Study: The real cost of Renewable Fuel Standards is... a lot

We’ve spent plenty of time here talking about the federal Renewable Fuel Standard, particularly as it pertains to ethanol blending. But what’s less often discussed is that fact that many states and cities have been implementing their own standards. The majority of these involve mandates that a certain percentage of their energy be supplied through green, renewable energy sources such as wind and solar while weaning themselves off hydrocarbons. What’s often left out of the debate about states adopting these sorts of energy portfolios are the questions of how effective they are and how much they wind up costing. Bloomberg looks at both of these questions this week and the numbers may surprise you.

To evaluate renewable-portfolio standards, it is essential to answer two critical questions. First, how much do they do to reduce greenhouse-gas emissions? Second, how much do they cost?

To some people, it is tempting not to worry much about the second question, on the assumption that any costs will be borne by some abstraction called “companies.” But that’s unrealistic. Costs are often passed on to consumers. High costs might also reduce employment.

Michael Greenstone and Ishan Nath of the University of Chicago have done the first careful study of the actual effects of renewable-portfolio standards, focused on the two critical questions. They study outcomes in the 29 states that have adopted the standards, comparing them with states that did not. Taking advantage of the different timing in the adoption of the standards, and with some technical analysis, Greenstone and Nath are able to control for confounding variables and to isolate the actual effects of renewable-portfolio standards.

The University of Chicago study appears to be nonpartisan and holds both good and bad news on both fronts. As to the effectiveness of these programs in reducing carbon emissions, they do seem to work, at least to some extent. Over the first seven years after the states in question adopted the standards, carbon emissions were indeed reduced by an estimated 659 million metric tons.

But at what cost? So-called green energy costs more and that showed up in consumers’ utility bills. Electricity costs in the 29 states under discussion increased by an average of 11% over the same period. The companies were not simply sucking up the losses, but rather passing them on to their customers. The total extra electricity bills across those states added up to about $125 billion.

The rest of the study deals with a variety of factors that delve into less easily measured factors, such as the “social cost” of carbon. But the upshot is fairly clear. Adopting renewable energy standards in this fashion is generally not cost-effective and the bill gets handed off to the consumer in the end. Also, what’s not addressed in the study is the additional stress put on the energy grid. If you issue a mandate saying that a certain percentage of your power comes from particular sources (which is technically impossible to achieve anyway because power from all sources is shared across the grid), you wind up putting less energy into the system sometimes. That means other suppliers have to pick up the slack during peak demand times. It’s messy and complicated.

If you want to move away from traditional fossil fuel energy, that’s up to you. But you also have to be ready to replace that energy with some other source or sources. If you also shut down nuclear, there’s another volume you’ll need to find to make up for it. And if you keep opting for the most expensive energy on the market, people are eventually going to push back.