Mary Claire Morris

In the development of energy and environmental policy, cooperation between research, industry and policy making is critical. This message was central to the work presented and discussed at the MIT Center for Energy and Environmental Policy Research (CEEPR) 2016 Spring Research Workshop. As always, the two-day event highlighted the complex dynamics and implications of energy and environmental policy at the forefront of today’s policy debates.

Workshop participants gathered in Cambridge, Massachusetts on May 12th and 13th to discuss a wide range of topics across the energy sector. Following opening remarks from CEEPR Director Christopher Knittel, the first session provided an outlook for fossil fuels. Dan Domeracki, Vice President of Government and Industry Relations for Schlumberger, an oilfield services company, discussed the balance that sound policy needs to strike between the interests and objectives of different stakeholders in the energy sector. With increasing environmental concerns, Domeracki explained, the fossil fuel industry must identify and mitigate the environmental risk of operations in order to effectively reduce social risk. Public opinion plays a crucial role in the industry’s ability to operate. But Domeracki also cautioned that policy occasionally misses the mark when attempting to address environmental concerns without compromising the affordability of energy supply. Policy informed by scientific research in consultation with industry is better able to adequately address both environmental and economic concerns.

Following on Domeracki’s presentation, Knittel drew attention to the growing support of climate action, which in turn points to a need to curb fossil fuel use. Although fossil fuels are finite, known reserves have continuously grown over the past decades due to the development of new production and extraction technologies, a trend that can be expected to continue into the future. Likewise, global demand for fossil fuels has not decreased as the fixed costs of cleaner alternatives remain high. To reduce fossil fuel consumption, therefore, serious policy action and a globally concerted effort will be necessary, Knittel concluded.

MIT’s John Reilly and Jessika Trancik followed on this theme with presentations on the achievement of decarbonization objectives through policy, reflecting on the Independent Nationally Determined Contributions (INDCs) and broad principles set at the Paris Climate Summit (COP21) in December 2015. Reilly, who serves as the Co-Director of the MIT Joint Program on the Science and Policy of Global Change, emphasized the need for engagement with and expansion of knowledge for the evaluation and financing of the Paris goals. He explained that the goals set at the summit have the potential to decrease atmospheric carbon dioxide levels, but that procedural, economic and diplomatic challenges remain. In order for emission reductions to occur, countries must be held accountable and global cooperation must continue beyond the conference.

Meanwhile, Trancik, an Assistant Professor of Energy Studies at the MIT Institute for Data Systems and Society, spoke on the need for innovation in mitigation and adaptation efforts to achieve climate objectives. She argued that, to reach the goals set out in the Paris Agreement, countries would need access to affordable renewable energy resources, something that would only come with innovation. Trancik further explained that local economic conditions and policies play a significant role in the renewable energy market, shaping the global distribution of energy. The levelized cost of a given energy resource varies across the world based on a country’s unique economy and resources. In order to drive down the cost of renewable energy resources, policy-supported market expansion and publicly funded research is vital.

Later in the day, MIT’s Richard Schmalensee and Michael Mehling discussed lessons learned with, as well as future prospects of, emissions trading. Schmalensee, a Professor at the MIT Sloan School of Management, gave a retrospective of emissions trading systems, focusing on a number of case studies to illustrate the different variables at play in the creation, implementation and impacts of these market-based policies. Schmalensee explained that although a cap-and-trade system is theoretically straight forward, nuances in a system’s design greatly impact its effectiveness. He argued that clear, informed rules improve cap-and-trade systems. Enforced restrictions on emissions must be continually informed by scientific research, and adjustments to system design – for instance through price collars – may be needed to promote price stability.

Mehling, Executive Director of CEEPR, spoke on the possibility of carbon market linkages following COP21. By allowing for voluntary cooperation between parties, the Paris Agreement established a framework for bottom-up cooperation between emissions trading systems and other policies that could lead to greater policy integration. But in order to effectively link domestic carbon markets, systems have to be compatible, limiting the possibility of market integration to jurisdictions with relatively homogeneous market designs. Alternative approaches to market linkage based on comparability rather than compatibility, operating through discounts or exchange rates, may help overcome system heterogeneity, but the research there has only begun.

Erin Mansur, professor at the Tuck School of Business of Dartmouth, and Stephen Zoepf, Executive Director of the Center for Automotive Research at Stanford University, brought the conversation back to innovation in the energy sector, presenting on transportation trends. Mansur’s presentation focused on the environmental impact of electric vehicles relative to vehicles with internal combustion engines. His model reveals that, on average, electric cars produce substantially more environmental externalities than conventional cars, with large geographic variation in regional results. This difference is largely due to the air pollution emitted from generating electricity to charge the vehicles in coal-fired power plants, Mansur explained. Pending a large-scale transition to cleaner electricity generation, driving electric vehicles may make local air cleaner, but deployment of electric vehicles will likely make society as a whole worse off.

Discussion resumed on Friday, May 13th, with presentations on energy and environmental policy in India delivered by Ujjayant Chakravorty, Professor of Economics at Tufts University, and Maureen Cropper, Professor of Economics at the University of Maryland. Chakravorty spoke on groundwater extraction for agricultural use in India, explaining that the region’s small farms are dependent on groundwater in order to maintain irrigation agriculture. A high demand for groundwater has created groundwater markets and led to excess entry into this market. As the regional aquifers begin to deplete, Chakravorty proposed a tax on the fixed cost of groundwater and a subsidy for the production cost of groundwater.

Cropper presented on the health harms associated with the rapid expansion of coal-fired electricity generation in India, and the resulting need for stronger environmental regulations of power sector emissions. Cropper investigated the effectiveness of retrofitting these power plants with flue gas desulfurization units (FGDs), or scrubbers, to help mitigate the health impacts of electricity production. To weigh related costs and benefits, Cropper calculated the cost of FGD installations in relation to potential lives saved. According to Cropper, the results indicated that the benefits of FGD installation clearly outweigh the costs.

Electricity market design featured in the last session, with presentations by Fernando de Sisternes, a CEEPR Research Affiliate and Energy Systems Engineer with the Argonne National Laboratory, and Steven Puller, a Professor at Texas A&M University. De Sisternes shared his work on capacity remuneration mechanisms as a possible solution to the challenges posed for energy development and investment by demand and policy uncertainty in low carbon energy systems. He explained that, in an electricity market, a variety of factors, including weather variability, policy changes, and economic fluctuations, cause demand instability. In turn, this creates uncertainty in demand distribution and growth, which leads to a reduction in the expected operating profits generated by scarcity rents. Without an expectation of constant demand growth, investors lack incentives to increase generation capacity. According to de Sisternes, capacity mechanisms can address the risk of inadequate generation capacity by expanding revenue sources to include both energy output and capacity, protecting investors against risk.

Puller presented on pricing challenges in retail electricity, explaining that – given the goal of emissions reductions – electricity consumption may not be easily curbed by simply increasing market competition or the price of a good. Conventional economic policy solutions do not always produce the expected consumer response. Counter to the norm, consumers in electricity markets do not respond significantly to increasing marginal costs or residential tariffs. According to Puller, thought must therefore be given to the price signals sent by bills and tariffs, which are difficult to control and communicate effectively, and which differ depending on the role of regulation in a given electricity market.

As the workshop concluded, participants were once again left with an appreciation for the evolving complexities in the energy sector and the need for balanced and objective research to craft sound, pragmatic policies.