A Federal RPS: A Very Bad Idea

However thrilled I am about Obama's choice of Steve Chu as Secretary of Energy, I am not exactly thrilled by the proposals being put forth by the transition regarding energy policy. Take, for instance, this component of Obama's stimulus proposal:

Obama and Biden will create a federal Renewable Portfolio Standard (RPS) that will require 25 percent of American electricity be derived from renewable sources by 2025, which has the potential to create hundreds of thousands of new jobs.

A federal RPS is simply bad policy, for a variety of reasons:

1) It's inequitable. Because different parts of the country vary enormously in their renewable energy potential, some parts of the country (such as my native Tennessee) would probably never be able to meet the 25% standard, even if cost were no object. I imagine that there will be some kind of trading scheme to address this imbalance, but it will both place enormous pressure on more endowed areas of the country to overinvest in renewable generation, and also increase the cost of compliance for have-nots. Therefore, to the extent that renewable portfolio standards are good policy (which I don't think they are) they should really only be mandated on a state-by-state basis.

2) It's economically inefficient. Unlike carbon pricing, a RPS does not encourage end-users to change their preferences in light of environmental externalities, but rather forces utilities to purchase power from sources that may not be appropriate. The need to meet targets will also create a massive distortions, allowing the renewable energy industry to increase their prices and making their product more expensive than it needs to be. This deprives other possible carbon-mitigation measures, from efficiency to nuclear power, of capital that would be more efficiently invested in them.

3) It's probably unattainable, given European experience with similar policies. The UK's decision to pursue new nuclear power plants resulted from a politically unpopular discovery that even in windy Britain, renewable energy just doesn't live up to the hype. Despite the DOE's report that wind could provide 20% of US electricity by 2030, this estimate is based on extremely optimistic assumptions that seem thoroughly debunked by European experience. Keep in mind that US electricity use will probably grow at least some by 2025, so growing from current US renewable capacity to 25% would involve a near-unimaginable number of new generators--given average capacity factors for solar and wind generators, probably 4x or more the size of the current US nuclear fleet in terms of nameplate capacity, in just over 15 years.

On the whole, a federal RPS is a boondoggle that will misallocate resources and distract attention from more efficient and effective means of combating global warming. I will grant, however, that it would probably live up to its promise to "create hundreds of thousands of jobs"--but only at the expense of being an enormous drag on the economy, in addition to huge federal subsidies. As the stimulus also promises:

They [Obama and Biden] will also extend the Production Tax Credit, a credit used successfully by American farmers and investors to increase renewable energy production and create new local jobs.

If renewable energy is a sensible investment, carbon pricing will be all that is necessary to expand its utilization to an appropriate level. If renewable energy is such a good idea, why is it necessary for the government to force people to buy it? Carbon pricing, whether cap-and-trade or a carbon tax, is a much more appropriate policy for addressing climate change. A federal RPS is simply a very bad idea.