Alliance Supports Carbon Price Signal, Calls for Energy Efficiency Investment Through Cap-and-Trade Allocations

Pending House climate legislation took center stage in Washington D.C. this week, as President Obama met with Democratic Members of the House Energy & Commerce Committee. The group is currently considering the Waxman-Markey draft legislation that combines a cap-and-trade program with an energy bill (known as the American Clean Energy and Security Act). Though no breakthroughs were reached on the content of the legislation, E&C Committee Chair Henry Waxman restated his intention that the bill be reported by the Committee before the Memorial Day recess. Following the meeting with Obama,  Rep. Waxman indicated  that he may bring the cap-and-trade bill directly to full Committee mark-up, rather than first holding a mark-up in the E&C Energy & Environment Subcommittee.

The Alliance to Save Energy strongly supports the creation of a cap-and-trade program like the one included in the Waxman-Markey draft. We advocate for three essential components to any cap-and-trade program: setting a carbon price, implementing complementary policies, and investing in complementary programs.

Setting a Carbon Price

The primary emissions reduction mechanism of a cap-and-trade program is the institution of a carbon price. A carbon price would spur greater investment in energy efficiency, along with other abatement options and innovation in clean energy technologies. According to a recent analysis by the U.S. Environmental Protection Agency, the Waxman-Markey proposal would drive significant reductions in the nation’s demand for energy, eliminating the increase in energy demand between 2015 and 2050 that is otherwise projected.  The system would spur this reduction in energy demand by establishing a price for carbon and letting the market respond appropriately, eliminating the need for government to determine winners and losers. 

To drive least-cost abatement options, the price signal must reach all the sectors of the economy. The reach of the price signal can be affected by allowance allocation decisions. For example, if regulated electric utilities receive free allowances and are not permitted by their regulators to pass the carbon price on to customers, the price signal to the end-use sector will be muted.  A muted price signal would not affect the overall level of emissions, but would lead to an underinvestment in end-use energy efficiency, eliminating an abatement option that is potentially one of the most cost-effective.  Underinvestment in energy efficiency – whether from existing market barriers or from allowance allocation decisions – would require the use of more costly abatement options in other sectors of the economy and thereby raise the overall cost of carbon abatement. In order for a cap-and-trade program to abate emissions at the least cost, the carbon price signal must reach end-users.

Implementing Complementary Policies

Under a cap-and-trade system, underinvestment in energy efficiency could also arise from existing market barriers. Complementary policies can be used to address those barriers.  For example, building energy codes and appliance and equipment standards can address certain types of split incentives (e.g., wherein tenants pay the energy bills and landlords buy the appliances) and lack of consumer awareness and information about cost-effective energy efficiency opportunities. Consumer information programs (e.g., energy labeling, consumer tips, etc.), along with rebates, low-cost financing, and other measures have also long been used to address energy efficiency market barriers.  The Alliance supports strong complementary policies – including a national energy efficiency resource standard – as part of climate legislation. 

Investing in Complementary Programs

Complementary programs also play a role in overcoming market barriers to energy efficiency, and the Alliance actively advocates for funding for complementary programs as part of a cap-and-trade program. Last week the Alliance and other members of our Energy Efficiency Coalition sent a letter to House Energy and Commerce Committee leadership, recommending that 26 percent of the revenues from the cap-and-trade program proposed in the American Clean Energy and Security Act of 2009 be invested in energy efficiency. The 146 signatories to the letter represent a broad-based coalition of energy and environmental organizations, public interest organizations and corporations, all of which believe that investing cap-and-trade proceeds in energy efficiency can both address market barriers not overcome by the price signal alone and lower the cost of compliance with a cap-and-trade program.

While the carbon price signal is our first priority, complementary policies and programs will be needed to ensure that cost-effective energy efficiency opportunities are tapped, permitting us to achieve our climate goals at the lowest possible cost.