How Michigan can save money while reducing greenhouse gases

The Environmental Protection Agency’s proposed Clean Power Plan will limit greenhouse gas emissions from the power sector. Under the proposed rule, the EPA will assign each state an emissions reduction target for carbon dioxide, the predominant greenhouse gas. Michigan’s proposed target would be to reduce carbon dioxide emissions by 32 percent by 2030 compared to a 2012 baseline.

The EPA, however, does not specify how the individual states must achieve the reductions. This is to allow flexibility for each state to determine a strategy that works best for its unique circumstances. Therefore Michigan will need a strategy to reduce its greenhouse gas emissions. Michigan might want to consider joining the northeastern states in the Regional Greenhouse Gas Initiative (RGGI) as a cost-effective way to achieve its emission reductions.

RGGI (pronounced “reggie”) is an emissions trading agreement among nine northeastern states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. (New Jersey was a member but has since withdrawn).

RGGI was created to use the power and flexibility of markets to find the least costly way to reduce greenhouse gas emissions from the electricity sector among its member states. Electricity producers have already traded more than $900 million worth of carbon dioxide permits (or its equivalent in other greenhouse gases) in the first three years of the RGGI market, starting in 2009. When RGGI was first proposed in 2005, the participating states generated 32 percent of their electricity from high-carbon sources such as coal and petroleum. By 2012, high-carbon sources contributed only 12 percent. It appears that the RGGI framework encouraged states to take advantage of low-cost natural gas, renewables and energy efficiency projects.

Economists of all political stripes, including Milton Friedman, have noted that price signal are the most effective, least intrusive means of reducing pollution. It has been successfully tried for reducing sulfur dioxide and nitrogen oxide emissions beginning in 1990 under amendments to the Clean Air Act.

Firms have no in incentive to reduce pollution when nature's waste disposal services are essentially free. But being free because there is no market is different from having no cost. Society pays the cost of pollution through negative health and environmental impairments. Putting a price on pollution gives firms the incentive to reduce emissions and save the waste disposal costs of releasing the pollution into the air. Establishing a price also provides an incentive for innovation to find the most cost-effective way to reduce pollution.

Harvard management professor Michael Porter hypothesized that strict but flexible market based environmental policies can reduce pollution at low cost and foster a culture of innovation within the firm. Twenty years of research has shown that the so-called “Porter Hypothesis” works. Emissions trading puts a price on pollution. The 1990 Clean Air Act Amendments used emissions trading to reduce acid rain-causing sulfur dioxide and nitrogen oxide pollution at a cost far less than was anticipated.

RGGI established a regional cap on total carbon emissions from power plants. Each power company purchases, through an auction, a tradable permit for each ton of carbon dioxide it emits. Firms now have an incentive to reduce emissions – they need to purchase fewer permits.

If a firm can reduce its emissions at low cost, it can sell its extra permits to firms that need additional permits to cover their emissions. The most recent auction in June found permits selling for about $5.50 per ton of carbon dioxide. This is well below the social cost of carbon dioxide (about $40 per ton) which accounts for the economic damages from carbon pollution.

RGGI reduces the emissions cap by 2.5 percent each year thereby lowering the overall emissions from the power sector year by year. Moreover, the permit auction revenues are recycled back to citizens through energy efficiency programs, community-based renewable energy projects, job training and other programs.

The RGGI member states have benefited from the program. The Analysis Group conducted an independent assessment and found that RGGI added $1.6 billion in economic development and 16,000 jobs in the program’s first three years. Investments in energy efficiency, made possible by the recycling of auction revenues, actually lowered electricity prices. These efficiencies more than offset any increase from the costs of carbon permits.

Energy efficiency also led to reduced electricity demand which led to reductions of about $1.6 billion in electric market revenues. Total carbon dioxide emissions fell from 170 million tons in 2005 to less than 100 million tons in 2012. The dramatic drop in emissions was related to many factors, including low natural gas prices, but the emissions trading program played a major role.

There is a precedent for new states joining RGGI. Maryland was not one of the original members but joined in 2007. Member states also span several segments of the electricity grid, including the New England Independent System Operator (ISO), the New York ISO, and PJM. Michigan belongs to the Mid-Continent ISO but that should not pose a barrier to joining.

Michigan could benefit in several ways by joining RGGI to meet its Clean Power Plan obligations. First, pricing emissions, whether through an emissions trading program or by a revenue neutral carbon fee, is the most cost-effective approach for reducing greenhouse gas emissions. Second, it stimulates innovation in the energy sector. Third, it would likely have a positive economic development impact for the state, including jobs. Fourth, RGGI is compatible with other state energy policies including the renewable energy standard.

More research is needed to quantify exactly how Michigan would benefit, but it is worth exploring. Michigan will need to adopt a strategy to reduce its emissions under the Clean Power Plan. Legislators would be wise to consider joining RGGI.

The opinions expressed in this essay are the author’s alone and do not necessarily reflect those of Grand Valley State University.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

About The Author

Erik Nordman

A guest author for Bridge Magazine.

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Comments

John Darling
Thu, 07/23/2015 - 9:54am
This sounds like a great plan. We need to move in this direction to preserve our resources (clean air, petroleum) for future generations. Moving towards more efficiencies and alternate forms of energy will not be without costs, but it is the right thing to do as stewards of this unique planet!
BigDCvx
Thu, 07/23/2015 - 10:14am
Any program that continues to support wasteful and destructive wind energy is unjustifiable. Beyond that, ignoring the huge opportunity offered by new nuclear power is a tragedy that needs to be remedied. You could probably pull off your desired reductions in evil carbon by simply switching to mostly natural gas, which Michigan has enormous quantities of. If this program were to actually eliminate the huge expense of taxpayer funded "renewable energy" subsidies, it would be worthwhile.
Erik Nordman
Thu, 07/23/2015 - 12:47pm
The current subsidies for wind energy, like the Production Tax Credit, are in imperfect way to account for the pollution costs of other fuels. The most economically efficient policy would be to price the pollution accurately, through emissions trading or a tax, and then let the market decide which energy sources are most cost effective. Ideally, there would be no need to subsidize specific technologies like wind. It should also be noted that fossil fuels receive about $4.7 billion per year in subsidies which distort their market prices (http://www.treasury.gov/open/Documents/USA%20FFSR%20progress%20report%20...).
Mrs A
Thu, 07/23/2015 - 1:46pm
Wind energy is NOT wasteful nor destructive, despite the opinions of a few and is, in fact, a highly useful resource that can be found almost anywhere in the state, at any time of year, and should be part of a bank of alternative energy resources as improved battery technologies (and other methods) make electricity storage feasible for those times when wind is not blowing. Solar energy is now generated at a lower cost/kWh than any fossil fuel. And every single day and night, waves roll onto the Great Lakes beaches literally surrounding our state, yet none of them are tapped for the wave power they generate. Why should we continue to seek solutions that prop up the existing fossil fuel industry that is poisoning the climate of the Earth, our only home? Follow the money....
David Marckini
Thu, 07/23/2015 - 5:34pm
This article presents some good ideas that Michigan should pursue. Trading off emission credits and carbon use fees can be used to let companies make use of what they see as their best method to meet reduction needs.
ArtZ
Fri, 07/24/2015 - 1:08pm
I would think long and hard prior in joining this group of states. One major question is Michigan has larger and operation industrial base following with why New Jersey withdrew. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. (New Jersey was a member but has since withdrawn).
KG-1
Sat, 07/25/2015 - 1:52am
Is it just me, or does this scheme would suspiciously like "Cap & Trade"? The EU has been having problems with this fiasco for at least the better part of a decade now and the UN itself issued a report just last year saying very bluntly,"Their short-run environmental effect has been limited." That same UN report also didn't have kind words for the RGGI, which was also specifically bashed. Instead of creating a new bureaucracy in an area that has already shown failure (along with the dubious "science" behind the entire global warming scare and its effect on our economy), Congress should just step in and shut down this ill-conceived idea. Or failing that, simply remove the funding from the federal budget for any enforcement of this plan.
Erik Nordman
Mon, 07/27/2015 - 3:36pm
KG-1, you are correct - RGGI is a cap-and-trade program. The European carbon market has suffered in recent years from an oversupply of allowances. This has caused the market to perform less than optimally. RGGI's designers learned from Europe's experience and designed several "safety valves" into the market to make sure it works well. The experience since 2009 - six years of emissions trading - shows that the RGGI market is well designed and has avoided the problems faced by Europe's market.
Barry Visel
Sun, 07/26/2015 - 3:38pm
There are many bandaid solutions to our clean energy needs...this is another. Instead of a bunch of marginal technologies and incentive programs to baby-step our way to a clean energy future, I would rather see resources devoted to a "Manhatten Style" research effort that: 1. Significantly improves solar energy capture, 2. Significantly improves energy storage capabilities, 3. Optimizes hydrogen capture and storage from water through electrolysis, and 4. Development of highly efficient hydrogen fuel cell technology. The ultimate goal would be self sufficient homes using roof space for solar capture creating electricity to capture hydrogen from water which would then power our homes, cars and whatever else we need power for. The sun is the key. Highly efficient use of the energy it provides is the goal. Let's get on with it!
Marion
Mon, 07/27/2015 - 8:58am
Barry, Just yesterday, my husband said that "everyone should be on solar power" and everyone should paint whatever they can white. I agree with you, but it will take miracles to get everyone on board.
Jim Hendricks
Sun, 07/26/2015 - 5:13pm
We need to get over our paranoia of nuclear power. This should be he centerpiece of our national power supply.
John Darling
Sun, 07/26/2015 - 7:17pm
I agree with Barry we need an all of the above approach. ....and this is one. Denial of the problem and quashing any approach will not help our children's offspring. Cap and trade has been successful with other pollutants and the more participants the better the solution will be.