Introducing a Novel Concept: Cost per Ton of CO2 Reduced

tji_studyby James A. Bacon

A new Thomas Jefferson Institute for Public Policy paper about the impact of a Renewable Portfolio Standard (RPS) on Virginia warrants close examination. You may or may not accept the study’s conclusion that implementing a requirement for 6% solar and wind in Virginia’s electricity mix by 2025 would increase electricity rates in Virginia by 9.85%, depress gross state product by $3.4 billion, and cost 24,000 jobs. Frankly, those who want to believe the numbers will believe them, and those who don’t want to believe them will not. Experts can argue all day about the assumptions, methodologies, models and data inputs that go into studies like this and none of it will mean anything to politicians or the public.

But the author, Timothy J. Considine with Natural Resource Economics, Inc., does raise a really fascinating question. Forget the electric rates, forget the jobs. Let’s say your No. 1 priority is reducing carbon dioxide emissions. Is mandating a minimum percentage of wind and solar production a cost-effective way to achieve your goal?

In the study, “Evaluating the Costs and Benefits of Renewable Energy Portfolio Standards for Virginia,” excerpted from a larger study encompassing 12 states, Consadine makes what seems to be an uncontroversial point: The cost of achieving RPS goals will vary from state to state, depending upon the cost structure of existing power sources and the availability of wind and solar resources. He writes:

For states with a fleet of low cost electricity generation capacity, imposition of RPS could raise electricity costs significantly higher because higher-cost wind and solar generation displace low cost sources of power.

Implementing a 6% RPS goal in Virginia, Consadine says, would reduce annual CO2 emissions by 7.6 million tons per year in 2025 at a total cost (including federal subsidies) of $182 million inflation-adjusted dollars. The cost to achieve those reductions: $182 per ton. The CO2 savings would increase in subsequent years and the cost would decline as the benefit from “free” fuel kicked in, driving down the cost per ton of CO2 avoided down to $136 by 2040.

That compares to the Environmental Protection Agency’s estimate of CO2’s social cost per ton of $12 to $24 (assuming a 5 percent discount rate to reflect the fact that a dollar today is worth more than a dollar in the future). Even if your sole priority in driving energy policy is CO2 emission, you have to confront the finding that the cost of implementing a 6% RPS goal for Virginia would exceed the social benefit by a margin of about 10 to 1.

I’m in no position to appraise Consadine’s methodology for arriving at these numbers. I’m sure that RPS advocates could poke holes in his approach, that Consadine could rebut them, and that the RPS advocates could counter the rebuttal. But a 10 to 1 differential is massive. Assuming Virginia’s goal is to reduce CO2 emissions at the lowest possible cost, as opposed to simply subsidizing the renewable energy sector, I think that everyone, including the most ardent environmentalists, would be open to the idea that there might be more cost-effective ways to achieve that goal.

While Virginians need not accept Consadine’s numbers at face value — it is always important to subject such studies to critical analysis — we should embrace the concept of “cost per ton of CO2 reduced,” we should seek to identify the most cost-effective means to cut CO2 emissions, and we should debate whether it makes sense to implement policies that cost more than the EPA’s estimated social cost. Finally, we should recognize the reality that policies that might make sense in other states might not make sense here.