With or without you: Renewable Portfolio Standards in the world of carbon pricing
In the fourth instalment of our blog series on the role of complementary climate policies, I ask: Can a renewable portfolio standard (RPS) work as a substitute for carbon pricing? What about as a complement to carbon pricing? I draw on examples from Nova Scotia and PEI to explore both options.
What is an RPS and where can I find one?
An RPS sets a minimum requirement for renewable power in a jurisdiction’s electricity mix. Under this system, electricity producers must source a fixed percentage of their supply from renewables, either generating it themselves or buying renewable energy credits (RECs) from another producer. In this way, RPSs implicitly tax hydrocarbons and subsidize renewable power. RPSs haven’t been widely embraced in Canada, but implementation is ramping up in the United States.
Two jurisdictions in Canada use RPSs. Nova Scotia legislated an RPS in 2007 with initial targets of 5% renewable generation by 2011 and 10% by 2013. The goalposts are still on the move. The province hit 27% renewable generation in 2015 en route to a formal target of 40% in 2020. Emissions reductions followed in the policy’s wake. According to Canada’s National Inventory Reports, emissions intensity of electricity generation in Nova Scotia has fallen by 8% since 2008. The RPS also allowed Nova Scotia to negotiate an equivalency agreement exempting it from the 2012 federal coal emission regulations.
PEI legislated an RPS in 2006 with more ambitious targets: 15% renewable generation by 2010 and 30% by 2013. However, 18% of PEI’s power generation came from wind before the RPS was even in force. This RPS was essentially a requirement for PEI’s diesel and fuel oil stations to buy credits from its wind farms, more a cross-subsidy than a binding constraint on the generation mix. Power demand varies drastically in PEI year-to-year, so emissions intensities in the electricity sector haven’t responded in the same way as Nova Scotia’s.
An unsuitable substitute?
An RPS is a narrow policy instrument with a specific objective: replacing fossil fuel generation with renewable generation. It lays the heavy lifting at the feet of a single sector, ignoring other significant emissions sources like transport and industry. As a standalone climate policy, it cannot drive economy-wide emission reductions. RPSs also tend to provide incentives only for specific technologies—renewables— and might miss opportunities to substitute natural gas for coal, implement efficiency standards, or adopt emerging technologies like carbon capture and storage.
As a result, RPSs can be costly relative to alternative policies. In their widely cited study that ranks six emission reduction options in the electricity sector, Fischer and Newell conclude that RPSs are more expensive than emission pricing policies, emission performance standards, and fossil power taxes.
Beyond poor flexibility and cost-ineffectiveness, RPSs carry an element of unpredictability. Overreliance on intermittent renewable power can mean both higher electricity prices and higher emissions if coal is a significant source of baseload power. Further, as the cost of renewable technologies falls, an RPS must become more stringent to maintain REC prices. Getting the balance right means constant tweaking.
Furthermore, unlike carbon pricing policies, RPSs don’t generate any revenue that could be used to reduce other distortionary taxes, fund further mitigation efforts, or support anyone who may be unfairly impacted by the policy.
A questionable complement?
An RPS doesn’t need to replace a carbon pricing system. It can be used when a carbon price is already in place. Nova Scotia, for example, now plans to implement a cap-and-trade system in addition to its RPS. But as with any complementary climate policy, using an RPS only makes economic sense if it does something that a carbon price can’t (or won’t) do.
So, can it?
There is a case to be made that RPS policies generate co-benefits. For each point below, however, a carbon price might have achieved the same objectives, and at lower cost.
First, the health impacts of coal-fired power are well-documented. If a jurisdiction relies heavily on fuel oil or coal, RPSs can yield public health benefits.
Second, an RPS could also compel producers to jump the natural gas “bridge” and move right from coal or fuel oil to renewables, which may smooth the path to deep, long-term emissions reductions. This is particularly relevant for Nova Scotia given its current moratorium on hydraulic fracturing. An RPS plus a moratorium means the province is likely to lean on coal, fuel oil, or gas imports for baseload power, which is bad news for emissions intensity.
Third, an RPS might kick-start a viable renewables industry. Nova Scotia has no clear comparative advantage for wind or solar, but tidal power is a possibility. For its part, PEI has more than doubled its wind generation over the last ten years, but this may have happened without the RPS.
There are no clear answers here because no two RPSs are alike, and there are unique policy interactions in every jurisdiction. Nova Scotia just announced plans to implement a cap-and-trade system in 2018, making them the only jurisdiction in Canada to combine carbon pricing with an RPS. Whether their goal of 40% renewables by 2020 will accomplish anything carbon pricing couldn’t is currently unclear.
It certainly looks like the emissions reductions from Nova Scotia’s RPS has given it a head start. The price of carbon in its cap-and-trade system is likely to be lower than it would otherwise have been. Moving forward, Nova Scotia might have an opportunity to lower costs further by relying more on the cap-and-trade system and less on the RPS.