US Climate Worries – We Got Solutions

Dec 3, 2018 | Blog

The recently released National Climate Assessment report paints a challenging climate picture for the United States, and its message was clear. Major sectors of the US economy will be affected by climate change and it is time to act.

The report opened with this: “Earth’s climate is now changing faster than at any point in the history of modern civilization, primarily as a result of human activities. The impacts of global climate change are already being felt in the United States and are projected to intensify in the future—but the severity of future impacts will depend largely on actions taken to reduce greenhouse gas emissions and to adapt to the changes that will occur.”

The hard part for many is to simply come to grips with such language and answer the question, what can we do about it? There are any number of solutions and suggestions outlined in the 1,656-page report but missing are market-based solutions such as cap-and-trade and renewable portfolio standard markets. Both have proven successful in addressing some of the most dire environmental problems we have faced in the United States such as Acid Rain, and across the globe.

The SO2 level in the United States is down 91 percent from 1990 levels at a much lower cost than was forecast before the cap-and-trade program began. Initial cost estimates were $400 to $600 per ton of SO2, but allowance auction prices averaged about $130 per ton over their first ten years. The overall cost of pollution reduction was $1 billion to $2 billion per year instead of the estimated $4 billion to $5 billion.

According to the NCA report, fossil fuel combustion accounts for 77 percent of total U.S. greenhouse gas emissions and it correctly points out that US GHG emissions hit their lowest levels in 2016, 25 percent below 2005 levels, largely due to the utility sector’s switch from coal to natural gas fuels. But quietly, carbon cap-and-trade markets in California and the Northeast’s Regional Greenhouse Gas Initiative (RGGI), have also incentivized the switch to a cleaner fuel. And state renewable portfolio standards and various tax credits have led to rapid growth in renewable energy generation and falling costs.

So what are the results? Fairly encouraging. In 2016, U.S. emissions were at their lowest levels since 1994. Natural gas sourced electricity now accounts for 35 percent of US electricity generation, up from 20 percent a decade ago, while coal fired power accounts for 28 percent of US electricity, down from 50 percent, according to the Energy Information Administration and NCA report. Wind and solar generation has risen to 7.6 percent of total generation in the US, from less than 1 percent. (Other renewables boost that total share to 17 percent.) An interesting side note is that while this was occurring, real electricity prices stayed nearly the same.

REC trading in Renewable Portfolio Standard markets, hosted by 29 states, and Washington DC, is fairly active across the country. The New Jersey Solar REC program, for example, has seen a dramatic increase in its renewable energy production, from just 306 Gigawatt hours in 2011 to 1,591 GH in 2018 and a goal of 5,316 GH in 2027, with SREC prices currently ranging from $105 to $227 per megawatt hour. Meanwhile, the cost of new solar have plummeted 85 percent since 2009 and wind prices have plunged 66 percent. Wind and solar are now cheaper or on par with fossil fuels, according to Lazard’s Levelized Cost of Energy and Levelized Cost of Storage 2018 report. Nationwide, wind and solar accounted for 55 percent of new generation capacity additions in 2017.

From a carbon emissions perspective, California reached its 2020 greenhouse gas emissions reduction target four years ahead of schedule. It’s 2016 emissions dropped to 429 MMt CO2e, thus surpassing the 2020 target of 431 MMt CO2e, which was the statewide greenhouse gas emissions level in 1990.

Can these markets coalesce into larger regional markets? Perhaps. The RGGI CO2 allowance market launched in 2009, is expanding back to its original number of 10 states, with New Jersey set to rejoin. Virginia is also looking to connect to RGGI in some capacity. The regional market also set a more stringent reduction target for its power plants of 30 percent by 2030. Meanwhile, California also extended its carbon cap-and-trade program to 2030 with a goal to lower emissions to 40 percent under the 1990 level by 2030. California also is part of the Western Climate Initiative, which includes Canadian provinces Quebec. Ontario pulled out of WCI but Washington and Oregon have shown interest in joining, and potentially could include Mexico, which is launching its own carbon market.

This is the backdrop for resurgent carbon and REC markets in the US and why IncubEx teamed up with the Nodal Exchange to launch carbon and REC futures contracts on November 16. The potential for these markets is substantial as more states consider joining existing carbon markets or establishing their own renewable energy programs.

Can the US address the dire challenges detailed in the National Climate Assessment report? Absolutely, and market-based approaches in carbon and renewables are already part of the solution.