Find a Market Solution to Problem of Climate Change

Posted June 12, 2009 at 11:03am

Our nation is engaged in a great policy debate regarding emissions of greenhouse gases that contribute to climate change. Changing how electricity is produced and consumed is key to successfully addressing this enormous challenge because electricity production represents 40 percent of U.S. greenhouse gas emissions. Keeping it reliable and affordable is essential to our economy and future economic growth.[IMGCAP(1)]While the myriad details of a national climate change program are being worked out in Congress, policymakers, overall, have rightly concluded that a market-based approach offers the most effective and economically efficient means of reducing greenhouse gas emissions. By relying on market forces, we will cost-effectively reduce greenhouse gas emissions by creating rational economic incentives for clean energy, greater efficiency and innovative products for both electricity generators and consumers.These same market forces will help meet the economic stimulus goals of climate change legislation, promoting the development of untapped wind and solar energy resources, and the manufacturing and service jobs that support that development.As negotiations over the finer details of a national climate change program continue, Congress should bear in mind that the best way to meet emissions reductions goals in the electricity sector will be through markets that promote innovation in electricity production and consumption. This core tenet, that clear and transparent price signals will drive efficient behavior and reward innovation, is already at work and providing benefits in electricity markets in many parts of the country.This fact is acknowledged in a recent joint statement of the Environmental Defense Fund and the Compete Coalition urging Congress to recognize the role of competitive electricity markets in achieving climate change policy goals. The EDF has long advocated market-based solutions to environmental problems and supports electricity competition because they understand that markets will help provide consumers and investors with clear, transparent information about prices, allowing them to make the smartest decisions on electricity consumption and production.One of the keys to the successful implementation of a market-based cap on carbon emissions, and ultimately reducing costs for consumers, will be ensuring that investments are made in the right places and in cleaner, more efficient and innovative technologies. Competitive electricity markets are already fostering investment in renewable energy and innovative services.For example, the American Wind Energy Association believes competitive electricity markets are conducive to wind energy development. According to the AWEA, more than 80 percent of the wind energy capacity installed in 2008 was in organized electricity markets. And, overall, regional competitive electricity markets host nearly three-quarters of all installed wind energy capacity nationwide — despite the fact that only 44 percent of wind energy potential is found in these areas.In addition to renewable and low-carbon electricity production, a national climate change policy must encourage greater efficiencies in the consumption of electricity. Innovative demand-response programs, which empower customers to benefit as participants in the market, are thriving in the organized competitive electricity markets thanks to clear and transparent price signals. And by combining our nation’s $4 billion investment in smart meters and smart grid technology with the transparent real-time price signals in competitive markets, these demand-response benefits will be available to a broader range of electricity consumers. By making it clear how much electricity actually costs, consumers have the incentive to take control of their bills by changing how and when they choose to use electricity.There is no silver bullet solution to climate change, but competitive markets have proven to be the most cost efficient and effective means to deliver goods and services to consumers. By allowing these markets to continue to develop in the electricity sector, we will bring the same benefits to help achieve the policy goals of a market-based federal climate change program.Federico Peña is a former secretary of Energy, former secretary of Transportation and former mayor of Denver. He is co-chairman of the Compete Coalition, a group representing electricity customers, suppliers, generators, transmission owners, trade associations and economic development corporations.