Subsidies for wind power and other renewable energy systems have been a politically popular program over the past decade, leading to explosive growth in wind power installations across the United States, especially in the Midwest and Texas. But new research shows they might not work as well as one might think.
The “social costs” of carbon dioxide would have to be greater than $42 per ton in order for the environmental benefits of wind power to outweigh the costs of subsidies, says Joseph Cullen, assistant professor economics at Washington University in St. Louis.
The social cost of carbon is the marginal cost to society of emitting one extra ton of carbon (as carbon dioxide) at any point in time.
The current social cost of carbon estimates, released by the Environmental Protection Agency in November and projected for 2015, range from $12 to $116 per ton of additional carbon dioxide emissions.
The prior version, from 2010, had a range between $7 and $81 per ton of carbon dioxide. The estimates are expected to rise in the coming decades.
“Given the lack of a national climate legislation, renewable energy subsidies are likely to be continued to be used as one of the major policy instruments for mitigating carbon dioxide emissions in the near future,” Cullen says. “As such, it’s imperative that we gain a better understanding of the impact of subsidization on emissions.”
Since electricity produced by wind is emission free, the development of wind-power may reduce aggregate pollution by offsetting production from fossil fuel generated electricity production. When low marginal cost wind-generated electricity enters the grid, higher marginal cost fossil fuel generators will reduce their output.
However, emission rates of fossil fuel generators vary greatly by generator (coal-fired, natural gas, nuclear, hydropower). Thus, the quantity of emissions offset by wind power will depend crucially on which generators reduce their output, Cullen says.
The quantity of pollutants offset by wind power depends crucially on which generators reduce production when wind power comes online.
Cullen’s paper, published in American Economic Journal: Economic Policy, introduces an approach to empirically measure the environmental contribution of wind power resulting from these production offsets.
Wind power offsets
“By exploiting the quasi-experimental variation in wind power production driven by weather fluctuations, it is possible to identify generator specific production offsets due to wind power,” Cullen says.
Importantly, dynamics play a critical role in the estimation procedure, he finds.
“Failing to account for dynamics in generator operations leads to overly optimistic estimates of emission offsets. Although a static model would indicate that wind has a significant impact on the operation of coal generators, the results from a dynamic model show that wind power only crowds out electricity production fueled by natural gas.”
The model was used to estimate wind power offsets for generators on the Texas electricity grid. The results showed that one mega watt hour of wind power production offsets less than half a ton of carbon dioxide, almost one pound of nitrogen oxide, and no discernible amount of sulfur dioxide.
“As a benchmark for the economic benefits of renewable subsidies, I compared the value of offset emissions to the cost of subsidizing wind farms for a range of possible emission values” Cullen says.
“I found that the value of subsidizing wind power is driven primarily by carbon dioxide offsets, but that the social costs of carbon dioxide would have to be greater than $42 per ton in order for the environmental benefits of wind power to have outweighed the costs of subsidies.”