The following commentary was published in February in The Rainey Center for Public Policy.
The past year was a mixed one for climate change policy. While global leaders at the UN climate summit (COP26) in Scotland renewed pledges to reduce their national carbon emissions, Congress fumbled in its attempts to advance sweeping energy transition legislation that largely depended on government funding to accelerate renewable energy deployment.
As Congress ponders its next moves on climate change, lawmakers would do well to recall the inherent advantages of America’s free-market system in delivering policy outcomes with broad appeal, which are inclusive, transparent, and efficient.
A pro-market approach to climate change stands a good chance of attracting bipartisan support at a time when partisan bickering makes progress on any policy priority a rarity.
Most voters intuitively understand the “economic logic” that markets promote innovation and new technology adoption because businesses must innovate to maintain an edge over competitors. The same holds true in the electricity sector, where over a decade of data – comparing states where there are monopolies, versus states with competitive marketplaces – shows that customers of all sizes win when they can choose from among multiple service providers.
Several studies published in recent months highlight the benefits of competition in reducing carbon emissions, spurring innovation, and increasing the installation of renewable energy resources – all stated goals of both Democrats and Republicans in Congress.
A study for the Energy Choice Coalition found states with competition saw carbon emission reductions that were one-third greater than reductions in vertically integrated states. The analysis by Dr. Joshua Rhodes of the University of Texas at Austin and three co-authors supports the findings of several other studies released in 2021.
The report, which compared environmental outcomes in the seven areas of the United States with competitive wholesale power markets and independent system operators (ISOs) with the emission reduction trajectories of areas with monopoly utilities, found regions with competition reduced power-sector emissions by about 35 percent from 2005 levels, while monopoly-area emissions shrunk by 27 percent over the same period.
Areas with particularly high levels of competitively-owned electric generation typically had the deepest emissions reductions. ISO New England, for instance, reduced carbon emission by 61 percent.
Competitive regions also had more robust growth in distributed solar than other regions. Since 2014, the increase in deployment of distributed solar photovoltaics in ISO regions was 214 percent compared with 199 percent for those without ISOs. Wholesale markets with ISOs were also responsible for nearly 80 percent of all utility-scale renewable generation capacity growth over the past decade, despite accounting for just two-thirds of existing power plant capacity.
Other recent studies have found that customers in competitive regions fared better than those in monopoly states when it comes to rising electricity costs.
In the thirteen states plus the District of Columbia that allow residential customers to choose their electricity supplier based on their preferences for cleaner energy, consumers saw prices decline 0.3 percent between 2008 and 2020 compared to a 20.7 percent price increase for consumers in states without retail choice, according to a study by the Pacific Research Institute.
A separate analysis by the University of Texas Austin for the Conservative Energy Network created a scorecard ranking all 50 states based on the competitiveness of their electricity markets. It should not come as a surprise that states that encourage competition at the wholesale and retail levels ranked the highest while monopoly states tended to score lower overall.
Compared to monopoly states, states with competitive electricity markets saw cheaper energy prices, more energy infrastructure investment to improve efficiency and reliability, and greater emission reductions.
While the correlation between competition and environmental benefits has not always been evident due to a scarcity of comparative data, these recent reports add to the case that free enterprise and a level playing field are effective policies to advance clean energy objectives without impeding economic growth.
Competition is about price, selection, and service. Increasing competition in electricity markets benefits consumers at all levels by keeping costs low and the quality and choice of goods and services high. Ultimately, competitive markets are flexible enough to account for pollution and other environmental externalities.
As policymakers look for ways to combat climate change that are viable and equitable, a pro-market approach stands a good chance of attracting bipartisan support at a time when hyper-partisanship makes progress on any policy priority highly difficult at best and unlikely at worst.