewable energy production from different types of energy providers. For instance, Massachusetts has more stringent renewable energy standards for new companies, and Colorado distinguishes standards for Investor Owned Utilities (private providers of energy) from Municipal Utilities and Electric Cooperatives (IOUs must reach 30% by 2020 vs. 20% by 2020 for large Electric Cooperatives and 10% for smaller Electric Cooperatives and Municipal Utilities). Still other states such as North Dakota and South Dakota have established “goals” for renewable energy shares in lieu of binding standards that require institutions to reach targets.
The history of RPS lies in California, Iowa, and Minnesota. First debates over RPS are attributed to California in 1995, but successful passage of RPS legislation would require another 7 years. The first state to pass RPS was Iowa in 1998, followed closely by Minnesota in 1998. Both sets of RPS established minimum absolute levels for renewable energy production. Since then another 37 states and the District of Columbia passed RPS or renewable portfolio goals. Smaller municipalities such as the city of Austin have also developed their own RPS.
How Effective are Renewable Portfolio Standards
The rapid uptake and expansion of RPS across the US begs the question of the efficacy of RPS as an energy policy instrument. Effectiveness of RPS can be measured along a variety of different lines (growth in renewable energy production, reduction in carbon emissions, electricity prices, etc.). If the goal of RPS is broadly to produce efficient energy outcomes through the internalization of environmental externalities, there appears to be little theoretical argument in support of RPS effectiveness. Bushnell et al. in 2007 argued that while RPS have the virtue of political feasibility, they are ill-suited to solve the global carbon emissions externality. Localities run the risk of bearing the burden of the costs associated with RPS, while failing to fully resolve excessive carbon emissions if neighboring areas continue to pollute at the same (or an elevated) level. A number of other papers also argue that RPS fails to achieve economic efficiency, and many argue that a carbon tax or a cap and trade system would be more efficient in attempting to solve environmental externalities.[6-8] A recent paper by Erik Paul Johnson argues that the marginal costs of carbon emission reductions from RPS are 4-11 times those of a regional cap and trade program.
At a base level, the goal of any set of RPS is to grow renewable energy, and so here, we should also consider the rate of growth in renewable energy as a measure of effectiveness. Far from any consensus, the economic literature is highly mixed over this issue. Three studies running statistical analysis of early RPS data each independently determined that RPS fails to lead to significantly more renewable energy generation.[10-12] However, a compelling study from Yin and Powers argues that the aforementioned analyses fail to fully take into account the massive variation in RPS across states. Using a measure of the stringency of RPS to control for various loopholes and other state-level regulatory variation, Yin and Powers do find a significant positive effect on renewable energy production growth.
Collectively, the existing literature suggest that RPS effectiveness is mixed at best and short of optimal when compared to other policy tools such as a cap-and-trade system or a carbon tax. This does not mean that RPS must be abandoned; indeed, policies aimed at fueling renewables growth may well be justified, and political feasibility makes RPS an attractive option. However, variation across states, while it offers an opportunity to study and experiment with different RPS, will likely limit the potential for large-scale effects from RPS going forward.
1. The White House. “Climate Change and President Obama’s Action Plan.” https://www.whitehouse.gov/climate-change.
2. EIA. “Renewable and Alternative Fuels.” Last updated March 31, 2015. http://www.eia.gov/tools/faqs/faq.cfm?id=92&t=4.
3. “Database of State Incentives for Renewables & Efficiency.” NC State University NC Clean Energy Technology Center. http://www.dsireusa.org.
7. Fischer, Carolyn, and Richard G. Newell. “Environmental and technology policies for climate mitigation.” Journal of environmental economics and management 55, no. 2 (2008): 142-162.
8. Michaels, Robert J. “Intermittent currents: The failure of renewable electricity requirements.” Available at SSRN 1026318 (2007).
11. Yohannes G. Hailu. “Effects of renewable portfolio standards and other state policies on wind industry development in the US.” Michigan State University, East Lansing, MI (2008).
12. Kneifel, Joshua. “Effects of state government policies on electricity capacity from non-hydropower renewable sources.” University of Florida (2008).
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