Before we can really move forward and explore energy policy in depth, we need to take a look at the types of policy out there that can be employed to achieve energy goals. As you read through this part of the lesson, be thinking about how different policy instruments are either more or less appropriate for different energy-related issues.
First, let's look broadly at the difference between legislation and regulation:
Legislation is a law that has been enacted by some type of governing body (Congress, the President, or some other governing body); before it was passed into law, it was likely referred to as a bill.
Example of Legislation: American Recovery and Reinvestment Act of 2009
Think of regulations as the way legislation is actually enacted on the ground. This can take on many forms, as you'll see below. Regulations are the details of implementation for achieving the desired effects of legislation.
Examples of Regulation: Click on the arrows below to see the various provisions in the American Recovery and Reinvestment Act of 2009 related to energy.
Policy Mechanisms and Examples
- increases energy efficiency in homes
- extends the production tax credit on alternatively produced electricity for three more years
- expands the investment tax credit beyond just wind and solar to geothermal, hydropower, biomass, and other technology project developers (or project developers can elect to take a grant award instead)
- increases tax credit for alternative fuel pump installation at gas stations
- increases tax credit for plug in electric drive vehicles
- $16.8 billion for renewable energy and energy efficiency programs over 10 years
- $11 billion to modernize national electricity grid
- $2.5 billion for renewable energy and energy efficiency research and development, demonstration, and deployment
- $300 million for Dept of Defense to research, test, and evaluate projects related to energy generation, transmission, and efficiency
- $100 million to Navy and Marine Corps facilities to fund energy efficiency and alternative energy projects
- increases federal matching grants for Smart Grid Investment Program from 20% to 50%
- $2 billion for manufacturing advanced batteries and related components
- Renewable Energy Loan Guarantee Program - $6 billion for renewable energy power generation and transmission projects (beginning construction before 9/30/2011)
What are some of the types of regulations we might see enacted in energy legislation?
- Taxation - involves levying a charge on a unit of good or service. In this case, we are examining an energy tax, which could either be charged at the point of production or consumption. In the case of a tax on energy production, oil refiners, power plants, natural gas distributors, etc., would all be charged a fee based on units produced. Taxing the production of energy is aimed at incentivizing producers to produce less of that product, or do so in environmentally friendlier ways. Taxing the consumption of energy targets the behavior of energy consumers, like you and me, and incentivizes us to be more conservative with our energy usage so that we don't incur those additional charges added on by the tax.
Let's look at taxation for the purpose of limiting carbon emissions. By taxing the carbon content of the fossil fuels we all consume, we're able to make alternative energy resources (wind, solar, biomass, etc.) more cost competitive. In addition to leveling the playing field for these newer technologies, taxing carbon also raises revenue which can then be funneled back into programs to reduce emissions further.
What doesn't taxation do? There's ongoing debate over which policy mechanism, a carbon tax or a tradable permits system, incentivizes innovation and deeper carbon emission reductions. Those in favor of a carbon tax contend that it is straightforward, transparent, and able to achieve desired reductions for a known cost. There's substantial literature supporting a carbon tax over a tradable permit system. If you'd like to know more, just ask me and I can point you to some reading material. In the meantime, here's one article from the University of Michigan Law School on the benefits of a carbon tax.
- Standards - are established to achieve a certain amount of environmental benefit, like the Renewable Portfolio Standards developed across the country by individual states to increase the percentages of electricity generated with renewable energy resources. Standards mandate that a particular activity be done - like in the case of a renewable electricity standard, that 20% of a state's electricity be generated from renewable sources by a given year.
Another type of standards related to energy policy would be the adoption of Best Available Control Technologies (BACT). This is commonly applied to new stationary sources of emissions and can include anything from emission control devices to emission limits or techniques. In other words, if a company would like to build a new power plant, they must obtain a New Source Review permit from the EPA and employ the BACT for emissions. Want to know more about BACT and the New Source Review process?
- Incentives and grants - some regulations address energy issues by offering incentives and grants rather than explicitly requiring action of any kind. These could include direct payments for a specific type of project or research, grant money to support research in part or in whole, tax credits for specific types of purchases or activity, or a price support / subsidy for a specified activity.
It is more difficult to predict an achieved level of success with this type of policy, because participation is voluntary. However, the voluntary nature of this policy instrument makes it a popular intermediate step between no regulation at all and some sort of mandatory compliance mandate like a tax or standard.
The examples from the American Recovery and Reinvestment Act in the list on this page illustrate incentives and grants very well. No one is required to comply with any specific standard for renewable energy in this act; however, it offers multiple financial incentives for adopting energy efficiency technologies, conducting research or on-the-ground demonstration renewable energy projects, and many other related activities.
- Guidelines - like incentives and grants, guidelines represent a voluntary opportunity to encourage citizens, businesses, or communities to adopt certain practices. Guidelines are there to facilitate the adoption of specific practices should someone want to undertake them; however, no one is required to follow them.
Guidelines tend to be a smaller scale policy instrument, though EPA and DOE's ENERGY STAR program is a great example of a larger scale, successful guideline related to energy policy. ENERGY STAR was started in 1992, a voluntary labeling program designed to help consumers identify energy efficient products (initially computer and monitors). Now, it has grown into a widespread network of partnerships with businesses and manufacturers. By their own estimates, ENERGY STAR saved consumers and businesses $17 billion in energy costs in 2009.
- Market-based approaches - Sometimes, policies lay the framework for the establishment of a market-based system to achieve policy goals.
One of the most notable forms of this is a system of tradable permits, also known as a cap and trade system. While cap and trade has gained much notoriety in recent years as a potential legislative option for handling carbon emissions in the United States, it was first implemented in this country as part of the 1990 Clean Air Act Amendments to address the acid rain problem. This program was incredibly successfully in reducing sulfur dioxide emissions (even more than expected) at only 20-30% of the anticipated costs. Read a summary of this cap and trade approach to addressing an environmental problem.
The European Union, under the Kyoto Protocol, adopted a similar trading scheme for carbon emissions. The program has been covering emissions since 2005. While it has not enjoyed the same successes in reductions and low costs that the US sulfur dioxide cap and trade program had, it served as a valuable learning experience as other countries around the world consider carbon trading as an option for reducing emissions.