Reducing Emissions in the Power Sector: What Energy Mix is Optimal?

Editor’s note: S&S is collaborating with the Harvard Environmental Economics Program (HEEP) to bring academic research findings to a broader audience. Writers at S&S are producing short summaries of discussion papers from HEEP and the Harvard Project on Climate Agreements (HPCA), streamlined for policymakers. As these summaries are published, they will be adapted and discussed here.

Here are two big questions in the struggle to reduce greenhouse gas emissions:

  1. Should carbon pricing (via a tax, or cap-and-trade) be a part of the policy portfolio?
  2. How should natural gas figure into our plans?

Both of these questions polarize. On carbon pricing: economists tend to believe that carbon taxation or cap-and-trade are the obvious best policy, but – as I’ve written about recently – many among the broader American populace believe there is no place for it (even if tax revenues were to be handed directly back to households!). And on natural gas: it is embraced by many as the perfect transitional fuel on our way to a renewables-heavy future, but it is also a fossil fuel capable of derailing the shift towards those renewables (a great 2013 article in The Atlantic Monthly touches on exactly this dichotomy).

These questions are important because, everywhere in the world, we are still trying to figure out the optimal way to update our energy systems – especially for power generation. Take the European Union (EU), for example. It has collectively pledged a 20-30% reduction in carbon dioxide emissions by 2020, relative to 1990, and its Emissions Trading System (ETS) is the largest international cap-and-trade program for carbon dioxide emissions in the world. At the same time, from 2010 to 2012, energy consumption tilted towards more emissions-intensive sources, not less: natural gas usage dropped 14% in that period, while coal usage rose 8%. Is that really what the EU wants?

Recent research from Italy has something to say about this. In it, the authors consider a number of possible policy scenarios for reducing emissions from the EU power sector. For each scenario, they simulate the lowest-cost energy mix to achieve stipulated climate goals. Essentially, they ask the question, “What should the energy mix look like, if we want to reduce emissions by X% and do so in the cheapest way possible?”

Recognizing the many possible regulatory strategies that the EU could take, the authors examine policy scenarios that vary along four primary dimensions: (1) the stringency of the emissions goal; (2) the presence of renewable energy targets; (3) the price of natural gas; and (4) the scope of energy efficiency improvements. Under each scenario, they compute the cheapest way of meeting policy goals using the available power generation resources, subject to technical and economic constraints.

So what does that least-cost energy portfolio look like? The general trends are not surprising: coal and nuclear power decrease, while generation from natural gas and renewables increases. Natural gas, in particular, is integral. The least-cost power mix involves steep rises in gas consumption between 2020 and 2050 regardless of the stringency of the emissions goal considered.

The analysis further reveals carbon pricing (via the existing EU ETS) to be the backbone of cost-effective policy. When every unit of emissions has a price, the playing field for electricity is level: emissions reductions can come from wherever they are cheapest. Renewable energy targets and subsidies only serve to weaken the carbon-price backbone, by favoring particular sources (renewable ones) even when they might be more expensive to utilize. In policy simulations, renewable policies increase wind and solar power generation but dampen carbon prices, which slows down the transition from coal to natural gas.

So, in answer to questions about the future role of carbon pricing and natural gas: Both are central to the achievement of climate goals with the least financial burden on society, according to this research. In the long run, much more ambitious emissions reductions will likely require renewable energy (like wind and solar) to dominate the power mix. But over the next thirty-five years, natural gas is a cheap and effective emissions-reduction tool. Moreover, carbon pricing should be adequate to incentivize those steep rises in natural gas consumption that show up in simulations of least-cost power generation. Other policies that target specific sources – like renewables – may just make the emissions phase-out process more costly.

A summary of this research for policymakers is available here; the discussion paper can be viewed here.

Image courtesy of Wikimedia Commons. Article originally published by S&S on August 26, 2015

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