Earlier today at the Center for Global Development, IMF Director Christine Legarde gave a talk promoting ‘responsible’ energy pricing, defined as pricing reflects the environmental costs of fossil fuels by way of launching the IMF’s new publication, Getting Energy Prices Right, From Principle to Practices. Meanwhile, developed countries on both sides of the Atlantic were busy demonstrating how put into practice a unprincipled climate policies that that get energy prices dead wrong.
Last week, the EU decided on targets of increasing energy efficiency by 30% by 2030, a percentage that is well below the 40% targets that many environmental groups were hoping for. The debate around energy efficiency targets in Europe has been fraught with accusations that the Commission is using opaque modeling to justify efficiency targets kept deliberately low in order to prop up the carbon price in the ETS. Brook Riley of Friends of the Earth has called the debate ‘bizarre’.
It would indeed be bizarre if the E.U. were keeping efficiency targets low to protect the carbon price. Efficiency and carbon pricing should be complementary, not competing policies. Energy efficiency targets are designed to mandate action on the negative end of the cost curve that is entirely insensitive to carbon pricing. If an economy is so energy inefficient that mandatory targets significantly reduce the demand for fossil fuels, then the logical implication is that there is plenty of room to increase reduction targets without causing the carbon price to spike. In essence, the best way to protect the carbon price is to reduce the cap. And energy efficiency policy should have no ambitions beyond efficiency. It is a pity that the EU-ETS cannot manage to solve its oversupply problem through a steeper or permanent set-aside, but treating efficiency as a back door to the carbon price is the wrong way to rectify the problem.
As the EPA closes out the Washington, D.C. public comments period for its Clean Power Plan, it is worth asking what the total global impact of the Obama Administration’s climate policies will be. The administration is mandating national emissions targets of just over 1100 lbs per MWh of generation by 2029. The size of this target is synonymous with locking in natural gas as the fuel of choice for the U.S. power sector. The Obama Administration has made no secret its intention to use natural gas as a bridge fuel for emission reductions. The appeal of this strategy is easy enough to see—having let cheap natural gas set up the ‘bridge’, the administration need not bother itself about how to get to the other side—a question the Clean Power Plan certainly doesn’t address.
A recent report by Rhodium Group and CSIS shows that the Clean Power Plan will cause a 15% increase in natural gas generation over the reference scenario by 2030 versus a 1% increase in renewable generation. Environmental groups lauding the Climate Action Plan tend to focus on its impact on coal, which will indeed decrease. To what end? More exports for China, evidently. The developed world has a long history of exporting its pollution to poorer countries, but the act takes on unusual perversity when the pollutant is carbon dioxide, which doesn’t stay out of the proverbial back yard if one chooses to burn it there.
But can the government be blamed that the coal is going to China? It can be. As the above article from Vox highlights, 40% of U.S. coal comes from public lands, and the Obama administration has presided over the leasing of 2.2 billion tons of coal to private companies in non-competitive auctions. That is to say, it is practically giving away the coal to allow private companies to profit by selling environmental destruction to China. A real climate policy would put a price on the carbon dioxide in coal at the mine mouth to close the export loophole. Some may protest that such a policy is out of reach of the Obama Administration, but setting a higher reserve price for the auction, which would have the same effect, is far from politically impossible. And yet the U.S. government continues to ask for plaudits for reducing coal, and all the while it is giving it away.
Whether in coal or carbon pricing, if the U.S. and Europe want credit for strong climate policy, they should put their money where their mouths are.