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Energy efficiency and emissions intensity standards

Author

Listed:
  • Harrison Fell

    (Division of Economics and Business, Colorado School of Mines)

  • Daniel T. Kaffine

    (Department of Economics, University of Colorado)

  • Daniel Steinberg

    (National Renewable Energy Lab)

Abstract

In order to comply with the Environmental Protection Agency's (EPA) recently released regulations governing greenhouse gas emissions from power plants, states are given the option to implement rate-based emissions intensity standards for the power sector. One well-known consequence of rate-based emissions standards is that in addition to encouraging substitution towards less emissions-intensive sources, they also subsidize output, and thus are considered by economists to be inferior to a first-best solution. However, the exiting literature has not considered energy efficiency decisions within the framework of intensity standards. This omission is particularly problematic in the context of the power sector, where energy efficiency has been considered an important channel of cost-minimizing emissions reductions. To encourage end-use efficiency measures under an intensity standard EPA allows states to credit electricity savings as a means of complying with the rule by treating them as a form of zero-emissions output. In this paper we investigate the role of energy efficiency choices in rate-based emissions intensity standards. We show that when demand for energy services is perfectly inelastic, crediting efficiency measures can recover the first-best allocation. This approach extends the output subsidy in a traditional intensity standard to energy efficiency, thereby eliminating the distortion that favors electricity generation over energy efficiency. However, when demand for energy services exhibits some elasticity, crediting energy efficiency can no longer recover first-best. While crediting energy efficiency removes the relative distortion between energy generation and energy efficiency, it distorts the equilibrium level of both energy generation and energy efficiency via an energy services subsidy. Simulations calibrated to the electricity sector in Texas examine the above issues numerically, as well as explore the implications of alternative energy efficiency crediting schemes.

Suggested Citation

  • Harrison Fell & Daniel T. Kaffine & Daniel Steinberg, 2015. "Energy efficiency and emissions intensity standards," Working Papers 2015-09, Colorado School of Mines, Division of Economics and Business.
    • Handle: RePEc:mns:wpaper:wp201509
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    References listed on IDEAS

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    1. James B. Bushnell & Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2017. "Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 57-90, May.
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    Cited by:

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    3. Brown, David P. & Eckert, Andrew & Eckert, Heather, 2018. "Carbon pricing with an output subsidy under imperfect competition: The case of Alberta's restructured electricity market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 102-123.
    4. Patankar, Neha & Fell, Harrison G. & Rodrigo de Queiroz, Anderson & Curtis, John & DeCarolis, Joseph F., 2022. "Improving the representation of energy efficiency in an energy system optimization model," Applied Energy, Elsevier, vol. 306(PB).

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