Electricity Pricing and Electrification for Efficient Greenhouse Gas Reductions

July 2, 2013
Lee S. Friedman

As California proceeds toward its long-run 2050 goal for permitted greenhouse gas (GHG) emissions, it will be necessary for electricity to become more decarbonized. It will also be necessary for some activities that are now fossil-fueled to run partially or fully on the cleaner electricity—a process referred to as electrification. Improved pricing policies are necessary to make decarbonization and electrification decisions effectively and efficiently.

This paper analyzes pricing reforms that could be considered by the state as part of its efforts to make effective and efficient GHG reductions.

  • First, in order to achieve necessary global GHG reductions, it is important that California’s carbon market link with other jurisdictions, like Quebec, that have comparable reduction goals and programs. 
  • Second, creating certainty in the minds of investors about the GHG reductions that will be required in California beyond 2020 will stimulate long-run infrastructure investments and research and development efforts that will reduce GHG emissions in the future. 
  • Third, individual electricity customers as well as small businesses will play a key role in cutting emissions. However, without a clear price signal, their usage is unlikely to change. To remedy this, legislation currently preventing 80 percent of the state’s population from receiving any carbon price signal could be reformed, while the California Public Utilities Commission (CPUC) could improve the price signal being given to small businesses. 
  • Fourth, and perhaps most importantly, in order to meet long-term GHG reduction goals, California will need to transition its electricity customers to time-varying marginal-cost based rates, as the current disconnect between rates and costs prevents many of the most important actions consumers could and would take to reduce GHG emissions.