When it comes to reducing CO2 emissions, policymakers consider either regulations or a carbon tax. Regulations include renewable portfolio standards (RPS), which mandate that utilities use a certain amount of wind and solar power, and Corporate Average Fuel Economy, or CAFE, standards, which mandate that car fleets achieve a set level of fuel efficiency. A carbon tax is considered a market-oriented alternative that makes explicit the cost of CO2 emissions, which causes consumers and producers to adjust demand and supply in the manner they choose. It also incentivizes researchers and innovators to bring new technologies to market.
Both approaches involve costs and benefits, but the costs associated with the regulatory approach are often hidden from voters. This may be an appealing characteristic to politicians, but it does not make for the best, or most honest, public policy.
A new study published this month by researchers at the MIT Center for Energy and Environmental Policy Research compares the costs and environmental and health co-benefits of various RPS versus carbon pricing in the Rust Belt.
The researchers set the carbon pricing policy to obtain twice the CO2 reduction as the current RPS set for 2030 would achieve – what they call “RPS + 100%.” While the climate benefits of these scenarios are equivalent, the co-health benefits and costs are very different:
- The costs associated with RPS + 100% are double those associated with carbon pricing.
- The health co-benefit of the carbon pricing scenario is 63 percent greater than the RPS + 100% scenario ($211/tCO2 versus $129/tCO2).
How does carbon pricing achieve more overall benefits at a lower cost? By allowing the market to drive CO2 reductions through the least-costly methods. As the researcher Emil Dimanchev and his co-authors explain:
The health co-benefit of the CO2 price is higher partially due to its stronger effect on coal-fired generation. It is also due to the increase in transportation sector emissions occurring under RPSs, which offsets their overall health co-benefits. In addition, carbon pricing results in lower cost by incentivizing the least-cost CO2 abatement options.
In short, the regulatory approach forces market participants to increase utilization of clean energy, which is less efficient and more costly than incentivizing them to adopt cleaner energy.
This new research helps bolster the case for a market-based strategy for reducing CO2 over a regulatory approach in two ways. First, this study highlights the fact that benefits of sound climate policy can include important local health benefits—namely, cleaner air—and the market-based strategy is better at achieving these benefits. Second, the study shows that the costs of achieving a given CO2 target are far lower with an explicit price on carbon than a regulatory approach.