4/5/2018 Why Carbon Taxes May Not Be the Best Solution for a Greener Planet - Knowledge@Wharton

PUBLIC POLICY

Why Carbon Taxes May Not Be the Best

Solution for a Greener Planet
Mar 30, 2018  North America  Podcasts, Research

In politics, like in business, positive actions often have unintended, negative side e ects.
New research from Serguei Netessine, a Wharton professor of operations, information and
decisions, reveals that very paradox in an economic policy long regarded as sensible and
sound. The practice of taxing traditional fossil fuels is designed to promote renewable
energies, such as wind and solar, which don’t pollute the environment with harmful carbon
emissions. But the so-called carbon tax may not be the best solution for a greener planet.
Netessine talked to Knowledge@Wharton about why creating industrial-scale ways to store
renewable energy is a better way to go. The research was co-authored with Sam A aki, a
professor at HEC Paris.

An edited transcript of the conversation follows.  

Knowledge@Wharton: Could you give us a brief overview of your paper?

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Serguei Netessine: The idea of the paper is really very simple. When you look at all kinds of
solutions or approaches that are o ered to increase the generation of electricity through
renewable energy sources — like solar, wind and so on — one of the solutions o ered is
taxing carbon.

Knowledge@Wharton: If you tax fossil fuels more, you’re likely to encourage more
renewables, correct?

Netessine: That’s what you would think and what the conventional wisdom says, but this is
not quite what we found in the paper. There is a subtle, subtle reason behind it. When you try
to rely extensively on renewable energy sources, the problem is that pretty much all
renewable energy sources are intermittent. That is to say, the sun doesn’t shine at night and
if you are to rely exclusively on solar energy, you will be in a lot of trouble because most of
the consumption of electricity happens just before the sun comes up or just after the sun
goes down.

What do you do? In this case, there is a grid operator who has to balance a grid. The grid
operator would love to use renewable energy because the marginal cost of it is zero. The sun
doesn’t really cost you anything. When you want to balance supply with demand, you have to
bring online some kind of an energy source that can be ramped up and ramped down very
quickly. Unfortunately, the only reasonable way to do it is to use heavily emitting energy
sources like gas- red turbines or coal. Gas turbines are very exible. You can ramp them up,
you can ramp them down. But pretty much for every megawatt hour that you would generate
using solar, you need a backup. Since you need this backup, you have to have it somewhere in
reserve, and sometimes you’ll bring it online and sometimes you power it down. When you
use it like that, it needs a lot of carbon. So, the more solar you’re going to use, the more
backup you’re going to use. If you’re going to tax carbon, you might actually end up having
more of those backup energy sources that are heavily emitting [greenhouse gases]. That’s
the gist of the paper.

Knowledge@Wharton: What are the alternatives to taxing carbon as a way to promote

renewables?

Netessine: There are a couple of things we can do. One thing you can do is deal with
intermittency. Of course, there’s not much you can do with the sun and the wind — you
cannot change that. But think about storage technologies. Currently, storage technologies
are nowhere at the industrial scale. There are lots of prototypes and ideas. Some people are
talking about, for example, pumping water up the hill and then letting it ow down when
you need electricity. Or you can push the train up the hill and then let it roll. But the most
realistic one we have right now is battery-based storage, and Tesla is trying to bring it to the

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industrial scale, although we are nowhere close yet. That’s the whole problem because if you
could store this electrical energy during the day and use it during the night, then in
combination with solar technology you would be ne.

Knowledge@Wharton: When you say less intermittent, what does that mean?

Netessine: Basically, I’m going to pay you more for electricity if you can give me stable
electricity…. Electricity generators don’t really worry about intermittency. They say, “When I
have electricity, I just give it to the grid and the operator pays me.” But if you incentivize
them to be less intermittent, they would start thinking about pooling di erent sources of
electricity together. Let’s say I have a hill and wind might be blowing on one side. If I don’t
have incentive, I just build turbines on one side…. But if I were incentivized to be less
intermittent, I would maybe build on both sides. Or maybe I would build solar and wind,
which are not that correlated, so I would be less intermittent. Currently, this is not
happening.

Knowledge@Wharton: There’s the idea of a household using its electric car or maybe some
other battery to store energy during the day and use it at night. Do those batteries have
enough capacity to do that?

Netessine: No, this is not industrial scale right now. More importantly, you have to ask a
question of producing batteries. It’s a very dirty process environmentally, so it’s not entirely
clear to me that this would be an environmentally friendly solution. The more immediate
solution would be this kind of a pooling of capacity and using di erent renewable energy
sources together to reduce this intermittency. I think that is a more short-term solution.

Knowledge@Wharton: You reduce the intermittency, but you’re still going to require some
kind of fossil fuel to help with those periods where you can’t quite cover what’s going on.

Netessine: Absolutely, and that’s the problem with balancing an electrical grid. You cannot
have a situation where demand exceeds supply, otherwise you end up in a blackout. The grid
operator has to work really hard, otherwise you have to start selectively shutting down the
people who consume a lot of electricity, and nobody wants that.

“There are many arguments against carbon

taxes, but I’ve never seen an argument that
carbon taxes are not going to work because of
intermittency.”

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Knowledge@Wharton: That’s why we have a worldwide grid because the sun’s always
shining someplace, right?

Netessine: That’s right. A grid operator basically borrows electricity from somewhere, but it
can be done in a smart way. For example, you have a three-hour di erence between the
eastern and western United States, so the high consumption period is a little staggered. You
could play with that. But you cannot completely get rid of gas- red turbines because they’re
just so exible, so nice.

Knowledge@Wharton: Did the conclusions surprise you because they were counterintuitive
in a way?

Netessine: Yes. We are not aware of any other work at the time, and this paper took some
time to write and publish. But I really have not seen any other articles pointing at this,
particularly about renewable energy sources as intermittent. There are many arguments
against carbon taxes, but I’ve never seen an argument that carbon taxes are not going to
work because of intermittency. I was speaking with three U.S. senators’ o ces about this
issue, and they mentioned that there was something somewhere in some paper, there was
some discussion recently of this intermittency problem, but I’ve yet to nd any other
references. So yeah, to us it was a bit surprising.

Knowledge@Wharton: Can you go into more detail about the practical implications of this
research?

Netessine: In the paper, we looked at several ways to stimulate investment into renewable
energy sources. One widely known one is feed-in tari s, which is to say that you tell the
generator of renewable energy that you’re going to pay a xed tari for electricity for the
next 20 years, for example. This is something that is extensively used in Europe. In the
paper, we show that this is not a bad approach. But it’s not going to work as well as dealing
with intermittency directly. From a practical standpoint, we argued that you have to
somehow provide incentive to electricity generators to reduce intermittency, probably by the
means of pooling di erent energy sources from di erent technologies that are not
correlated strongly with each other. That’s a short-term implication; you have to provide
those kinds of incentives.

The longer term is thinking about storage technologies. You can make money nowadays
using storage because sometimes a supply for electricity greatly exceeds demand, and for
brief moments of time there are negative prices for electricity. You can observe them in the
market. The operator of the grid is begging you take electricity and pays you take it, right?
That’s bizarre. That should not be happening in theory. If you have some kind of industrial-

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sized storage technology, you can actually make a lot of money during those time periods.
You can basically buy energy for almost nothing and then give it back when the price is
particularly high, when demand greatly exceeds the supply.

There are a few ideas for storage, but they’re all at the prototyping stage as far as I can tell. I
think a part of the reason is that there has never been a recognition that you need storage
with renewable energy sources. Imagine the situation where half of your energy needs are
renewable, which are intermittent and go in and out, then you have a huge demand for
storage. You would think companies would spend more money researching energy storage,
and I just don’t think enough money is spent on that. Tesla is developing energy storage in
batteries, but everything else is in the prototype stage as far as I know.

“From a practical standpoint, we argued that

you have to somehow provide incentive to
electricity generators to reduce intermittency.”

Knowledge@Wharton: It has to start somewhere.

Netessine: Yes, and the problem is the prices for batteries for storage keep falling. Once Tesla
starts production in its huge factory, it’s going to fall even further. Then once it gets some
experience, it’s going to fall even further. You could see how people are hesitant to invest
now when the cost of storage is high, which is normal with new technology. Somebody’s
going to lead the way, and it’s probably going to be Tesla.

Knowledge@Wharton: What else should we know about this paper?

Netessine: Another aspect that we studied in the paper is deregulation. Deregulation

happened in the U.S. market, and there are some bene ts of deregulation. But when it comes
to renewable energy sources, what we nd is that deregulation ampli es this problem with
intermittency. Even if everything was perfectly integrated and there was one government
running everything, you would still have this issue that you need backup generation to deal
with the renewables. But when industry is deregulated, the issue is ampli ed. There is going
to be more under-investment in renewable energy sources under competitions and under
vertical integration.

Knowledge@Wharton: Why does that happen?

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Netessine: It’s because of the way electricity is priced in the market. When demand greatly
exceeds supply, prices for electricity are high. Imagine there is a grid operator who can use
hydroelectricity, hydropower, solar, nuclear and so on. What tends to happen rst is the grid
operator uses renewable energy sources because they have zero marginal cost. That’s the
optimal thing to do, but this is when prices are the lowest. So, the rst part of demand is
covered by renewable energy sources and you don’t get such a high price for your electricity.
On the other hand, when demand is huge and these backup generators are brought online,
the person who runs this kind of backup generation bene ts the most even though he’s
going to be taxed the most on the carbon. But the prices are also very high. It turns out that
under this kind of a system, which was designed to accommodate all these competing
suppliers of electricity, you might over-invest into non-renewable energy sources.

Knowledge@Wharton: Ultimately, we need storage to make it all work.

Netessine: Yes, probably some kind of a combination of energy storage and pooling of
various sources of a renewable energy. That’s ultimately what we’re going to need. I think if
you give some kind of incentives to generators to be less intermittent, to provide electricity
in a more stable way, then they will probably start investing in R&D rst for energy storage
and ultimately into energy-storage solutions.

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Pennsylvania (http://www.upenn.edu/).

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