Using California’s programs as an example, Figure 2 shows that the imposition of a 20% low carbon fuel standard (LCFS) reduces transportation sector emissions significantly. In turn, this reduces the pressure and cost of abatement from other sectors and reduces the demand for allowances. Such an imposition lowers California’s projected market-clearing allowance price by $19/metric ton CO2e (CO2 equivalent), relative to a 10% LCFS mandate.
Striking a balance with dynamic programs
Complementary measures have also played a major role in the power sector in the form of policies such as energy efficiency mandates and renewable portfolio standards (RPS). Failing to make these targets dynamic may leave stakeholders blind to the evolving linkages between sectors.
Ultimately, poorly handled complementary measures lead to a fragmented policy framework that results in a disproportionate reliance on one measure.
Figure 3 displays the need to walk the line between doing too much and too little. California’s 2030 decarbonization target requires deep cuts in the power sector, achieved through greater penetration of renewable resources.
Therefore, the RPS is a complementary measure that works in addition to cap-and-trade to achieve these reductions. Setting too low a target (e.g., a 33% RPS level) results in no change in market-clearing carbon allowance prices since the carbon price is sufficient to incent renewable penetration equivalent to a 50% RPS level.
On the other hand, the imposition of a 60% RPS level in 2030 would drop allowance prices by $10/metric ton. A 60% RPS forces the market to reduce power sector emissions further and faster than economics would dictate. The increased abatement reduces the burden on reductions from other sectors and lowers the carbon price. The cost of incremental renewable commitments is still passed on to customers, potentially increasing the program’s total cost. A balanced program that takes advantage of changing dynamics is crucial to cost-effectively meet carbon reduction goals.
The need for a holistic view
Programs that encourage decarbonization are not a panacea for an entire country. The benefits of any proposals or policies targeting the deep decarbonization of large swaths of the economy must be balanced with the individual attributes and goals of the region or sector implementing the policies.
Electrification of residential heating loads is one example of how a policy with unconsidered factors has the potential for significant unintended consequences. While the electrification of residential heating loads would displace direct-use natural gas by consumers, any changes to net emissions would need to account for factors such as the local electric grid emission levels and the relative performance and efficiency of the replacement electric heating unit.
The colder the climate, the lower the grid emissions required to result in a net reduction in CO2 emissions. In addition, in colder climates, heat pump efficiency declines substantially on the coldest days, leading to increases in peak period electricity demand, and potential costly increases in the electricity capacity and transmission grid.
Additionally, while reductions in natural gas use could present savings opportunities on future gas distribution infrastructure requirements, any incremental demands placed on the electric system require consideration. If the system is unable to accommodate significant increases in winter demand, there may be a need to develop new generating capacity, thus increasing the cost of the emissions savings.
Developing policies catered to the needs and goals of a particular actor ensure the pursuit of the most cost-efficient program.
Designing an optimal decarbonization strategy
Components of carbon policy portfolios (already underway in some states and provinces; envisioned in others) affect other components, as well as the success of the overall program.
Meeting targets in one sector can influence market-clearing allowance prices that affect all sectors, resulting in significant risk to all market participants, regardless of their own abatement potential. Thus, stakeholders must understand compliance not only in relation to their respective sectors and others in their sphere but how compliance in other sectors may affect their own as well. Regulators, meanwhile, must deliberately balance these measures to meet emission reduction requirements.
Designing a harmonized set of carbon-reducing policies and programs depends on the quality of cooperation among stakeholders and regulators. To strike the right balance, they must commit to incorporating perspectives across the energy landscape with integrated analysis at the company level of potential outcomes. New policies and programs shouldn’t “shake things up,” but instead should balance costs and benefits with existing efforts; should update those efforts to welcome new efforts, technologies, and changes to the market; and should consider the cost implications of the different elements of the emissions reductions strategy.