The Take

Beyond carbon policy: A national feed-in tariff

Posting in Design

Carbon policy has failed to meaningfully cut emissions. It's time to try a new approach that uses carrots, not sticks. A national feed-in tariff could do the trick.

Climate hawks are hopeful that the U.S. will finally take action on carbon emissions in the aftermath of Superstorm Sandy and the President's acceptance speech comment that "We want our children to live in an America that. . . isn't threatened by the destructive power of a warming planet."

Unfortunately, they're trotting out the same tired old policy prescriptions that have failed in the past.

I think I have a better idea.

But first let's review why carbon policy has failed.

Why carbon policy fails

Cap-and-trade, cap-and-tax, and carbon taxes all try to clamp down on carbon emissions. This makes sense when you "do the math" on the warming potential of atmospheric carbon, as highlighted in Bill McKibben's current 350.org road tour.

These proposals have failed to gain traction politically, however, for a few reasons.

First, they are essentially Pigovian taxes -- punitive taxes intended to quash negative externalities. As such, they immediately arouse the opposition of the fossil fuel and utility industries, who object to being singled out for providing essential services that all of us demand. Those taxes would gradually rise over time, often without clear definition up front, opening the door to exaggerated claims about how much they will cost consumers.

The vogue idea of a carbon tax appears to be a non-starter. President Obama has already said that he does not intend to put a carbon tax on the agenda in his second term. Right-wing groups are already mustering their opposition to it. When the GOP's anti-tax crusader Grover Norquist suggested this week that he might be open to a carbon tax, he reversed himself one day later after being criticized by a Koch-funded energy think tank.

Second, they fail to offer an assured alternative energy supply. Vague promises that the revenues raised would be spent on renewables like wind and solar, which currently make up less than 2 percent of U.S. energy supply, don't offer much confidence that a substitute supply of energy will be able to take up the load as fossil fuel supply is phased out. Opponents can easily whip up fears about grid outages and so on without clear assurance that alternatives will be built. As long as there is demand for it, fuel will flow.

The fight over the Keystone XL pipeline is a fine example: If opponents prevent Canadian tar sands oil from flowing to U.S. refineries, it will simply go somewhere else --like Asia -- because it is still very much in demand. The net reduction in carbon emissions will be zero.

Third, because carbon emissions are a global issue, unilaterally controlling them without requiring global competitors like China to do the same raises concerns about losing our competitive edge. This has been the primary failing of decade after decade of international climate summits that produced no tangible progress.

Fourth, carbon trading schemes have demonstrably benefited the banks who underwrite their trade more than they have produced meaningful cuts in emissions. And when the market price of carbon falls, as it has in Europe, they become ineffectual.

Fifth, the natural constituencies who support climate policy are vastly outgunned by their fossil fuel opponents. As I detailed in August, the oil and gas, coal, and utility lobby outspent the wind, solar, and geothermal lobby by 50 to 1 in 2011, and if all forms of funding are taken into account, the fossil fuel, utility, automobile, trucking, road-building, and airline complex probably outspends the sustainable industries complex by 100 to 1.

We need look no further than Michigan's attempt to raise its renewable energy standard in this year's general election to see the problem. As Dave Roberts detailed in Grist, a large coalition of green groups raised what was for them an enormous amount of money in support of the ballot proposition, and poured their hearts into a ground campaign. One month before the election, voter approval was at 49 percent. Then -- whomp! -- two of the state's big utilities carpet-bombed it with negative ads, outspending proponents by two to one, and the effort failed spectacularly.

In the fight for energy transition, proponents of clean energy will never be able to win against their opponents this way. It's like a super flyweight boxer trying to stand toe-to-toe with a heavyweight and trade body blows. It will never, ever work. The incumbents will always be able to defeat ballot propositions and water down state-level renewable energy standards to the point of uselessness, as they have done in the past.

Instead, climate hawks should look to judo, where a smaller fighter can use the weight of a larger opponent against them. In that spirit, I offer the following outside-the-box proposal.

Pitch a FiT

President Obama could side-step the legislative wrangling over incentives for renewables by doing something truly audacious, which would give far more hope to the climate hawks than anything else proposed to date.

He could simply follow the model of the national Highway Trust Fund, and create a national standard for feed-in tariffs (FiTs) through the authority of the Federal Energy Regulatory Commission (FERC).

(FiTs, as I detailed here, have proved to be the most effective policy tools worldwide for incentivizing renewable power generation. They typically pay an above-market rate for renewably-generated power for a decade or more.)

Now, there are some important legal details here, so bear with me.

FERC has the authority to regulate wholesale electricity rates for utilities who trade electricity across state lines, and to decide if those rates are just and reasonable. Therefore, FERC does not have authority over the electricity rates of Alaska, Hawaii, or Texas, which have their own grids. FERC has similar authority over interstate transmission pipelines for natural gas.

Normally, FERC requires electricity rates to be set according to the "avoided cost" of building new generation capacity. However, under a recent ruling requested by California, FERC allows states to define for themselves what the avoided cost is. So if a state requires utilities to buy solar power under their renewable energy standards, for example, then the state can define solar power as the avoided cost basis (instead of much cheaper coal or natural gas-fired capacity) and set electricity rates accordingly.

The president could direct FERC to define national guidelines for FiTs. They could be differentiated by resource intensity, so that a FiT for wind in North Dakota wouldn't pay as much for wind in, say, Oregon. They could further differentiate by size – for example, favoring rooftop solar photovoltaics over utility-scale systems. And they could differentiate by application, to limit utility-scale systems to brownfield sites like formerly mined land. Finally, they could differentiate by the type of generation, in order to recognize the different costs for wind, solar, geothermal, biomass, biogas, and marine technologies.

If the FiTs are properly defined, every state could benefit: the heartland has wind resources, the southeast has biomass, the west coast has geothermal capacity, the coastal states have wind and marine potential, and everybody can install some solar.

A parallel FiT program could be offered for building upgrades, to help pay for things like better insulation, windows, replacing inefficient furnaces, and other ways of reducing energy waste.

The states would then implement their own FiTs, according to their unique capacities and needs, under the Public Utility Regulatory Policies Act (PURPA).

In order to pay for the FiTs, an assessment would be levied on all consumers' utility bills, just like the charges we currently pay for things like nuclear decommissioning, public purpose programs, bond charges, and so on. For starters, they could be set at a low level -- say, 1 percent, or about one-tenth of a cent per kilowatt-hour, and one cent per therm of natural gas. That would give the program around a $5 billion annual budget for starters.

The revenues collected would go into a dedicated national Energy Trust Fund, just as a portion of our gasoline taxes go into the national Highway Trust Fund. And like the latter, they would then be disbursed to states who elect to implement FiTs meeting or exceeding the federal guidelines. The states would not be required to implement FiTs, but if they didn't, they wouldn't be eligible for the federal funds. The funds collected would only be used for renewable generation capacity and building efficiency upgrades.

The FiT fees would be adjusted upward over time as the market evolves and demands more funds, up to a limit defined by FERC. Then, as capacity and efficiency milestones are achieved, the incentives would be reduced. FiTs are already declining in countries that have had them in place for a decade or more. When the wholesale cost of grid power rises to the price of renewable power, the FiTs would be eliminated.

Impediments to implementation

There are a few sticky wickets in this idea, to be sure.

FERC is not accustomed to taking direction from a president in the fashion I've outlined, nor is there a great deal of precedent for FERC to assert its authority in this way. However, the legal experts I consulted think there is opportunity for FERC to interpret its regulatory authority more broadly than it has in the past, and believe that FERC might be able to find an avenue to develop such a program if it wanted to. For FERC, this is undefined, not forbidden, territory.

It might also be difficult to establish the revenue pass-through mechanism as I have defined it, from a line item on customers' bills through to a federal fund. However, fees for the Yucca Mountain nuclear waste repository are already collected through the Department of Energy and held by the Treasury, so perhaps a similar approach could be taken for a national Energy Trust Fund. FERC could also use the carrot-and-stick approach they've taken in the past with regional transmission operators (RTOs) and independent system operators (ISOs) to persuade utilities and state utility commissions to accommodate the national FiT. (For a detailed discussion of RTOs and ISOs, see "Why baseload power is doomed.")

The definition of a "qualifying facility" under PURPA might need some modification to adopt a national FiT, but that's well within FERC's authority to do. Alternatively, there might be other ways FERC could implement it outside of PURPA.

Some recalcitrant utilities would no doubt object to the FiT program, since distributed renewable power cuts into their profit-making generation and transmission businesses. They could exert influence on their respective states to resist the collection of fees, or to refuse to participate in the FiT program. But utility customers could also lobby their local elected officials and utilities more effectively than they have been able to do in support of statewide mandates like renewable energy standards.

Fundamentally, I think the idea is sound. It would no doubt require a good deal of working over by legal eagles who understand the ins and outs of applicable regulatory statutes better than I do. But I'm reasonably confident that if there's a will, there could be a way.

Climate judo

A national FiT would take essentially the opposite approach to carbon mitigation than has been tried to date. Carbon taxes are all stick, while a FiT is all carrot. The benefits of this approach should be obvious.

It would create an alternative supply to fossil fuels first. It would not raise fears about being left in the dark. As the price of renewable power falls, it would naturally force coal and natural gas off the grid. Incumbents would find themselves losing creditworthiness as their business models are disrupted, as is already happening in Europe. That's climate judo!

It would be a completely new angle of attack for renewables, one which the incumbents haven't spent years preparing to battle. It would be funded directly by ratepayers, not by cash-strapped green groups.

It could be executed from the top down via legal means, bypassing Congress and avoiding the state-by-state battles that have been used to stop the advance of renewable portfolio standards.

It would offer a clear value proposition to ratepayers, who could be confident that the negligible fees they pay into the program will result directly in new renewable generation capacity, not line the pockets of banks who make a market in carbon offsets, or wind up being spent on other things.

It would result in a much more rapid deployment of renewables, and accomplish far more than carbon policy has in short order. Thanks to its FiT, 25 percent of Germany's electricity now comes from solar, wind and biomass. An equivalent achievement could be made in the U.S. in perhaps 15 years' time. We've tried carbon policy for that long already and accomplished next to nothing.

Most importantly, what consumers will pay for the FiTs will be recovered over time, resulting in a long-term reduction in grid power and heating expenditures. Again, this has already been proven in countries like Germany and Denmark, but it will happen even more quickly in the future as fossil fuel prices continue to rise, and the cost of renewables continues to fall. In three or four decades, the U.S. could meet perhaps 80 percent of its grid power needs with renewables, at a far lower cost than the status quo path.

Incumbents will certainly recognize the existential threat of a FiT and resist it, accusing the federal government of "picking winners" and repeating their usual complaints. But there would be no ground lost there over the status quo. They will also surely insist that the grid can't handle higher penetration rates for renewables, despite the evidence that with proper planning, it can. That's fine. Either they'll go along with the inevitable energy transition, or they'll die.

This is President Obama's chance to show real leadership, and create a legacy on par with Eisenhower's highways and Roosevelt's Social Security. It would transform America for the long haul, leaping over Congressional gridlock and delivering true sustainability in a century that will be defined by climate and energy challenges. I hope he takes it.

My thanks to Paul Gipe, Jennifer Gleason, Scott Thomasson, Elias Hinckley, and John Farrell for their expert contributions to this article.

Photo: Wind turbines in Wyoming (paleololigo/Flickr)

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Chris Nelder

Columnist (Energy)

Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books on energy and investing, Profit from the Peak and Investing in Renewable Energy, and has appeared on BBC TV, Fox Business, CNN national radio, Australian Broadcasting Corp., CBS radio and France 24. He is based in California. Follow him on Twitter. Disclosure