In December, RFF collaborated with researchers in California and Germany to hold the fourth in a series of workshops addressing New Research Questions on Electricity, Transportation, and Carbon Markets. The workshop, held in Davis, CA, continued a thread of ideas examining the successful integration of renewable energy into California’s and Germany’s energy systems and what it means for electricity markets, carbon markets, and next steps in decarbonization.
California and Germany stand out as frontrunners in implementing policies aimed to mitigate climate change. RFF has been engaged in a three-year project with researchers in Germany and California to identify lessons that can guide further success in these jurisdictions and others. After initial successes in launching decarbonization of their power sectors, California and Germany are now striving toward considerably more ambitious decarbonization goals that require a substantial ratcheting up of policy stringency and deeper engagement of other sectors. Electrification of the transportation and building sectors is widely thought to be a cornerstone of that ambition.
There is little guidance from history about which policy pathways could achieve an intentional large-scale transition involving coordination across sectors. Theory identifies a central role for carbon pricing, but various political and economic barriers slow the increase of its stringency. Indeed, companion policies (for example, incentives for the introduction of renewable energy, fuel efficient cars, and electric vehicles) are responsible for most of the emissions reductions and technology innovation thus far. Even if one advocates for a growing role for carbon pricing, history will not wait, and companion policies will likely continue to play an important role. Economists, however, often express concern that companion policies can undermine the efficiency of carbon pricing. Hence, we are challenged to address how different climate change mitigation policies interact with each other and with other market institutions and to imagine a pathway toward improved efficiency and effectiveness.
The first workshop (Berlin, 2016) posed the fundamental question of whether policies were working, whether we needed more of the same, or whether we needed to do something different. At the time, some participants perceived that carbon pricing might not be working due to consistent low prices in carbon markets. Advocates of carbon pricing suggested that low prices were eroding the incentive for innovation. Whether or not this is really the outcome in the long run, the so-called “waterbed effect” image supports the notion that an emissions cap undermines the ability of individuals, firms, and organizations to take action on climate by enabling emissions increases in other locations.
The second workshop (Berkeley Law School, California, 2017) produced a different perspective: the conversations suggested that companion policies to carbon pricing plug holes not adequately reached by modest carbon pricing (such as the need for technological innovation). Important differences between California and Germany came into view, but both jurisdictions have substantial companion policies that deliver co-benefits such as improvements in air quality. These policies may be thought of as part of a policy sequence, building coalitions that over time support the development of climate policy.
In July 2018, the AHEAD project convened a workshop at the Center for European Policy Studies in Brussels to investigate the role of a minimum price in emissions trading programs. This policy design is a building block of the California and other North American markets, and it could be implemented in the EU. Early in 2018 the EU Emissions Trading Program adopted other program reforms that boosted its carbon price—at least for the time being. The Brussels workshop investigated whether a minimum price was still necessary, and, if so, how it could be implemented.
The fourth workshop, held at the Institute for Transportation Studies in Davis, looked at lessons from the integration of renewables in electricity markets, the expansion of electricity in transportation, and the interaction of policies promoting these outcomes with the carbon market. This meeting was described as a “pathfinder workshop” to identify research questions and strategies to improve the effectiveness of climate policy in a cost effective way, considering the practical constraints of political feasibility and economic sustainability.
California and Germany retain the roles of leading jurisdictions, although each faces its own challenges. Even as emissions overall have been falling, individual sectors have significant room for improvement. In California, emissions from the transportation sector have been increasing. In Germany, the resilience of coal in the electricity sector has offset emissions reductions due to the integration of renewables. Each jurisdiction faces a new set of questions. This research presents a lesson that applies to the climate policy challenge in general: solutions can be found only through cooperation and collaboration across jurisdictions. The experience in these leading jurisdictions can provide guidance for the efforts of others.