The Welfare Costs of GHG Reduction with Renewable Energy Policies in the US

A range of policies have been implemented in the agricultural, transportation, and electric power sectors, which comprise the majority of GHG emissions in the US. Two prominent policy sets are the national RFS and state-level RPSs. The purpose of this research is to examine the GHG implications of the state RPSs and their welfare costs of mitigating GHG emissions. We also analyze the interactions between the RFS and state RPS policies and the extent to which these policies create competition or complementarity in their use of biomass for meeting the standards since the production of cellulosic biofuels also generating renewable electricity as a co-product that can substitute for fossil fuel based grid electricity and contribute to meeting the RPS. We compare the cost effectiveness of these policies implemented jointly to a carbon tax policy that achieves the same level of GHG emissions. We find that while a carbon tax increases social welfare, the RPS imposes a welfare cost on the economy. However, the implementation of the RFS does reduce the welfare costs of the RPSs by substituting co-product electricity for costly biomass electricity and providing a terms of trade benefit in the agricultural and fuel sectors. We find that the RPSs cause an increase in renewable energy based generation, which primarily offsets natural gas based generation rather than coal and increases total electricity consumption. The joint implementation of RFS and RPSs results in reduction in the use of co-firing and dedicated biomass. Coal based generation increases relative to the RPSs only scenario, while natural gas generation decreases relative to the RPSs only scenario. The implication of this is that the effects of jointly implementing the RFS and RPSs on GHG emissions are not additive.