The EU should look into pouring a high proportion of carbon revenues into energy efficiency, but not before an institutional framework to reallocate the money efficiently is in place, Richard Cowart, director of European Programmes for the Regulatory Assistance Project (RAP), told EURACTIV in an interview.
Richard Cowart, who has advised cap-and-trade designers in California, north-east USA and the US Congress, is director of European programmes for the Regulatory Assistance Project (RAP). He has also served as chair of the Vermont Public Service Board (PSB).
He was speaking to Susanna Ala-Kurikka.
Now that the US, Australia and many others are debating putting in place an EU-style emissions trading system, do you think cap-and-trade systems alone can do the job of cutting emissions?
I was advisor to the Regional Greenhouse Gas Initiative (RGGI) in the US and to the California PUC at the beginning of the AB 32 [Assembly Bill 32, the Global Warming Solutions Act] process in California. So it’s two cap-and-trade designs being developed in the US.
And I have testified in the US Congress on current legislation, so I have some experience on thinking about this. That’s by way of context.
One of the things we learnt both in RGGI and in California was that about 75% of the carbon reductions that set out as goals were going to be delivered through what, at the time, we called complementary policies. I call them foundation policies.
Now your question is, what are the foundation policies for a successful cap-and-trade. So I just wanted to reframe the question a little bit.
A successful cap-and-trade programme will be designed as a market-based overlay on an entire suit of clean energy policies. The reason I’m bothering to say it this way is that I really want to emphasise that the foundation has to be there before you can put the roof on.
There are a variety of powerful elements but the highest priority must be given to energy efficiency.
How do you deliver most successful, dramatic improvements in energy efficiency throughout the economy?
I think policymakers need to take a really hard look across the policy arena and constantly ask, ‘Can we deliver savings through efficiency at a lower cost than the energy supply alternatives, either conventional fossil, nuclear or advanced renewables?’ Every time there is a research decision to be made, the first question should be, ‘Can we meet this need more cost-effectively, more reliably, with lower emissions?’ Can we meet this need through deeper investment in energy efficiency rather than adding additional supply?
The truth is that quite often a large fraction of what we think of as new energy needs can actually be met through reduced energy demand. And in fact, if you take any hard look at all at climate science and what we need to attain in terms of emissions reductions, we have to do it.
First of all, I would say we should do it because it’s lower cost and it’s more reliable and it’s easier to do. And secondly, from the point of view of emissions, we have to do it. So that’s the first thing.
We are underperforming across the globe in the delivery of energy efficiency. That certainly includes our experience in North America and many Europeans have also said the same thing to me.
By way of simple example, the 20-20-20 mandates, two of them are up to now mandatory but the efficiency mandate is not. And that may be changed but that’s symbolic of this problem.
The second set of complementary, or foundation, policies to cap-and-trade is low-carbon generation. And both the mandates to deliver renewable power and in some cases renewable heat as well.
So more proactive policies to support a much higher penetration of low-carbon resources in power grids. That includes such things as promoting a grid architecture that would support the integration of very large-scale renewables resources like offshore wind, Southern European and Northern African solar power, these pretty big initiatives that are going to be needed if we’re going to decarbonise the power sector.
What needs to be done to integrate these renewables to the grid and how do you pay for it?
We have to think of it in two scales. With respect to distributed resources, sometimes called microgeneration, we need at least a partial implementation of the so-called smart grid technologies. You don’t have to have a smart meter on every building, but you do have to have a smart meter on every building that you want to interconnect with on-site generation.
Then along with that, we need smart policies. There no point having smart grids without smart policies.
That would include, for example, an appropriate incentive for distributed resources to contribute power to the grid and to be compensated for that. That’s at the distributive end of renewable resources.
At the other end of the policy world would be the necessity of building large transmission links that would be transnational in nature to connect really large-scale intermittent resources to the grid. That requires international cooperation and a common vision of what those major links are needed, how they would be managed and how they would be paid for.
I think those large-scale links have to be paid for by tariffs connected to their use. In turn, they need to be supported by policies like renewable obligations that provide investors with the knowledge that the generation that they would interconnect is actually going to have a market.
On the one hand, there’s no point in investing in the wires unless you have the generation and you won’t get the generation unless there’s a market. You need all three.
The last bit is the realisation that it will take an agreement by member states to cooperate in the regulatory supervision of those transnational links.
How should cap-and-trade revenues be used?
Here I can speak from experience in the US. We discovered in doing the models for RGGI that cap-and-trade programmes would be much less costly to consumers if, number one, allowances were auctioned, and number two, those auction revenues were invested in clean energy programmes, especially energy efficiency. I call this the cap-and-invest strategy.
My recommendations to the Congress were that US federal legislation should devote a very high proportion of revenues to the clean energy transition.
Now, in RGGI, the percentage devoted to clean energy is almost 80% of allowance value. Most of that, over 70%, is energy efficiency so it’s a very high fraction.
I’m convinced that in the case of RGGI, that’s quite appropriate.
How allowance revenues should be allocated is a matter of judgement in each case. The variables include things like, ‘what is the allowance price and how much money are we talking about?’ And second question would be, ‘what are the underlying conditions in that market in an individual member state?’
So the appropriate approach would be to say, looking at this case at this instance, ‘what’s the best thing we can do?’ So not a generic answer in other words.
Now, in RGGI, we recommended and I advocated almost a complete dedication to energy efficiency. We ended up with something like 75% of revenues over time will be devoted to efficiency. That’s appropriate.
One of the reasons is that the carbon allowance price is fairly low. It’s been ranging between two and three dollars a tonne. So the amount of money that’s been ploughed back into efficiency is less than it would be if allowances were 20 dollars a tonne.
On the other hand, very little is being dedicated to renewable power, because renewable power is being delivered through the renewable portfolio standards. You don’t have to pay for it because you have a mandate.
Should the EU have made its recommendation to earmark 50% to activities reducing emissions mandatory?
In the European context, the fraction that ought to be devoted to the low-carbon transition will depend on these same factors: what will the carbon price be, do we have the capacity to prudently invest the revenues in efficiency and low-carbon power in each programme year, or should the amount being spent on those things ramp up over time as the capacity of individual programmes ramps up?
Right now, if we tried to dump a huge amount of money in energy efficiency in many member states, we don’t have the institutional capacity to spend that money wisely and cost-effectively. So why would we recommend that? We wouldn’t.
What we recommend is building the programmes rapidly so that we can go capture more of those savings.
While I’d like to see a strong practice throughout the member states of recycling carbon revenue particularly for efficiency but possibly for other low-carbon policies, I would also of course want to work with any member state government to figure out how to really cost-effectively and intelligently build programmes so that over time we get there.
We don’t necessarily just try to throw a lot of money at low-carbon policies. Maybe that’s a totally obvious statement, but it does put you in a situation where you want to say, alright, over time, half the money probably should be spent on the transition. The other half might be spent on alleviating fuel poverty, assisting industries that are impacted by the carbon policy, or perhaps investing in the assistance that is needed to less developed countries in order to support a global deal.
These are all appropriate uses of the carbon revenue. One thing that I think we should avoid is the world in which carbon revenue is viewed solely as another source of governmental funding and we don’t target the revenues to meeting climate objectives.
I strongly recommend that governments adopt a disciplined approach to carbon revenue which accepts that this revenue should first and foremost be used to promote the goals of the climate programme.
The US has been looking into the EU emissions trading system (EU ETS) when devising plans for their own, but is there something that the EU could take from the US on climate legislation?
The major point I would make here pertains to the topic we were just talking about. The Waxman-Markey bill that passed the House has provisions in it that would permit a significant fraction of carbon revenues to be dedicated to end-use energy efficiency and other clean energy technologies, but there is significant opportunity for efficiency there.
That grows out of the lessons in California and RGGI about how powerful that tool can be. The only provision like that in the ETS phase three that I’m aware of is the carbon capture and storage set-aside. If you look at the US federal legislation, there are three or four provisions in it that create very significant opportunities to promote efficiency.
Energy efficiency is the lowest-cost resource to help us reduce carbon: that’s a smart policy. So yes, I would say that would be something that Europeans could look at when thinking about how they’ll implement phase three.