Good for You, Bad for Us: The Financial Disincentive for Net Demand Reduction

By Vandenbergh, Michael P.; Rossi, Jim | Vanderbilt Law Review, November 2012 | Go to article overview

Good for You, Bad for Us: The Financial Disincentive for Net Demand Reduction


Vandenbergh, Michael P., Rossi, Jim, Vanderbilt Law Review


Introduction.................... 1528

II. Utility Incentives ....................1535

A. The Carbon Reduction Benefits of NDR.................... 1535

B. Existing Demand-Related Policy Instruments and NDR.................... 1538

C. Distribution Utilities as NDR Gatekeepers.................... 1544

D. Regulatory Incentives for Efficiency and Conservation ....................1545

E. NDR and Incentives for Alternative Supply Options ....................1549

III. Potential Solutions ....................1551

A. Carbon Pricing and Social Cost Approaches to Demand Reduction.................... 1553

B. Performance Standards for Demand Reduction.................... 1557

C. Revenue Decoupling and Shared Savings in Demand Reduction.................... 1558

IV. Conclusion.................... 1562

An unexpected drop in U.S. electricity consumption has utility companies worried that the trend isn't a byproduct of the economic downturn and could reflect a permanent shift in consumption that will require sweeping change in their industry.

- Rebecca Smith, Wall Street Journal1

Good for you, bad for us.

-Electric Utility Official2

Introduction

Energy policy debates often focus on increasing the supply of renewable energy, but energy demand merits equal attention. Lowcarbon energy sources will not be able to displace fossil fuels at the levels necessary to achieve climate goals if global demand continues to grow at projected rates.3 To meet the widely endorsed goal of 50% global carbon emissions reductions by 2050, including 80% reductions from developed countries, global emissions from fossil fuel use will need to decline by more than seven billion tons from projected levels by 2050. 4 Major new sources of low-carbon energy will become available, but it is unrealistic to assume that new low-carbon sources will expand quickly enough to displace existing fossil fuel sources if global demand doubles as projected.5 In fact, although the percentage of global electricity generation from fossil fuels has decreased in recent years, the total amount of fossil fuels consumed has increased.6 The same analysis holds true for energy supply and demand in the United States: the supply of low-carbon energy is projected to grow, but without a substantial reduction from projected levels of demand, it is difficult to imagine how low-carbon sources can supply enough energy to enable the United States to achieve its share of global carbon emissions reductions.7

Recognition of the need to reduce energy demand has spawned a vast literature on energy policy measures that will increase efficiency and conservation at the industrial, commercial, and household levels.8 Although the precise magnitude of the opportunity is the subject of debate, the literature has identified large, low-cost opportunities to reduce energy use and carbon emissions from these sectors.9 For example, recent research in the social and behavioral sciences suggests that the use of information and other nonintrusive interventions could achieve a '^behavioral wedge" of carbon emissions reductions at the household level.10 Behavioral wedge strategies reduce carbon emissions by reducing household energy demand through improved efficiency (e.g., purchase of less energy-intensive appliances) and conservation (e.g., reduced use of existing appliances).11 Any one strategy could have a small effect on its own, but aggregate behavioral efforts have the potential to produce reasonably achievable reductions in total U.S. emissions of 7% by 2020. This amount exceeds the total emissions of many major industrial sectors and is larger than all of the emissions from France.12

Notable reductions in the growth of household energy use have occurred in recent years,13 but the United States is not on track to achieve a behavioral wedge.14 Although many scholars have emphasized demand reduction as an important area for new legal and policy tools,15 few have focused on the institutional barriers to its achievement. …

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Good for You, Bad for Us: The Financial Disincentive for Net Demand Reduction
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