I chuckled when I saw this article extolling how CAFE fuel economy standards should be replaced with “clean tax cuts.” One proponent said, “If you want more of something, tax it less.”
But apparently, these incentives work only one direction. “It’s very common, historically, for companies to not meet the targets and just pay the fines,” said Josiah Neeley, a senior fellow for the R Street Institute. However, the auto companies were not happy with a proposal to increase the penalty 155%. Does that mean that the penalty got large enough to incent greater compliance?
Two board member of the Valley Climate Action Center, Gerry Braun and Richard Bourne wrote two articles on making building energy use in Davis sustainable and resilient. VCAC board members, including myself, had input into these articles. They reflect a vision of getting to a zero-net carbon (ZNC) footprint while being economically viable. Both were published in the Davis Enterprise.
I like this taxonomy of what type of regulatory/liability framework to use in which situation posted in Environmental Economics. (Reminds me of a market-type structure I created for my 1996 paper on environmental commodity markets.) However, I think the two choices on the right side could be changed:
- Lower right corner to “incentive-based regulation”: The damages are clear and can be valued, but engaging in market transactions is costly. For example, energy efficiency has a clear value with significant spill over benefits, but the costs of gaining information about net gains is costly for individuals. So setting an incentive standard for manufacturers or in energy rates is more cost effective.
- Upper right corner to “command and control regulation”: The damages are known and significant, but quantifying them economically, or even physically, is difficult. There are no opportunities for market transactions, but society wants to act. In this case, the regulators would set bounds on behavior or performance.
Panel imports were up 1,200 percent in fourth quarter 2017. That implies that installers were banking supplies to ride out the import tariff imposed by the Trump Administration. Unfortunately, it also means that the rapid technical and cost progress for panels may stall for that three year period.
The Edison Electric Institute has floated the idea that demand charges should be renamed as “efficiency rates.” Demand charges measure the maximum use in a month, and once a customer reaches that demand level in a month, a portion of the usage is free below that demand level. Providing power for free encourages more use, not less, which is the opposite of what “efficiency rates” should do. Apparently this proposal is part of a larger effort to relabel everything that utilities find objectionable, such as distributed energy resources.
Demand charges can have a place in rate making, but the best such tool, made feasible by the rollout of “smart meters,” is daily demand charges that reset each day.
The California Public Utilities Commission (CPUC) held a two-day workshop on rate design principles for commercial and industrial customers. To the the extent possible, rates are designed in California to reflect the temporal changes in underlying costs–the “marginal costs” of power production and delivery.
Professor Severin Borenstein’s opening presentation doesn’t discuss a very important aspect of marginal costs that we have too long ignored in rate making. That’s the issue of “putty/clay” differences. This is an issue of temporal consistency in marginal cost calculation. The “putty” costs are those short term costs of operating the existing infrastructure. The “clay” costs are those of adding infrastructure which are longer term costs. Sometimes the operational costs can be substitutes for infrastructure. However we are now adding infrastructure (clay) in renewables have have negligible operating (putty) costs. The issue we now face is how to transition from focusing on putty to clay costs as the appropriate marginal cost signals.
Carl Linvill from the Regulatory Assistance Project (RAP) made a contrasting presentation that incorporated those differences in temporal perspectives for marginal costs.
Another issue raised by Doug Ledbetter of Opterra is that customers require certainty as well as expected returns to invest in energy-saving projects. We can have certainty for customers if the utilities vintage/grandfather rates and/or structures at the time they make the investment. Then rates / structures for other customers can vary and reflect the benefits that were created by those customers making investments.
Jamie Fine of EDF emphasized that rate design needs to focus on what is actionable by customers more so than on a best reflection of underlying costs. As an intervenor group representative, we are constantly having this discussion with utilities. Often when we make a suggestion about easing customer acceptance, they say “we didn’t think of that,” but then just move along with their original plan. The rise of DERs and CCAs are in part a response to that tone-deaf approach by the incumbent utilities.
Finally, a real world example of how benefit-cost analysis should be used in practice. Alberta takes the revenues that represent a portion of the society wide benefits and distributes those to the losers from the policy change. Economists have almost always ignored the problem of how to compensate losers in changes in social policy, and of course those who keep losing increasingly oppose any more policies. Instead of dreaming up ways to invest carbon market revenues in whiz bang solutions, we first need to focus on who’s being left behind so they are not resentful, and become a key political impediment to doing the right thing.