Credibility, ambition, and discretion in long-term U.S. energy policy targets from 1973 to 2011

30 Pages·2013·0.34 MB·English

Robert M.
La Follette School of Public Affairs
at the University of Wisconsin-Madison
Working Paper Series
La Follette School Working Paper No. 2013-007
http://www.lafollette.wisc.edu/publications/workingpapers
Credibility, ambition, and discretion
in long-term U.S. energy policy targets from 1973 to 2011
Gregory F. Nemet
Assistant Professor, La Follette School of Public Affairs at the University of Wisconsin-Madison

[email protected]
Peter Braden
La Follette School of Public Affairs at the University of Wisconsin-Madison
Edward Cubero
La Follette School of Public Affairs at the University of Wisconsin-Madison
Bickey Rimal
La Follette School of Public Affairs at the University of Wisconsin-Madison

May 2013

1225 Observatory Drive, Madison, Wisconsin 53706
608-262-3581 / www.lafollette.wisc.edu
The La Follette School takes no stand on policy issues; opinions expressed
in this paper reflect the views of individual researchers and authors.
Credibility, ambition, and discretion in long-term
U.S. energy policy targets from 1973 to 2011
Gregory F. Nemet, Peter Braden, Edward Cubero, and Bickey Rimal
La Follette School of Public Affairs
University of Wisconsin–Madison
[email protected]
May 8, 2013
Abstract
Alookatthepast40yearsofU.S.energypolicyprovidesampleevi-
denceofvolatility,includingrapidlychangingbudgets,movingtargets,
andshiftingincentives. Changingpolicytoooftenisaseriouscriticism
becausesystemicinertia—forexampleduetothelong-lifetimesofcap-
ital stock and to the atmospheric residence time of CO —implies a
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need for persistence in order to achieve social goals. Further, a pat-
tern of failing to meet objectives may reduce the credibility of future
targets, and thus reduce the incentives for investment and behavioral
change. But changing policy has benefits as well: it allows for adap-
tive management, experimentation, policy learning, and assimilation
of new information. This paper reviews the effectiveness, duration,
andambitionof63energypolicyinitiativeswithtargets≥5years. We
find: targets were met 64–77% of the time; median duration to tar-
get was 12 years; and median rate of change was 2%/year. Significant
predictorsofsuccessinmeetingtargetsareenforcement,duration,and
ambition. Thesedeterminantsarerobustacrossmultiplespecifications
and definitions of ambition and success. We find a significant decline
inambitionovertime. Bindingtargetsaremuchmorelikelytobemet
than non-binding ones, but discretionary clauses completely offset the
effect of enforceable penalties on the likelihood of target attainment.
keywords: energy policy, credibility, targets, ambition, discretion.
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1 Introduction
The characteristics of both the energy system and the problems associated
with it imply that energy policy making should take a long term perspec-
tive. Consider for example, the 50–80 year lifetime of capital stock in the
energy system or the nearly century-long residence time of CO in the at-
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mosphere. As a consequence of these time scales, energy system modelers
often employ longer time horizons, speaking in terms of 2050 as an ‘interme-
diate’ period, often using 2100 as an endpoint, and even conducting serious
analyses of outcomes in 2200. Policy making typically operates with much
shorter time scales, reflecting election frequency, business cycles, and shifts
insocialpriorities. Despitetheperpetualpresenceofneartermimperatives,
policy makers have made several attempts to design energy policy that is
not short-term focused, but rather, more commensurate with decadal time
scales inherent to energy problems. This study assesses two questions: To
what extent have we been successful in meeting the longer-term targets we
have set? What characteristics of policy initiatives are associated targets
that have been met? More broadly this study seeks to provide a basis for
subsequent work and provide an initial basis on which to address the ques-
tion does the frequency of goal attainment effect the credibility of subsequent
proposals?
We looked at the ex ante expectations, performance to goal, and reper-
cussions of 63 energy targets involving targets of 5 years or greater. In this
paper, we first discuss in section 2 the tradeoffs between setting long term
targetsandmaintainingdiscretionamongpolicyleaders. Insection3wedis-
cuss our selection of policies and approach to evaluating them.1 Section 4
1FurtherdetailsabouttheapproachanddatausedareincludedinaSupportingInfor-
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presents the results of our efforts to identify predictors of successfully meet-
ing targets. Finally, in section 5 we discuss implications of the past 40 years
oflongtermcommitments, andparticularlytheircurrentrelevance–bothfor
policy design and resulting incentives.
2 Flexibility and long-term commitments
For several reasons, governments are intimately involved in decisions re-
lated to energy production. Foremost, multiple externalities—air pollution,
climate change, security concerns associated with the maintenance of reli-
ableenergysupplies,andmacro-economicdisruptionassociatedwithsudden
changes in prices—provide justification for a government role in influencing
private decisions on energy. Knowledge externalities require government
support for energy technology development. Indeed the recognition of per-
vasive social externalities from energy during the 1960s and early-1970s was
a primary motivation for the development of a new institution, the Fed-
eral Energy Administration in 1974, which later became part of the broader
Department of Energy (Regens and Rycroft, 1981). Further, energy con-
sumption directly accounts for roughly 10% of GDP and is an intermediate
input for the production of almost every good and service in the economy.
The transition to an energy system that can improve access to energy ser-
vices while reducing the social costs of its externalities—even if primarily
implemented by the private sector—requires government action to provide
adequate incentives .
mation (SI) document: https://mywebspace.wisc.edu/nemet/web/si_targets.html.
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2.1 Implications of long lifetimes in the energy system
The characteristics of the energy system, and its associated impacts, imply
that at least some government actions need to assume a long-term perspec-
tive. First, the long life-time of capital stock in the energy sector leads to
lengthy technology substitution times, on the order of decades (Grubler,
1991; Knapp, 1999; Comin and Hobijn, 2010). Power plants, pipelines,
transmissions systems, buildings, and roads are built to last for 50–80 years.
Second, due to pervasive economies of scale in the energy system (Wilson,
2012), such investments often involve billions of dollars and are essentially
binarydecisions, ratherthancontinuouschoicesthatcanbetunedtochang-
ing conditions. Third, some energy problems have inherent lags. For exam-
ple, the residence time of greenhouse gases in the atmosphere is on same
multi-decadal time scale as infrastructure transitions. CO emitted today
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will continue to reradiate heat for close to a century regardless of subse-
quent efforts at mitigation. As a result, transitions in the energy system
often involve large investments that can take decades to payoff. Decisions
about, whether to build a new power plant, what type of plant to build,
whether to invest in pollution controls, or new transmission capacity reflect
expectations about conditions many years in the future.
2.2 Credibility of commitments
Because of the central role of government in providing incentives, payoffs to
many investments depend on the states of policies several years, to decades,
in the future (Nemet, 2009; Gallagher et al., 2012). Historically, energy
policies have been notoriously volatile (Nemet, 2010b). If investors view
historical policy volatility as an indicator of future policies, they will be
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skeptical of the longevity of energy policies that involve long-term, and even
medium-term, targets(Helmetal.,2003). Forincentivestobeeffectivethey
need to convey reasonably certain expectations of persistence.
Previous work on energy shows that investment and social outcomes are
highly sensitive to perceptions of the credibility of future policy commit-
ments. For example, Teisberg (1993) concludes that regulatory uncertainty
leadsutilitiestodelaytheirinvestmentsandchoosesmallerandshorter-lead
time plants. Bosetti and Victor (2011) find that lack of regulatory credibil-
ity results in the most significant increase in costs when compared to the
ideally regulated baseline. Kettunen et al. (2011) find that carbon policy
uncertainty may lead to a more concentrated and less competitive market
structure because larger firms are less risk averse and can borrow money at
more favorable terms than new entrants. Delmas and Heiman (2001) assert
that the relative failure of the American nuclear industry when compared
to the French experience is primarily due to the lack of institutional com-
mitment in the U.S. Other work has found similar results for independent
power producers in the U.S. (Ishii and Yan, 2004), hydropower investment
in Quebec (Saphores et al., 2004), and low-carbon electricity in Australia
(Reedman et al., 2006). A particularly rich, and relevant, area of work
involves the assessment of incentives on investment in carbon capture and
sequestrationundercarbonpriceuncertainty(Blythetal.,2007;Reineltand
Keith, 2007; von Stechow et al., 2011). Policy discretion plays a particular
role; looking at investment in renewables in the Ontario and Texas, Holburn
(2012) finds that less flexible policy making processes, with agencies that
are relatively independent of elected politicians, are associated with reduced
regulatory risk.
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2.3 The case for flexibility
Despite the apparent need for long term commitments, there are several
benefits to incorporating flexibility within a broader commitment. First,
flexibility allows for policy experimentation. One can intentionally imple-
ment various instruments for shorter periods and iteratively adjust policy
design to seek better outcomes. Second, flexibility can allow one to recover
from mistakes or policy failures (Aldy et al., 2003). A recent example is
the first period of the european union’s CO emissions trading system (EU
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ETS) (Neuhoff, 2011). Third, it that allows decision makers to make use
of new information and pursue adaptive management (McLain and Lee,
1996). Fourth, flexible policies can take into account changes in social pri-
orities, precipitated for example by price shocks, recessions, armed conflicts,
financial crises, and natural disasters. Finally, policy discretion may allay
concerns in controversial legislation.
2.4 Navigating a tradeoff
Otherareashaveaddressedthistradeoffbetweenthebenefitsofcommitment
and those of flexibility, most notably in monetary policy (Lohmann, 1992),
the finance industry (Nosal and Ordonez, 2013), and even in the early years
of the U.S., when lack of credibility in the new dollar contributed to its
collapse (Grubb, 2011). An important attribute of this time-inconsistency
problem is that participants’ expectations are dynamic; they adjust their
expectations if they know that policymakers have discretion (Kydland and
Prescott, 1977). Assuming dynamic expectations favors commitments with
limited flexibility. However, in some cases, flexibility in the form of policy-
makers’ discretion can enhance credibility by making the policy making
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process more robust to major changes (Cowen et al., 2000). Carlson and
Fri (2013) have recently brought attention to this tradeoff in energy policy
design with a call for policy that is both “durable” and “adaptable.” Our
study aims to make an initial empirical contribution to this aspect of energy
policy design.
3 Approach
This study uses data on previous energy policy targets to address two re-
search questions:
1. Have long-term energy policy targets achieved their goals?
2. What characteristics of these targets affect goal attainment?
3.1 Selection of targets and evaluation strategy
We include in our sample federal and state policy targets in the U.S. an-
nounced between 1970 and 2011, that addressed energy issues, and that
involve a commitment to a specific quantity at least 5 years after the an-
nouncement of the target. This definition excludes local, non-quantified,
and nearer-term goals, as well as policies outside the U.S. For comparison
we do include some high-profile non-U.S. targets, but do not attempt to
be comprehensive in this larger domain. Our selection criteria exclude some
targetsthatdonotfitourcomparativeframeworkeasily, butprobablymerit
separate investigation, e.g. the creation of the strategic petroleum reserve
(Blumstein and Komor, 1996), the adoption of a 2 degree climate target
(Randalls, 2010) outside the U.S., and targets subsumed under broader tar-
gets that we do include, such as cellulosic contribution to the EISA biofuels
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Table 1: Targets by geography and policy initiative
Federal (12) Project Independence
Corporate Average Fuel Economy (CAFE) and
New CAFE
Synfuel I and II
Carter Speech
U.S. Clean Air Act Amendments SO2 I and II
Regional Clean Air Initiatives Market
Energy Policy Act of 2005
Energy Independence and Security Act
Obama Energy Security
State (21) Renewable Portfolio Standards
State (24) Energy Efficiency Resource Standards
Non-U.S. (6) Japan New Sunshine
German Renewable Energy Sources Act I and II
EU ETS Phase I, II, and III
targets. We arrived at a list of 63 such targets (Table 1), for which we
provide summaries and references in the SI.
We construct variables to measure characteristics for each of the 63 tar-
gets. We use descriptive analysis of the data for these variables to answer
research question 1. To address research question 2, we specify models to
identifytheeffectsofvariouscharacteristicsonthelikelihoodoftargetbeing
attained. Finally, we conduct a second set of regression in which we identify
the predictors of a target’s ambition, one of the primary variables.
3.2 Characteristics of each target
We code each target for several characteristics, which our literature review
suggestmighthaveaneffectonwhetheratargetwasmet. Weusethesechar-
acteristics to construct variables, which are consistent across all 63 targets.
Where variable construction requires weights or subjective interpretation,
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we define them in multiple ways and then use all possibly construction to
check the robustness of our regression results. Table 2 summarizes the vari-
ables used and the SI provides complete descriptions of how each target was
coded and how each variable was constructed.
Table 2: Variable Definitions
Variable Definition
Met v1 1 = target met, in compliance all years, or met in last
year, 0 = target not met or not in compliance any
year,
Met v2 1 = target met or in compliance all years, 0 = target
not met or not in compliance any year
Binding Does the policy have a binding commitment?
Discretionary Does the policy have a non-binding commitment?
Start Year The year the policy is announced
Duration Years from the start year to the target year
RPS Is the policy a state Renewable Portfolio Standard?
Revised Has the target has been revised since the policy went
into effect?
Ambition v1 Sum of the following (weights in parenthesis): acceler-
ate a trend (1=yes, 0=no), reverse a trend (1=yes,
0=no), novel type (1=yes, 0=no), % Change >
Median-all (1=yes, 0=no), % Change > Median-all
(1=yes, 0=no)
Ambition v2 Sum of the following (weights in parenthesis): ac-
celerate a trend (1=yes, 0=no), reverse a trend
(2=yes,0=no),noveltype(0.5=yes,0=no),%Change
> Median-category (1=yes, 0=no), % Change >
Median-category (2=yes, 0=no)
Ambition v3 Sum of the following (weights in parenthesis): ac-
celerate a trend (1=yes, 0=no), reverse a trend
(1=yes, 0=no), novel type (1=yes, 0=no), % Change
> Median-category (1=yes, 0=no), % Change >
Median-category (1=yes, 0=no)
Ambition Rate Average percentage change required by target.
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