Two Key Design Parameters in Clean Electricity Standards

A clean electricity standard, more commonly called a clean energy standard (CES), can serve as a transformative policy in the electricity sector to deliver significant emissions reductions. Depending on its design, the economic efficiency of emissions reductions under a CES can approach that of a power-sector-only carbon emission pricing policy. Two important design considerations under a CES are (1) the emissions intensity benchmark used to calculate clean energy credits earned by a given electricity generator (and that inherently determines generator eligibility under the policy); and (2) the escalation method of clean energy targets over time.In this issue brief, we employ a power sector simulation model, E4ST, to explore effects of different choices of these two design parameters —reflecting options contained in proposed legislation and under consideration for forthcoming legislation— on power sector greenhouse gas (GHG) emissions, generation, electricity prices and societal benefits and costs, including climate and health impacts from air pollution. Specifically, we compare the effects of the emissions intensity benchmarks and escalation methods in the Clean Energy Standard Act of 2019 (CESA 2019) with those under consideration in the discussion draft of the CLEAN Future Act. CESA 2019 uses a lower benchmark emission rate that does not allow for partial clean energy credits for natural gas generation without carbon capture technology. It also implements a tailored, tiered set of target escalation rates. The draft CLEAN Future Act would use a higher benchmark emission rate that allows partial crediting for natural gas and would employ a uniform linear escalation rate of targets from current clean generation percentages to 100% of retail sales by 2050. We also consider additional cases reflecting the other two combinations of these design choices.The modeling simulations discussed in this brief are intended to be illustrative and explore the relative tradeoffs of changing the benchmark emission rate and escalation method each in isolation. Importantly, though the simulations reflect certain aspects of CESA 2019 and the CLEAN Future Act discussion draft, they do not account for all of their features. Both have additional features that would affect emissions and the composition of the power sector.We observe the following general effects of modifying the benchmark emission rate and the credit requirement escalation method:Carbon Emissions Intensity Benchmark for CreditingA benchmark emission rate above typical emission rates of natural gas-fired generators distinguishes between natural gas and higher-emitting sources by providing natural gas-fired generation with partial credits. The 0.82 metric tons / MWh benchmark in the CLEAN Future Act discussion draft is an example.Providing partial credit to natural gas-fired generation still reduces natural gas use compared to a current policies baseline, but results in more natural gas use and less coal use than an otherwise identical CES with a benchmark that is low enough to preclude natural gas (without carbon capture) from earning credit (e.g., 0.4 metric tons / MWh benchmark as in CESA 2019).By reducing coal-fired generation more, the higher benchmark reduces sulfur dioxide and nitrogen oxide emissions, and consequently premature mortality, more than the lower benchmark.Holding the clean energy target constant, the higher benchmark results in less GHG emissions reductions than the lower benchmark due to more natural gas generation.Under the higher benchmark, the target can be increased to match GHG emissions under the lower benchmark. The resulting policy reduces emissions at lower cost and produces larger air quality benefits, compared to the policy with the lower benchmark. It does so by incentivizing more sources of low-cost emissions reductions (e.g., replacing coal with natural gas rather than just replacing natural gas and coal with non-emitting generation).For a given emission quantity under a CES, the natural gas generation industry would be larger under a higher benchmark. This could increase the risk that the natural gas industry would secure changes to the CES that make it less stringent than planned.Clean Energy Target Escalation MethodHolding the benchmark emission rate constant, the CESA 2019 target escalation method yields higher targets on average than the linear escalation in the CLEAN Future Act discussion draft, through approximately 2040. Higher targets require a larger number of clean energy credits to be surrendered. All else equal, they are associated with lower emissions.From approximately 2040 through 2050, the linear escalation targets are on average higher, as targets reach 100% of retail sales by 2050 under the draft CLEAN Future Act but not necessarily under the CESA 2019 method.The linear escalation under the draft CLEAN Future Act can yield higher targets in every year for electricity suppliers with particularly carbon-intensive baseline portfolios, as the starting target is low and must rise more rapidly to 100% by 2050.