Carbon Emissions Trading: A Stimulus for Energy Efficiency
How do CO2 cap-and-trade programs really affect economies? Analyses suggest that programs like the European Union Emissions Trading System encourage investments in energy efficiency and low-carbon technologies by pricing carbon competitively. In the long run, this should mean lower electric bills for consumers and significant job creation.
Carbon cap-and-trade programs are often criticized as leading to higher electricity prices, loss of jobs, and weaker economies. Analyses of the European Union Emissions trading System (EU ETS), along with the first regional trading program in the United States, suggest that in the longer term the opposite is true.
The EU ETS, the world’s only major carbon emissions trading program, was launched in 2005 as part of the EU Climate Change Programme.1 It covers some 11,000 energy-intensive factories and power plants representing 40 percent of the EU’s total CO2 emissions. Industries covered include power generation, iron and steel, glass, cement, and ceramic and brick works. The EU ETS works on the cap-and-trade principle: Industries can buy and sell permits to emit CO2 (allowances) within a cap representing the total allowable greenhouse gases emissions in the EU. In practice, if a company reduces its emissions, it can keep the spare permits for future needs or sell them to another company and reinvest the money. By limiting the total allowances available, the EU for the first time put a price on carbon emissions.
In addition to the EU ETS, Member States put in place carbon pricing schemes to reduce national carbon emissions from sources not covered by the EU. One of these is the UK’s Carbon Reduction Commitment (CRC), which complements the EU ETS by focusing on non-energy-intensive sectors.
In the United States, the Regional Greenhouse Gas Initiative (RGGI) is the country’s first market-based regulatory program to reduce greenhouse gas emissions. Founded in 2008, it is a cooperative effort involving Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. Together, these states have capped and aim to reduce CO2 emissions from the power sector 10 percent by 2018. The states sell nearly all emission allowances through auctions and invest the proceeds in consumer benefits: energy efficiency, renewable energy, and other clean energy technologies.
Research to date indicates that the benefits of the cap-and-trade programs are multiple and go well beyond emission reductions. Due to the financial crisis and other factors, carbon allowances within the EU ETS are trading at very low prices (7 euros per metric tonne), hampering investments in low-carbon technologies and reducing demand for energy efficiency measures.
A recent International Energy Agency (IEA) report, “Energy Efficiency Policy and Carbon Pricing,"2 llustrates that energy efficiency policies can be much more effective in combination with a competitive carbon price. According to the study, a higher carbon price can raise awareness about the costs and environmental impacts of energy consumption, encouraging action and investments in energy efficiency measures and technologies. Furthermore, a higher carbon price can complement energy efficiency policies and measures by encouraging more efficient use of energy. Consequently, customers’ interest in energy efficiency can increase demand and encourage manufacturers to supply more and cheaper low-carbon technologies.
As for the United States, one of the most recent studies on the administration of the RGGI,3 states that the cap-and-trade programs have a direct impact on energy efficiency market development. In the RGGI program, a significant percentage allowances were used to fund energy efficiency investments across different countries. Programs included auditing and benchmarking efforts, investments in retrofits for existing buildings, lighting and equipment replacement, and new building measures. Even if at first sight CO2 allowances tend to increase electricity prices, RGGI analysis shows that there is big potential for lowering costs over time if countries invest a substantial amount of the allowances in energy efficiency programs that reduce consumption. According to the study, consumers overall – households, businesses and government – can gain nearly $1.1 billion as their overall electric bills go down through investments in energy efficiency.
Besides decreasing costs, the same study highlights another big benefit of carbon cap-and-trade programs: jobs. According to the RGGI analysis, the CO2 trading scheme will lead to the creation of thousands of new jobs over time – it is estimated to have created 16,000 jobs in the first three years alone. Jobs include engineers who perform efficiency audits and workers who install energy efficiency measures in commercial buildings.
In Europe, the implementation of energy efficiency measures, supported by the EU ETS and other ambitious energy related policies, has the potential to create up to 2 million new local jobs by 2020.4
This data supports the conclusion that the two instruments – carbon schemes and energy efficiency measures – are complementary and that one affects the other. In conclusion, in efforts to promote a sustainable future through energy efficiency investments, evidence suggests that cap-and-trade programs are extremely effective and make economic sense as well.
1 See http://europa.eu/legislation_summaries/other/l28118_en.htm
2 See www.iea.org/papers/2011/EE_Carbon_Pricing.pdf
3 The Regional Greenhouse Gas Initiative represents the Northeastern US CO2 trading program. See www.rggi.org.
4 See Energy Efficiency Plan 2011 at eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0109:FIN:EN:PDF