CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

The Effects of 

Renewable or 

Clean Electricity 

Standards 

JULY 2011

© Shutterstock LLC
Pub. No. 4259
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

The Effects of Renewable or 

Clean Electricity Standards

July 2011
CBO

Notes

Unless otherwise indicated, all years referred to in this report are calendar years. 

Numbers in the text, tables, and figures may not add up to totals because of rounding.

The cover shows (clockwise from the top) the cooling towers of a nuclear power plant, a geothermal power station, an array of photovoltaic solar panels, wind turbines, a biomass power 

plant that burns wood chips, and power lines on a transmission tower. (The last photo is courtesy of the National Renewable Energy Laboratory; the others are copyrighted as indicated on 

the cover.)
Preface

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Federal lawmakers have recently considered several policies to alter the mix of fuels used 

to generate electricity in the United States. Those policies—referred to here as renewable or 

“clean” electricity standards—would lead to greater reliance on energy sources that produce 

few or no emissions of carbon dioxide (CO2), the most prevalent greenhouse gas contributing 

to climate change. Renewable electricity standards would require a certain share of the nation’s 

electricity generation (say, 25 percent) to come from renewable sources, such as wind or solar 

power. Clean electricity standards would require a certain percentage of the nation’s electricity 

generation to come from renewable sources or from nonrenewable sources that reduce or 

eliminate CO2 emissions, such as nuclear power, coal-fired plants that capture and store 

CO2 emissions, and possibly natural-gas-fired plants. Many renewable and clean electricity 

standards already exist at the state level.

This Congressional Budget Office (CBO) study—prepared at the request of the Chairman 

and Ranking Member of the Senate Committee on Energy and Natural Resources—examines 

how a federal renewable or clean electricity standard would change the mix of fuels used for 

electricity generation, the amount of CO2 emissions, and the retail price of electricity in 

different parts of the United States. In particular, the study explores how some proposed 

features of such standards (such as various preferences, exemptions, and alternative compliance rules) would affect those outcomes and identifies underlying causes of uncertainty 

about such outcomes. The study also highlights key elements in designing a renewable or 

clean electricity standard that would help minimize its costs to U.S. households and businesses. In keeping with CBO’s mandate to provide objective, impartial analysis, this report 

makes no recommendations.

The study was prepared by Terry Dinan of CBO’s Microeconomic Studies Division and 

by Brian Prest, formerly of CBO, under the direction of Joseph Kile and David Moore. 

Justin Falk, Daniel Frisk, Ron Gecan, Robert Shackleton, and Julie Somers provided 

valuable input, and Marin Randall fact-checked the report. Helpful comments also came 

from Christopher Namovicz of the Energy Information Administration; Patrick Sullivan 

of the National Renewable Energy Laboratory; David McLaughlin, Karen Palmer, and 

Matthew Woerman of Resources for the Future; and Catherine Wolfram of the University of 

California at Berkeley. (The assistance of external reviewers implies no responsibility for the 

final product, which rests solely with CBO.)

Chris Howlett edited the study, with assistance from Sherry Snyder, and John Skeen 

proofread it. Maureen Costantino and Jeanine Rees prepared the report for publication, 
CBO

PREFACE

and Maureen Costantino designed the cover. Monte Ruffin printed the initial copies, and 

Linda Schimmel handled the print distribution. The report is available on CBO’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director

July 2011
Contents

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Summary vii

1 Introduction 1

Federal Proposals and State Standards for Renewable and Clean Electricity 1

How a Renewable or Clean Electricity Standard Could Work 3

Trends and Challenges in Producing Electricity from Renewable and 

Other Clean Sources 6

2 Potential Effects of a Renewable or Clean Electricity Standard 15

Effects on Sources and Locations of U.S. Electricity Generation 18

Effects on Greenhouse Gas Emissions 24

Effects on Prices for Electricity 24

Interaction of a Federal Standard with Existing State Standards 27

3 Considerations in Designing a Cost-Effective Renewable or 

Clean Electricity Standard 29

Effects of Credit Trading on Costs 29

Effects of Maximizing Compliance Options on Costs 31

Effects of Timing on Costs 32
VI THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Tables

2-1. Effects of Seven Potential Federal Renewable or Clean Electricity Standards 16

Figures

1-1. States with Renewable or Clean Electricity Standards or Goals 2

1-2. Mix of Sources Used to Generate Electricity in the United States in 

2010 and 2035, by Amount of Electricity Provided and Share of Total Generation 7

1-3. Nonhydropower Renewable Sources of Electricity Generation in 2010 and 

2035, by Amount of Electricity Provided and Share of Total Generation 10

1-4. Average Annual Wind Speeds in the United States at 80 Meters Above the Ground 11

1-5. Projected Annual Additions to U.S. Generating Capacity Through 2035 13

2-1. The Five Regions Used for Reporting Changes in Prices and 

Generation in This Study 19

2-2. Policy-Induced Change in Renewable Generation for the 

Final Year of the Projection, by Source 20

2-3. Policy-Induced Change in Renewable Generation for the 

Final Year of the Projection, by Region 21

2-4. Percentage of Qualifying Generation for the Final Year of the Projection, 

Without and With the Policy 22

2-5. Average Change in Electricity Prices Between 2020 and 2030, by Region, 

Under Seven Potential Federal Electricity Standards 26

Boxes

1-1. Current Policies Aimed at Lowering the Costs of Renewable and 

Other Clean Electricity Generation 8

3-1. The Cap-and-Trade Alternative for Decreasing CO2 Emissions 30
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Summary

Many policymakers have expressed interest in 

mandating that a minimum percentage of the electricity 

consumed in the United States be generated from renewable or “clean” sources of energy. A majority of states have 

implemented similar requirements in their jurisdictions. 

Such requirements—known as renewable or clean electricity standards—would reduce emissions of carbon 

dioxide (CO2), the most prevalent greenhouse gas, by 

decreasing the percentage of electricity generated from 

fossil fuels. That change would not significantly reduce 

energy imports, however, because most of the energy used 

for electricity generation in the United States already 

comes from domestic sources. 

How a Renewable or Clean Electricity 

Standard Would Work

Currently, only about 10 percent of U.S. electricity is 

produced from renewable sources of energy, such as 

hydropower, wind, and biomass (which includes waste 

products from the forest industry and farms). The bulk of 

electricity is produced using coal (45 percent), natural gas 

(24 percent), and nuclear power (19 percent). 

Meeting a renewable electricity standard (RES) would 

generally entail replacing fossil-fuel-fired generation, 

which emits CO2, with generation from renewable 

sources that would produce fewer, if any, CO2 emissions. 

In particular, an RES would probably increase reliance on 

wind, biomass, solar energy, and geothermal energy to 

generate electricity. Hydroelectric power is usually 

excluded from RES proposals because of environmental 

concerns, although it accounts for more than half of all 

renewable generation at present. 

A clean electricity standard (CES) would expand the set 

of qualifying sources to include not only renewable 

energy but also nuclear power, which produces no CO2

emissions, and fossil-fuel-based generation that involves 

the capture and storage of CO2 emissions (a process still 

under development). A more inclusive CES could allow 

the standard to be met with generation from natural-gasfired plants, which release only about half as much CO2

per unit of electricity produced as coal-fired plants do. 

Utilities would typically be required to comply with a 

renewable or clean electricity standard by submitting 

“credits,” each of which certified that a megawatt hour 

(MWh) of electricity had been produced from a qualifying renewable or other clean source. The number of 

credits that a utility would have to submit would depend 

on the standard and on the utility’s electricity sales. 

For example, under a 30 percent RES or CES, a utility 

would have to submit 30 credits for each 100 MWhs of 

electricity it sold. 

The federal government would give credits to generators 

that produced electricity from qualifying sources, and the 

generators in turn could sell the credits to the highest 

bidder. Utilities that generate at least some of their own 

electricity would comply with the policy either by using 

credits that they received for producing electricity from 

qualifying sources or by buying credits from other generators that use qualifying sources. Utilities that do not own 

generating facilities would need to purchase all of their 

credits. Utilities’ demand for credits to comply with the 

standard would encourage generators to produce more 

electricity from qualifying renewable or other clean 

sources. If the credits were traded freely, the market 

could determine the least expensive method of achieving 

the desired increase in renewable or clean electricity 

generation.

Potential Effects on Power Generation, 

CO2 Emissions, and Electricity Prices

A national RES or CES would alter the mix of energy 

sources used to produce electricity, the amount of CO2
VIII THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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emitted, and the price of electricity, with those 

effects varying by region. To illustrate the effects, the 

Congressional Budget Office compared the results of 

seven analyses of different potential federal standards 

conducted in the past two years by the Energy Information Administration or the National Renewable Energy 

Laboratory (parts of the Department of Energy) or by the 

independent research organization Resources for the 

Future. Those analyses examined renewable and clean 

electricity standards with a variety of design features and 

relied on models of the electricity sector that incorporated different assumptions about the costs of relevant 

technologies. The comparison reveals some common 

findings about the potential impact of a national RES or 

CES policy, offers insights into the effects of specific 

design features, and highlights the uncertainties underlying projections of policy outcomes. 

Most analyses concluded that the bulk of the increase in 

renewable generation resulting from an RES or CES 

would come from additional wind generation (mainly in 

the High Plains region of the western and central United 

States) and from biomass generation (mainly in the 

Southeast). The relative importance of those sources 

depends heavily on assumptions about the availability of 

resources in different regions and about the relative costs 

of various technologies. 

Including certain design features in an RES or CES 

policy could cause the actual percentage of electricity 

produced from qualifying sources to be less than the standard. That could happen if some utilities were exempt 

from complying with the standard; if some technologies 

were given preferential treatment, allowing them to earn 

more than one credit per unit of electricity produced; or 

if utilities were allowed to make “alternative compliance 

payments” instead of submitting the necessary credits. 

Those features were either included in RES and CES policies proposed in the previous Congress or are part of 

some state programs.

Either an RES or CES would reduce CO2 emissions in 

the United States compared with the amount that would 

occur in the absence of the policy. The actual reduction 

resulting from a given standard and set of design features 

would be uncertain, however. For example, generators 

that substituted biomass for coal would reduce emissions 

more than generators that substituted wind for natural 

gas, because a MWh of electricity generated from coal 

produces about twice as much CO2 as one generated 

from natural gas. 

Either an RES or CES would also raise the average cost of 

generating electricity in the United States because, in the 

absence of the standard, regulators and generators would 

generally choose the lowest-cost method of producing 

electricity. Higher generation costs in turn would lead to 

higher electricity prices for many businesses and households; however, the price effects would differ among 

regions. A federal electricity standard would cause prices 

to go up in most parts of the country but down in other 

parts. Predictions about effects on regional electricity 

prices vary significantly among policies and when 

different models are used to analyze similar policies. 

Those effects are strongly influenced by regional patterns 

of investment in new generating capacity and by the 

extent to which electricity prices in a given area are set 

by regulators or determined by market forces. 

Changes in electricity prices offer an indication of the 

effects of an RES or CES on electricity consumers, but 

they do not provide a comprehensive measure of the 

policy’s overall cost. To the extent that a standard reduced 

electricity prices in a particular region, the cost of the 

policy would be borne initially by electricity producers in 

that region, or by consumers in other regions where utilities (taken together) were net buyers of credits. The cost 

to electricity producers would take the form of lower 

returns on their existing capital. Those lower returns 

would discourage new capital from being invested in 

the electricity sector, eventually reducing the supply of 

electricity and causing the price to rise. Thus, ultimately, 

the cost of the policy would be borne by electricity 

customers. 

Implementing a federal RES or CES would be complicated by the fact that 31 states and the District of 

Columbia have some form of renewable or clean electricity standard already in place. The incremental effect that 

a federal standard would have on the amount of renewable or clean generation would depend on the provisions 

of those state programs. If utilities could not count a 

given MWh of qualifying generation toward their compliance with both a state and a federal policy, the increase 

in renewable or clean generation necessary to meet the 

federal standard—and the cost of achieving that 

increase—would be much greater than would otherwise 

be the case. Moreover, regardless of whether a MWh of 

generation could qualify for credits at both the state and 
SUMMARY THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS IX

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federal levels, the enactment of a federal standard would 

affect the prices of credits traded in state programs. 

As a general rule, a given increase in renewable or clean 

generation, or a given decrease in emissions, could be 

accomplished at a lower cost through a single federal 

standard than through a combination of a federal standard and numerous state standards. The reason is that 

state policies would tend to constrain the pattern of 

renewable and clean generation across the United States, 

hindering the ability of a federal standard to spur the 

lowest-cost investments in such generation, at least in 

some regions.

Ways to Make an Electricity Standard 

More Cost-Effective

Although the costs of meeting a particular RES or CES 

cannot be predicted with certainty, they could be reduced 

by incorporating certain design features. For example, 

allowing unrestricted trading of credits, expanding the 

range of energy sources that could be used to comply 

with the policy, phasing in the standard gradually, and 

giving companies the flexibility to shift credits between 

years would all make an RES or CES policy more 

cost-effective.

Unrestricted Trading 

The electricity market faces various regional limitations. 

For example, storing electricity or building transmission 

lines to move power over long distances is expensive and 

difficult, and some areas are better suited than others to 

certain types of generation. Letting utilities comply with 

a standard by submitting credits that could be bought 

and sold independently of the electricity generation with 

which they were associated—rather than requiring that 

each utility get a certain percentage of its electricity 

directly from renewable or other clean sources—would 

help overcome such limitations and thereby lower utilities’ compliance costs. 

Compliance costs could be reduced further by allowing 

financial firms that do not generate or distribute electricity to participate in credit trading. Participation by those 

firms would increase the liquidity of the market, meaning 

that utilities and generators could buy and sell large numbers of credits without affecting the price.

Expanded Compliance Options 

Allowing as many energy sources as possible to qualify for 

credits (within the constraints of achieving the objectives 

of the policy, which might include reducing CO2 emissions, avoiding further damage to the environment, or 

developing specific technologies) would help minimize 

the cost of meeting an RES or CES and of achieving any 

resulting emission reductions. In particular, a clean electricity standard would be likely to bring about a 

given reduction in CO2 emissions at a lower cost than a 

renewable electricity standard because a CES provides 

incentives for a wider variety of low-emitting technologies than an RES does. 

If regulators linked the amount of credits that various 

technologies could receive to their emissions, then 

letting both existing and new sources of electricity generation earn credits (rather than just sources that started 

operating after the policy began) could help better align 

financial incentives with actual emission reductions. 

For example, granting partial credits for both existing 

and new natural-gas-fired generation would give generators a larger financial incentive to substitute a megawatt 

hour of emission-free generation for a megawatt hour of 

generation from a high-emitting source, such as coal, 

than from a low-emitting source, such as natural gas. 

Total costs of reducing CO2 emissions could be lowered 

even further by allowing emission-reducing improvements in energy efficiency to qualify for credits. For 

example, generators could upgrade their plants in a 

manner that allowed them to produce the same amount 

of electricity from less fossil fuel, or large companies 

could install lighting that used less electricity. 

However, regulators would face significant challenges 

in accurately measuring the energy or fuel savings from 

such improvements. 

Even with a wide variety of compliance options, neither 

an RES nor a CES would be as cost-effective in cutting 

CO2 emissions as a “cap-and-trade” program. Such a 

program would involve setting an overall cap on emissions and letting large sellers of emission-creating 

products (such as electricity generators, oil producers and 

importers, and natural gas processors) trade rights to 

those limited emissions. In that way, a cap-and-trade program would create a direct incentive to cut emissions; in 

contrast, an RES or CES would create a direct incentive 

to use more renewable or other types of clean electricity 

but would have only an indirect effect on emissions. 
X THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Gradual and Flexible Timing

Electricity generation typically involves investments in 

large-scale and long-lasting physical equipment, and U.S. 

demand for electricity is growing slowly enough that the 

potential for investment in new generation and distribution capacity is fairly small. Utilities and generators 

would therefore benefit from provisions that phased in an 

RES or CES gradually over an extended period. They 

would also benefit from being allowed to transfer credits 

between different time periods—by “banking” current 

excess credits for use in later years or by “borrowing” 

credits that they expected to earn in the future for use 

now. Such provisions would make it easier for utilities 

and generators to comply with the standard in the course 

of planning for moderate increases in new capacity, without prematurely retiring existing capacity. However, the 

standard would not be met if firms that borrowed credits 

failed to fulfill their obligations. 
CHAPTER

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1

Introduction

In recent years, federal policymakers have proposed 

various ways to alter the mix of energy sources used to 

generate electricity in the United States. In many cases, 

those proposals have been motivated by a desire to 

decrease emissions of carbon dioxide (CO2) that result 

from burning fossil fuels. CO2 is the most prevalent of 

the greenhouse gases, whose accumulation in the atmosphere, if allowed to continue unabated, is expected by a 

strong consensus of experts to have extensive, highly 

uncertain, but potentially serious and costly impacts on 

regional climates throughout the world. 

Some of those proposals involve renewable electricity 

standards (RESs), which would require utilities to meet at 

least a certain percentage of consumers’ demand for electricity with power generated from renewable sources, 

such as wind or solar energy. Other proposals involve 

clean electricity standards (CESs), which would require 

utilities to use some minimum percentage of “clean” 

energy sources—generally defined to include renewable 

sources and also nuclear power (which emits no CO2) 

and fossil-fuel-burning power plants that capture and 

compress their CO2 emissions for storage underground 

(a technology that is still at the development stage). Some 

CES proposals would also define natural gas as a clean 

energy source because it emits roughly half as much CO2

as coal does per unit of electricity produced. RESs and 

CESs in some form are already operating in a majority of 

U.S. states. 

Under a federal renewable or clean electricity standard—

as under many of the state policies—electric utilities 

would have to comply with the standard by submitting 

“credits” to the government. Each credit would represent 

a megawatt hour (MWh) of electricity that was generated 

from a qualifying renewable or other clean source. For 

example, a 30 percent RES or CES would obligate utilities to submit 30 credits for each 100 MWhs of electricity 

they sold. In general, utilities would buy the credits they 

needed from electricity generators, who would receive 

credits from the government for each MWh of qualifying 

electricity they produced. The demand for credits on the 

part of utilities would encourage generators to produce 

more electricity that qualified for credits. If the credits 

could be traded freely, the market could determine the 

least costly method of achieving the desired increase in 

renewable or clean electricity generation. 

This chapter provides a brief overview of federal proposals and existing state standards for renewable and clean 

electricity, describes how a federal standard would work, 

examines the current mix of energy sources used to produce electricity, and discusses the challenges to increasing 

the use of renewable or other clean sources. Chapter 2 

assesses how a federal RES or CES might affect power 

generation and electricity prices in various regions of the 

United States and the amount of CO2 emitted by the 

electricity sector. It also discusses complications posed 

by layering a federal standard on top of existing state 

standards. Chapter 3 offers general observations about 

how an RES or CES policy could be designed to be 

cost-effective. 

Federal Proposals and State Standards 

for Renewable and Clean Electricity 

During the previous Congress (the 111th), several 

Senators proposed legislation to establish renewable or 

clean electricity standards. For example, Senators Jeff 

Bingaman and Sam Brownback proposed an RES in the 

Renewable Electricity Promotion Act of 2010 (S. 3813). 

Under that standard, 15 percent of U.S. electricity generation would have had to come from renewable sources by 

2021. Senators Richard Lugar, Lindsey Graham, and Lisa 

Murkowski introduced the Practical Energy and Climate 

Plan Act of 2010 (S. 3464), which would have required 

that, by 2030, 30 percent of electricity generation come 

from renewable sources, from new nuclear capacity, or 
2 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Figure 1-1.

States with Renewable or Clean Electricity Standards or Goals

Source: Congressional Budget Office based on information from the Pew Center on Global Climate Change.

Note: States vary widely in which sources of electricity generation are eligible to receive credits under their standards. For example, 

West Virginia provides credits for certain types of coal technology, although most other states do not.

from coal plants that capture and store CO2 emissions. 

Both of those proposals would have utilities meet part 

of their compliance obligation by submitting energyefficiency credits. Such credits could be awarded to 

generators that upgraded their facilities in a manner that 

allowed them to generate more electricity with the same 

amount of fossil fuel, to states or utilities that sponsored 

programs to promote energy-saving improvements, or to 

large end users of electricity that made energy-saving 

investments. (Neither bill was brought to a vote, and 

neither has been reintroduced in the 112th Congress.)

In addition, in his 2011 State of the Union address, 

President Obama expressed support for a CES that 

would require 80 percent of electricity generation to 

come from clean sources by 2035. Under that proposal, 

clean sources would include renewable energy, nuclear 

power, “efficient” natural gas, and fossil-fuel-fired plants 

that capture, compress, and store their CO2 emissions. 

In recent decades, 31 states have implemented renewable 

or clean electricity standards of varying stringencies: 

27 states plus the District of Columbia have renewable 

portfolio standards, which are similar to renewable electricity standards, and another 4 states have alternative 

energy portfolio standards, which are similar to clean 

electricity standards (see Figure 1-1).1

 In addition, 

7 states have voluntary goals for electricity generation. 

(The other 12 states have no mandatory standards or 

voluntary goals.) 

Renewable Electricity Standard

Clean Electricity Standard

Voluntary Renewable or Clean Electricity Goal

No Standards or Goals

1. See Pew Center on Global Climate Change, “Renewable and 

Alternative Energy Portfolio Standards” (August 7, 2011), 

www.pewclimate.org/what_s_being_done/in_the_states/rps.cfm. 
CHAPTER ONE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 3

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How a Renewable or Clean Electricity 

Standard Could Work

Virtually any renewable or clean electricity standard 

would have some basic features, such as the standard itself 

(the minimum share of electricity generated by qualifying 

sources that the policy would require), definitions of the 

energy sources included in the policy, and credits that 

utilities would submit to comply. Typically, the standard 

would be phased in over time; for example, a CES might 

require that 50 percent of electricity be generated from 

clean sources by 2025, with lower but increasingly strict 

standards for each year leading up to 2025. 

An RES or CES could have a variety of other design 

features as well, such as allowing credits to be traded 

widely, varying the number of credits that sources are 

awarded according to their CO2 emissions, providing 

credits to existing generators (rather than limiting them 

to new generating capacity), allowing credits to be 

“banked” or “borrowed” for use in other years, and letting improvements in energy efficiency qualify for credits. 

Moreover, policymakers could opt to limit the cost of 

complying with the standard by letting utilities make 

alternative compliance payments instead of submitting 

credits, could give preference to certain energy technologies, and could combine an RES and a CES into a tiered 

standard. Those various design features, which are 

described below, would influence a policy’s effects on 

electricity production, electricity prices, and CO2

emissions (as discussed in Chapter 2) and the policy’s 

cost-effectiveness (as discussed in Chapter 3).

Credits Could be Traded Widely 

Credits would be tradable financial assets that could be 

bought and sold independently of the electricity generation with which they were associated. Generators would 

receive credits from the federal government when they 

produced electricity from qualifying sources and could 

sell those credits to utilities, either with or without the 

associated power. Utilities would use the credits to comply with the policy. Utilities that generate at least some of 

the electricity they sell would comply either by using 

credits that they received for producing electricity from 

renewable sources or buying credits from other generators 

that use qualifying sources. Utilities that do not own 

generating facilities would have to buy all of their credits. 

The U.S. electricity market tends to be regional in scope. 

Once generated, electricity is difficult and costly to store, 

and moving it from one place to another requires the 

use of transmission lines, which are expensive and time 

consuming to build. In addition, as discussed later in this 

chapter, some areas are better suited than others to 

specific types of power generation. Allowing utilities to 

comply with an RES or CES by submitting credits would 

get around such constraints by decoupling utilities’ compliance from the sources of energy used to generate the 

electricity they sold. Thus, for example, a utility in Ohio 

could comply with the standard by purchasing credits 

from a wind plant in North Dakota, without actually 

purchasing the plant’s electricity (which, for logistical 

reasons, would probably be sold to a local utility). 

As the market for credits developed, entities other than 

generators and utilities—such as banks and pension 

funds—could be allowed to trade credits. Participation 

by those entities would provide liquidity to the market, 

enabling utilities and generators to buy and sell large 

numbers of credits without affecting the price. Utilities 

would seek to purchase credits at the lowest possible 

price, and that competitive pressure would encourage 

generators that could expand their electricity production 

from qualifying sources at the lowest cost to do so. The 

price of credits would rise to the point at which the number of credits created by qualifying generators was large 

enough for utilities to obtain the credits they needed to 

comply with the standard. 

Credit Amounts Could Be Related to CO2 Emissions 

The amount of credits that generators would receive for 

various types of electricity production could be adjusted 

to account for differences in the amount of CO2 released. 

For example, a megawatt hour of electricity generated at a 

nuclear plant would produce no CO2 emissions and thus 

would receive one credit under a CES policy. A megawatt 

hour generated at a natural-gas-fired plant would emit 

roughly half as much CO2 as the same amount of generation at a coal-fired plant (in the absence of capture and 

storage technology) and thus might receive half a credit 

per MWh. Such weighting would give generators the 

greatest incentive to install the cleanest technologies and, 

as a result, would help achieve emission reductions in a 

cost-effective manner. However, it would require 

policymakers to define partial credits for all technologies 

in proportion to their emissions and update those definitions over time to reflect technological changes.
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Credits Could Be Given to Existing Generators 

An RES or CES policy could allow both existing and new 

sources of electricity generation to earn credits, or it 

could restrict eligibility to sources that began operating 

after the program started. In order to achieve the same 

amount of renewable or clean generation, the stringency 

of the standard would need to be adjusted accordingly. 

For example, nuclear power, hydropower, and other 

renewable sources currently account for about 30 percent 

of U.S. electricity generation; until the existing stock of 

power plants was replaced, a 40 percent CES in which 

existing generators of electricity from those sources were 

eligible to receive credits would lead to the same increase 

in clean electricity as a 10 percent CES in which credits 

were not granted to existing generators. 

The decision about whether to allow existing sources of 

electricity generation to earn credits would have consequences for how the policy’s effects were distributed as 

well as for its ability to motivate the lowest-cost emission 

reductions: 

 If existing sources could receive credits—and thus 

more credits would have to be required and purchased 

to produce the same increase in qualifying generation—the additional purchases would transfer revenue 

from areas that were net buyers of credits to areas that 

were net sellers. In general, regions with existing plants 

that generate qualifying electricity—such as the 

Southeast, which has a significant amount of existing 

nuclear generation—would benefit from the sale of 

credits. At the same time, utilities (and ultimately 

their customers) in other regions would face higher 

costs because of the need to buy a larger number of 

credits. 

 Granting credits to existing sources would also 

motivate lower-cost emission reductions than would 

otherwise be the case because the policy would provide 

incentives to retire relatively dirty sources of electricity 

generation earlier than relatively clean sources. For 

example, plant operators would be more likely to 

retire coal-fired plants first if existing nuclear or 

gas-fired plants received credits for the electricity 

they produced. 

Credits Could Be Banked and Borrowed 

An RES or CES program could allow utilities to transfer 

credits between years by letting them bank any excess 

credits they possessed for use in a future year. The 

program could also let utilities borrow credits from future 

years—for example, by permitting them to comply in 

2015 with a credit they would obtain in 2016. A utility 

might want to borrow credits from the following year if it 

anticipated that a new qualifying plant would begin generating electricity in that year, increasing the supply and 

lowering the price of credits. As discussed in Chapter 3, 

banking provisions could help reduce the overall cost of 

complying with the standard by allowing utilities to stock 

up on credits in years when they were relatively inexpensive. Most state programs permit banking of credits, but 

not borrowing.

Improvements in Energy Efficiency 

Could Qualify for Credits

The types of activities that could earn credits could be 

expanded to include qualified electricity savings—

reductions in electricity consumption resulting from 

efficiency improvements that would not have been made 

in the absence of an RES or CES. Such efficiency 

improvements could occur in the production of electricity; for example, plant operators could decrease the 

amount of fossil energy needed to produce a MWh of 

electricity. Efficiency improvements could also occur in 

the consumption of electricity; for instance, businesses 

and households could invest in insulation or energyefficient lighting. 

Granting credits for energy-efficiency improvements 

could, in theory, provide a financial incentive for low-cost 

reductions in CO2 emissions. Implementing that feature 

would be challenging, however. Policymakers would need 

to clearly define criteria for what types of efficiency 

improvements might qualify for credits and then determine whether each improvement met the criteria. For 

instance, establishing the legitimacy of a firm’s claim 

for energy-efficiency credits would require establishing 

a baseline to determine what the company’s energy 

consumption would have been in the absence of the 

efficiency improvement. Ideally, that assessment would 

account for factors that affect the firm’s energy use 

(independently of the efficiency improvements), such as 

variations in weather or demand for its products. 

Compliance Costs Could Be Limited 

Policymakers could set an upper limit on the cost of 

complying with the standard by letting utilities make an 

alternative compliance payment (ACP) instead of submitting a credit. In that case, utilities would be willing to 
CHAPTER ONE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 5

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purchase credits from generators up to the point at which 

the price of a credit equaled the ACP; beyond that point, 

they would choose to comply by making the alternative 

payment. As a result, renewable or clean generation 

would increase until the legislated standard was met 

or the additional cost of producing electricity from 

qualifying sources was equal to the ACP. If utilities 

complied with a standard by making alternative payments, the actual percentage of electricity coming from 

renewable or other clean sources would be less than the 

stated standard. 

An ACP could dampen the price of credits and, if utilities 

were able to bank credits, could do so even when the market price for credits was less than the alternative payment. 

The reason is that utilities would attach a lower value to a 

credit today to reflect the fact that its price could not rise 

above the ACP at any future time.2

 Such price dampening would be most likely to occur when the market price 

of credits was near the ACP. Any reduction in the price of 

credits that resulted from the ACP would reduce the 

incentives for utilities to invest in renewable or other 

clean technologies. 

If policymakers chose to include an ACP, they would 

need to decide how to allocate any revenue it raised. 

Those choices could have a variety of implications for 

the cost-effectiveness of the program and for the manner 

in which its costs would be distributed among regions 

or households.3

 Policymakers could use the revenue 

collected from the ACP to offset costs for some of the 

producers and consumers who would be affected by 

the standard. 

Certain Technologies Could Receive 

Preferential Treatment 

Policymakers could also design an RES or CES to favor 

selected technologies—either by establishing different 

standards for different technologies (referred to as tiered 

standards) or by providing extra credits for certain technologies. Several states’ standards include provisions that 

provide such preferential treatment. For example, Nevada 

has a tiered standard requiring that, in 2013, 5 percent of 

electricity generation in the state come from solar power 

and a total of 15 percent come from all qualifying renewable sources.4

 In another example, Michigan provides 

triple credits for each MWh of electricity generated by 

photovoltaic solar power (which converts solar radiation 

into direct-current electricity using semiconductors). 

The reasons for giving preferential treatment to particular 

technologies vary. In some cases, states want to encourage 

types of generation for which their state is particularly 

well suited. In other cases, favorable treatment goes to 

sources that are expected to have a large potential for cost 

reductions in the future because of “learning by doing” 

(the process through which innovations occur as a result 

of gaining experience with a technology). The potential 

for learning by doing is generally thought to be higher 

for fairly new sources of electricity generation, such as 

photovoltaic power, than for technologies that have been 

in use for many years, such as onshore wind generation. 

Advocates of extra incentives for relatively new or rapidly 

changing technologies suggest that such incentives could 

spur enough additional innovation to significantly lower 

the cost of those technologies. 

Clean and Renewable Standards Could Be Combined 

A CES and an RES could be combined in a tiered fashion. For example, a program could require that, by a 

certain year, 50 percent of all electricity be generated 

from clean sources (including renewable energy, nuclear 

power, and coal- or natural-gas-fired plants with carbon 

capture and storage) and that at least 25 percent of electricity be provided exclusively from renewable sources. In 

that case, utilities would need to ensure that at least half 

of the credits they submitted came from renewable 

sources. Complying with that tiered standard could cost 

more than complying with a 50 percent CES. However, 

advocates of tiered standards suggest that the additional 

cost could be justified because renewable sources would 

impose lower environmental and health costs than alternative clean sources. For example, using renewable 

sources to generate electricity would not involve creating 

dangerous waste materials, as nuclear generation does, or 

2. For a more detailed discussion of that point, explained in the 

context of a cap-and-trade program for greenhouse gas emissions, 

see Congressional Budget Office, Managing Allowance Prices in a 

Cap-and-Trade Program (November 2010). 

3. For a discussion of those implications in the context of a 

cap-and-trade program, see Congressional Budget Office, 

The Economic Effects of Legislation to Reduce Greenhouse-Gas 

Emissions (September 2009).

4. See R. Wiser, K. Porter, and R. Grace, “Evaluating Experience 

with Renewables Portfolio Standards in the United States” 

(Lawrence Berkeley National Laboratory, March 2004), 

http://eetd.lbl.gov/ea/ems/reports/54439.pdf. 
6 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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pollution runoff, as mining coal to use in coal-fired plants 

with carbon capture and storage would. 

Trends and Challenges in Producing 

Electricity from Renewable and 

Other Clean Sources

An RES or CES would change the mix of sources for 

electricity generation. In the absence of additional policy 

initiatives, that mix is projected to remain fairly constant 

over the next two decades, in part because the expansion 

of renewable or clean generation is limited by various factors that make those sources relatively costly. 

Trends in the Generation Mix 

Coal is currently the leading fuel used to produce electricity in the United States, accounting for 45 percent of 

generation in 2010 (see Figure 1-2). It is followed by 

natural gas (24 percent), nuclear power (19 percent), 

petroleum (1 percent), and a variety of renewable sources 

(totaling 10 percent). According to the Department of 

Energy’s Energy Information Administration (EIA), that 

mix of sources is unlikely to change much over the next 

25 years under current policies. Coal is expected to 

remain dominant—declining only slightly as a share of 

total generation, to 43 percent in 2035—because it is 

abundant, relatively inexpensive, and well suited to the 

continuous operation of plants that provide “base-load” 

generation (electricity to meet the minimum level of 

demand around the clock). Natural gas and nuclear 

power are also expected to account for roughly the 

same shares of total generation in 2035 that they do 

today. Fossil-fuel-burning plants that capture and store 

CO2 emissions do not yet exist on a commercial scale and 

thus do not provide any significant generation; in the 

absence of additional policies, no significant amount is 

projected for the next 25 years.

Of the sources of energy that are naturally replenished, 

hydroelectric power is the main one in use today, 

accounting for 6 percent of electricity generation. However, many RES programs exclude hydropower as a 

qualifying renewable source because of various concerns, 

such as those about the effects of dam construction on 

stream flow and fish migration and the displacement 

that occurs when land is flooded to create reservoirs. 

Among renewable sources other than hydropower, wind 

currently accounts for the bulk of electricity generation 

(see Figure 1-3 on page 11), followed by biomass (materials such as municipal solid waste, residue from crops, and 

wood waste from the timber industry) and geothermal 

energy (the Earth’s internal heat).5

 Solar power accounts 

for only a tiny fraction of electricity generation. EIA 

projects that biomass will make up a growing share of 

nonhydropower renewable generation in the future, 

roughly equaling wind power by 2035, and that most 

of the biomass will be used by industrial producers that 

generate electricity to use in producing finished goods. 

The total share of U.S. electricity generated from sources 

with very low emissions of CO2—renewable energy and 

nuclear power—was 29 percent in 2010 and is expected 

to grow only slightly, to 31 percent, by 2035. EIA 

projects only modest growth in those sources, for reasons 

discussed in the next section, despite the fact that various 

federal grants, tax credits, and subsidies are designed to 

encourage such generation (see Box 1-1).

Challenges Associated with Increasing 

Renewable or Clean Generation 

Increasing the share of electricity generated from 

renewable sources, nuclear power, or fossil-fuel-fired 

plants with carbon capture and storage would reduce 

CO2 emissions (compared with what they would be 

otherwise). Achieving such an increase, however, would 

require overcoming a variety of complications that generally make renewable or clean generation more costly than 

fossil-fuel-fired generation. Those complications include 

the location-specific and variable nature of some renewable energy sources, technological uncertainties, and 

environmental concerns. Substantially expanding the use 

of low-emitting sources to generate electricity—through 

an RES, CES, or other policy—would require addressing 

those factors. 

Location Constraints. Most forms of renewable generation are better suited to some locations than others, and 

many of those places are far from large population centers 

5. Geothermal energy is considered to be sustainable because the 

heat extracted is small compared with the Earth’s heat content.
CHAPTER ONE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 7

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Figure 1-2.

Mix of Sources Used to Generate Electricity in the United States in 2010 and 

2035, by Amount of Electricity Provided and Share of Total Generation

(Billions of kilowatt hours)

Source: Congressional Budget Office based on data from Department of Energy, Energy Information Administration, Annual Energy Outlook 

2011, with Projections to 2035 (April 2011), www.eia.gov/forecasts/aeo/. 

a. Includes wood waste products and other biomass burned as fuel, geothermal energy, municipal waste (trash) burned to reduce its 

volume and to produce electricity, and solar energy.

that have high electricity demand.6 For example, land 

areas that are well suited to wind generation—places with 

average annual wind speeds of at least 6.5 meters per 

second at a height of 80 meters—are concentrated in the 

middle of the United States (see Figure 1-4 on page 12), 

whereas the population is concentrated along the coasts. 

Relatively modest increases in the use of renewable 

sources could be made without significantly changing the 

infrastructure for distributing electricity: Those increases 

could take place in windy or sunny areas and be used to 

meet local demand for electricity. However, substantially 

boosting reliance on renewable generation would require 

transporting the power to areas that consume large 

amounts of electricity—a process that would entail costly 

and time-consuming expansions of transmission capacity. 

Finding sites for new transmission lines can require 

0

500

1,000

1,500

2,000

2,500

3,000

45%

24%

19%

6%

2% 2% 1%

43%

25%

17%

6%

3%

5%

1%

Coal Natural

Gas

Nuclear

Power Hydropower Wind

Other

Renewable

Sources

Petroleum

a

Actual, 2010

(Total generation = 4,136 billion kilowatt hours)

Projected, 2035

(Total generation = 5,150 billion kilowatt hours)

6. Geothermal power provides the most extreme example of this 

constraint. Conventional methods may be used to generate electricity from geothermal energy at a cost that is competitive with 

coal-fired generation; however, the locations at which that can 

take place are so limited that geothermal power currently accounts 

for less than 1 percent of U.S. electricity generation and is not 

expected to grow significantly over the next several decades. 

Enhanced methods might allow for greater reliance on geothermal 

energy, but successful research and development would be 

necessary to make those enhanced methods cost-competitive.
8 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Continued

Box 1-1.

Current Policies Aimed at Lowering the Costs of Renewable and 

Other Clean Electricity Generation

The amount of U.S. electricity generated from 

renewable sources other than hydropower is small 

(currently about 4 percent of total generation), 

despite the fact that such generation has received 

significant subsidies over the past several decades. 

For example, renewable electricity production 

received more than $1 billion in federal subsidies in 

fiscal year 2007 (the most recent year for which comprehensive measures are available), or 15 percent of 

all subsidies for electricity generation that year (see 

the table on page 9). The bulk of the subsidies for 

renewable electricity production went to wind 

generation, amounting to $23 per megawatt hour 

produced, or 2.3 cents per kilowatt hour (kWh). By 

comparison, the average retail price of electricity sold 

in the United States in 2007 was 9.1 cents per kWh.1

Until 2009, federal support for renewable energy 

projects primarily took the form of tax credits for 

production or investment. For instance, qualifying 

wind generation was eligible for a production tax 

credit for 10 years after a facility was put in place. 

Solar generation, by contrast, mainly received support through a 30 percent investment tax credit. 

Section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA, Public Law 111-5) 

created a $5.6 billion program to provide cash grants 

for renewable energy projects that were placed in service during the 2009 or 2010 tax years or that met 

certain start-of-construction requirements before the 

end of 2010. Firms could choose to receive those 

grants instead of the production or investment tax 

credits for which they would otherwise be eligible. 

Projects involving most forms of renewable electricity 

generation could receive grants equal to 30 percent of 

their eligible cost basis.2

 The grant program was later 

extended through 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 

Act of 2010 (P.L. 111-312). 

Wind generation has received about 84 percent of 

that ARRA grant money.3

 As a result, such generation 

is on track to more than double over a four-year 

period, rising from 56 billion kWhs in 2008 to 

143 billion kWhs (or about 4 percent of projected 

U.S. electricity generation) in 2012. However, the 

Energy Information Administration projects that 

after the cash grant program expires in 2012, wind 

generation will remain fairly flat, rising only to 

159 billion kWhs by 2030.4

Nonrenewable “clean” energy sources have also 

received major federal support over the years. Significant incentives for building new nuclear power plants 

were included in the Energy Policy Act of 2005. They 

included production tax credits (1.8 cents per kWh 

for qualifying new generation), loan guarantees, 

insurance against regulatory delays, and extension of 

the Price-Anderson Act, which set a cap on the total 

amount of liability that the industry could incur and 

defined rules for apportioning that liability. In fiscal 

year 2007, nuclear generation received more than 

$1.2 billion in subsidies, or about 0.16 cents per 

kWh. Even with those subsidies, future growth in 

1. See Department of Energy, Energy Information Administration, “Average Retail Price of Electricity to Ultimate 

Customers: Total by End-Use Sector” (revised April 2011), 

www.eia.gov/cneaf/electricity/epm/table5_3.html.

2. See Phillip Brown and Molly F. Sherlock, ARRA Section 1603 

Grants in Lieu of Tax Credits for Renewable Energy: Overview, 

Analysis, and Policy Options, CRS Report for Congress 

R41635 (Congressional Research Service, February 8, 2011). 

3. Ibid. 

4. See Department of Energy, Energy Information Administration, Annual Energy Outlook 2011, with Projections to 2035

(April 2011), www.eia.gov/forecasts/aeo/. 
CHAPTER ONE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 9

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Box 1-1. Continued

Current Policies Aimed at Lowering the Costs of Renewable and 

Other Clean Electricity Generation

Federal Subsidies and Support for Electricity, Fiscal Year 2007

Source: Congressional Budget Office based on Department of Energy, Energy Information Administration, Federal Financial 

Interventions and Subsidies in Energy Markets 2007 (April 2008), Table 35, p. 106.

Note: * = reported as too small to be meaningful; n.a. = not applicable.

a. Includes projects funded under the Clean Renewable Energy Bonds and Renewable Energy Production Incentive programs.

nuclear generation is uncertain. New federal subsidies 

and incentives had prompted some renewed interest 

(a conditional commitment was made for an $8.3 billion guarantee for a loan to finance the addition of 

two reactors at Southern Company’s Plant Vogtle in 

Georgia). However, concerns about financial risks 

and health and environmental safety persist, particularly in light of the recent disaster at the Fukushima 

Daiichi nuclear plant in Japan.

Moreover, in recent years, the Congress has appropriated an average of about $400 million annually to 

develop technology to reduce carbon dioxide (CO2) 

emissions from coal, most notably by capturing and 

storing CO2 produced by coal-burning plants and 

industrial facilities. (That 2007 funding is included 

in the $854 million for coal shown in the table.) 

The Congress also appropriated $3.4 billion in 2009 

under ARRA for those activities. In spite of such 

support, no significant fraction of current electricity 

generation involves carbon capture and storage, and 

none is projected to do so for the next two decades. 

1,946 854 0.44

72 2,156 29.81

919 227 0.25

794 1,267 1.59

40 36 0.89

15 14 0.92

258 174 0.67

1 14 24.34

31 724 23.37

6 8 1.37

9 1 0.13

____* 37 * _____ ____

360 1,008 2.80

n.a. 1,235 n.a. _____ _____ ____

Total 4,091 6,747 1.65

Net Generation in 2007

(Billions of

Federal Subsidies and Support in 2007

Dollars per Megawatt Hour of

Electricity Produced

Millions of

kilowatt hours) 2007 Dollars

Biomass (and biofuels)

Geothermal energy

Hydropower

Electricity Generation

Coal

Refined coal

Natural gas and petroleum liquids

Nuclear power

Renewable energy

Solar energy

Wind

Landfill gas

Municipal solid waste

Unallocated renewable energya

Subtotal, renewable

Electricity Transmission and Distribution
10 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Figure 1-3.

Nonhydropower Renewable Sources of Electricity Generation in 2010 and 

2035, by Amount of Electricity Provided and Share of Total Generation

(Billions of kilowatt hours)

Source: Congressional Budget Office based on data from Department of Energy, Energy Information Administration, Annual Energy Outlook 

2011, with Projections to 2035 (April 2011), www.eia.gov/forecasts/aeo/. 

a. Solor photovoltaic power involves converting sunlight directly into electricity through the use of special cells. 

b. Solar thermal power involves using sunlight to create heat, which can then serve as a power source in a conventional electricitygenerating plant (among other applications).

obtaining permission from numerous government entities, because many lines cross multiple counties and 

states. On average, siting a new transmission line takes 

14 years.7

 In addition, building transmission lines entails 

resolving difficult questions about how the cost of that 

capacity should be allocated.8

 Once constructed, 

transmission lines could be used by generators or customers who were not envisioned in the initial plan; thus, the

0

25

50

75

100

125

150

175

200

225

Onshore

Wind

Wood and

Other

Biomass

Geothermal

Energy

Municipal

Waste

Solar

Photovoltaic

Solar

Thermal

Offshore

Wind

2.2%

1.0%

0.4% 0.4%

0.1% 0.03% 0%

3.2% 3.1%

1.0%

0.3% 0.4%

0.02% 0.01%

a b

Actual, 2010

Total Generation = 4,136 Billion Kilowatt Hours

Projected, 2035

Total Generation = 5,150 Billion Kilowatt Hours

7. Charles Ebinger, remarks given at the Brookings Institution seminar “Energy and Climate Change 2010: Back to the Future,” 

Washington, D.C., May 18, 2010, www.brookings.edu/~/media/

Files/events/2010/20100518_energy_climate/

20100518_energy_climate_change_II.pdf. 

8. For a discussion of siting and cost-allocation issues, see Stan Mark 

Kaplan, Electric Power Transmission: Background and Policy Issues, 

CRS Report for Congress R40511 (Congressional Research 

Service, April 14, 2009); and Mason Willrich, “Electricity Transmission Policy for America: Enabling a Smart Grid, End‐to‐End” 

(seminar presentation to the Center for Environmental Public 

Policy, Goldman School of Public Policy, University of California, 

Berkeley, November 18, 2009), http://gspp.berkeley.edu/

programs/docs/CEPP_Willrich_111809.pdf. 
CHAPTER ONE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 11

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Figure 1-4.

Average Annual Wind Speeds in the United States at 80 Meters Above the Ground

Source: Congressional Budget Office based on information from the National Renewable Energy Laboratory, www.windpoweringamerica

.gov/wind_maps.asp.

Note: Locations with an average annual wind speed of at least 6.5 meters per second at a height of 80 meters are considered well suited to 

generating wind power.

generators and customers who agreed to an initial 

allocation of cost might need to renegotiate that plan as 

additional generators and customers wanted to make use 

of the new lines. 

Intermittency. Wind and solar plants can be operated 

only part of the time because the wind does not always 

blow and the sun is not always visible. On average, wind 

plants produce just 34 percent of the electricity that they 

could if they operated continuously; solar plants produce 

22 percent to 31 percent of their theoretical full capacity, 

depending on the type of plant.9

 As a result of those low 

“capacity factors,” the capital costs of building wind and 

solar plants are spread over a fairly small amount of 

generation, and hence the plants tend to have relatively 

high average costs. That intermittency, together with a 

lack of a low-cost way to store electricity, also means that 

wind and solar power cannot serve as a source of continuous electric power, as base-load generation through coal 

combustion does. Finally, periods of high wind or bright 

sunshine may not correspond with the periods when the 

value of electricity, and thus the price that generators 

More than 10

Less than 4

8 to 10

6 to 8

4 to 6

Wind Speed (Meters per second)

9. See Department of Energy, Energy Information Administration, 

“2016 Levelized Cost of New Generation Resources from the 

Annual Energy Outlook 2010” (no date), www.eia.doe.gov/oiaf/

aeo/pdf/2016levelized_costs_aeo2010.pdf.
12 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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could charge for it, is highest.10 That fact tends to limit 

the potential for renewable generation to be dispatched 

(or increased quickly) when the demand for electricity is 

greatest. 

In general, wind and solar plants are more frequently 

substituted for natural-gas-fired generation than for 

coal-fired generation, because natural gas tends to have 

higher operating costs than coal and because coal plants 

tend to operate continuously. However, for the reasons 

described above, an additional megawatt of solar or wind 

capacity cannot substitute for an additional megawatt of 

nonrenewable capacity. For example, given the current 

generation mix in the United States, EIA estimates that 

50 megawatts of wind capacity would be required to 

replace 20 megawatts of natural-gas-fired capacity. In the 

absence of a low-cost means of storing electricity, the 

intermittent nature of wind and solar energy would 

significantly limit their ability to provide the majority 

of the nation’s electricity, even if all regions were equally 

well suited for such generation. 

Potential Effects of Large-Scale Use of Biomass. Unlike 

wind and solar power, biomass can be used to produce 

electricity around the clock; therefore, biomass may be 

able to substitute for coal in supplying continuous 

base-load generation. However, as reliance on biomass 

grows—for producing biofuels for the transportation 

sector as well as for use in the electricity sector—its price 

may increase. Current biomass sources include waste 

products generated by the forest products industry and 

by farms. Increased reliance on biomass to generate 

electricity and to supply transportation fuels could 

involve growing crops explicitly for that purpose, which 

could drive up prices for land and for the agricultural 

commodities that the biomass crops would displace.11

One estimate suggests that growing enough biomass to 

satisfy 6 percent of total U.S. electricity demand in 2008 

would have required an amount of land roughly equal to 

that currently being farmed for all types of crops in 

Iowa.12

Burning biomass specifically grown for electricity generation in place of fossil fuels could also raise questions 

about the extent to which such a substitution would actually reduce CO2 emissions. Determining the ultimate 

effect of that substitution would require comparing all of 

the emissions that result from producing, distributing, 

and burning both types of fuel (so-called life-cycle emissions). Such calculations are complicated and depend on 

assumptions about whether land-use patterns would be 

altered by growing biomass for energy production.13

Technological, Safety, and Environmental Uncertainties. 

No commercial-scale electricity plants currently exist that 

capture, compress, and store CO2 emissions. As a result, 

the cost of building such a plant is uncertain, although 

both construction and operating costs would be higher 

than for an equivalent new plant without that capability. 

A generating plant designed for carbon capture and storage would need additional equipment to separate CO2

from the rest of the exhaust gases, capture it, and compress it so that it could be transported to storage sites. 

Moreover, capturing and compressing CO2 is an energyintensive process, which would consume 15 percent to 

30 percent of the total electricity that the plant would 

produce. As a result, the plant would need to be larger 

than one that sold the same amount of electricity but did 

not capture and store its CO2 emissions, and it would 

require more inputs for each MWh of electricity that it 

sold. Because no full-sized plants with that capability 

have yet been built, available cost estimates rely on engineering designs. However, as technologies pass through 

different stages from development to commercialization, 

researchers often discover that the actual implementation 

of a concept is more complicated, and hence more expensive, than it first appeared.14

10. Failure to account for that fact can lead to misleading comparisons 

between the market value of wind or solar plants and conventional 

alternatives. See Paul L. Joskow, Comparing the Costs of Intermittent and Dispatchable Electricity Generating Technologies

(Massachusetts Institute of Technology, Center for Energy 

and Environmental Policy Research, September 2010). 

11. See Congressional Budget Office, The Impact of Ethanol Use on 

Food Prices and Greenhouse-Gas Emissions (April 2009).

12. See Kelsi Bracmort, Biomass Feedstocks for Biopower: Background 

and Selected Issues, CRS Report for Congress R41440 (Congressional Research Service, October 6, 2010), www.fas.org/sgp/crs/

misc/R41440.pdf. 

13. See Congressional Budget Office, The Impact of Ethanol Use on 

Food Prices and Greenhouse-Gas Emissions.

14. That phenomenon is so common that energy modelers often 

include a “technological optimism factor” to compensate for early 

underestimates of final costs. See Department of Energy, Energy 

Information Administration, “The National Energy Modeling 

System: An Overview—Electricity Market Module” (October 

2009), www.eia.doe.gov/oiaf/aeo/overview/electricity.html.
CHAPTER ONE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 13

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Figure 1-5.

Projected Annual Additions to U.S. Generating Capacity Through 2035

(Percentage of total generating capacity)

Source: Congressional Budget Office based on data from Department of Energy, Energy Information Administration, Annual Energy Outlook 

2011, with Projections to 2035 (April 2011), www.eia.gov/forecasts/aeo/.

Note: Added capacity is relatively high from 2010 through 2012 in part because of cash grants provided through the American Recovery and 

Reinvestment Act of 2009 that are set to expire at the end of 2011.

Expanding carbon capture and storage could also be 

hampered by environmental or safety concerns about the 

potential for unintentional releases of compressed CO2. 

Likewise, new nuclear power plants would raise safety 

and environmental concerns. Opponents of nuclear 

power cite potential risks and environmental damage 

from mining, processing, and transporting uranium; 

the risk of nuclear weapons proliferation; the unsolved 

problem of storing nuclear waste safely; and the potential 

hazard of a serious accident. Such concerns make developing new nuclear generating capacity difficult, time 

consuming, and costly. As a result, no new nuclear plant 

has begun operating in the United States during the past 

15 years.

Limited Growth in New Capacity. Altering the generation 

mix could be achieved at the lowest possible cost through 

an RES or CES if generators could simply invest in qualifying generation when they needed to add capacity. In 

that case, the share of generation provided by qualifying 

sources would increase gradually, without forcing the 

premature retirement of existing capacity.15

However, the demand for new generating capacity in 

the United States is expected to be relatively low in coming decades. Predictions from EIA suggest that annual 

construction of new capacity will account for less than 

1 percent of total generating capacity each year between 

2013 and 2035 (see Figure 1-5), and cumulative new 

capacity over that period will make up just 12 percent 

of generating capacity in 2035. Capacity growth is 

projected to be particularly slow in the near future: 

Annual construction of new capacity is expected to be 

less than 0.7 percent of total capacity each year between 

2013 and 2025, and cumulative new capacity over that 

time frame is expected to account for only 6 percent of 

capacity in 2025. 

The limited demand for construction of new generating 

capacity stems from a variety of factors, including: 

 Excess generating capacity in the electricity sector 

today—driven in part by incentives for new wind generation (see Box 1-1 on page 9)—which lessens the 

need for firms to replace capacity that is due to be 

retired in the next decade;

 The fact that virtually no existing capacity is scheduled to be retired between 2021 and 2031; and 

2010 2015 2020 2025 2030 2035

0

0.5

1.0

1.5

2.0

15. That approach would also mean that the reduction in 

CO2 emissions induced by the policy would occur slowly.
14 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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 Slow projected growth in the total demand for electricity in the United States over the next 25 years. The 

growth rate of electricity production has gradually 

declined over the past several decades, from an average 

of 4 percent a year in the 1970s, to 3 percent in the 

1980s, 2 percent in the 1990s, and less than 1 percent 

in the past decade. Much of that slowdown in growth 

reflects the fact that the U.S. economy has become less 

electricity intensive per unit of output. For example, 

between 1980 and 2009, electricity generation grew 

much more slowly, on average, than real (inflationadjusted) gross domestic product (by 1.8 percent a 

year versus 2.8 percent).16

By itself, slow growth in the demand for electricity could 

reduce the cost of meeting an RES or CES. The reason 

is that achieving the standard would require a smaller 

absolute increase in qualifying generation if growth in 

demand was slow than if it was rapid. However, coupled 

with slow turnover in the existing capital stock, slow 

growth in demand for electricity could increase the 

likelihood that meeting the standard would force the 

premature retirement of existing power plants. 

16. See Department of Energy, Energy Information Administration, 

Annual Energy Review 2009 (August 2010), Table 8.1, 

www.eia.gov/emeu/aer/pdf/pages/sec8_5.pdf; and Pew Center 

on Global Climate Change, “Electricity Overview” (June 2011), 

www.pewclimate.org/technology/overview/electricity.
CHAPTER

CBO

2

Potential Effects of a Renewable or 

Clean Electricity Standard

A renewable or clean electricity standard would 

directly alter the mix of sources used to generate electricity in the United States, which in turn would change the 

amount of greenhouse gases and other pollutants emitted 

by electricity generators and the prices charged for electricity. Those effects would vary across the country. 

In addition, some advocates of a federal RES or CES 

suggest that it would reduce U.S. dependence on foreign 

sources of energy. Such an outcome is unlikely, however, 

because the vast majority of fuel used to generate electricity in the United States—primarily coal and natural 

gas—already comes from domestic sources. (The United 

States produces enough coal to be a net exporter, and 

only about 12 percent of the natural gas it consumes is 

imported, on net.) Further, because petroleum accounts 

for just 1 percent of electricity generation, an RES or 

CES would not significantly affect U.S. oil consumption 

or imports.1

To better understand the potential impact of a renewable 

or clean electricity standard, the Congressional Budget 

Office (CBO) examined seven recent analyses of potential federal standards conducted by various government 

or independent organizations (see Table 2-1).2

 Each policy that was analyzed represents a unique combination of 

features. Three of the policies would establish a 25 percent RES, but they differ in terms of whether utilities 

could make an alternative compliance payment (ACP) 

instead of submitting credits and whether generators 

would receive multiple credits for certain technologies 

(those design features are described in Chapter 1). Two of 

the policies would establish a 25 percent CES, one of 

which would allow natural gas generation at plants that 

began operation after the policy took effect to qualify for 

credits and one of which would not. The other two policies would establish a 20 percent RES, one with an ACP 

provision and one without. The seven analyses simulated 

the effects of those policies using three models of the 

electricity sector: 

 The National Energy Modeling System (NEMS), 

which was developed by the Department of Energy’s 

Energy Information Administration (EIA); 

 The Regional Energy Deployment System (ReEDS) 

model, which was created by the National Renewable 

Energy Laboratory (NREL), also part of the Department of Energy; and

 Haiku, which was developed by the independent 

research organization Resources for the Future (RFF).3

1. Department of Energy, Energy Information Administration, 

Annual Energy Outlook 2011, with Projections to 2035 (April 

2011), www.eia.gov/forecasts/aeo/.

2. For descriptions of each analysis, see Department of Energy, 

Energy Information Administration, Impacts of a 25-Percent 

Renewable Electricity Standard as Proposed in the American Clean 

Energy and Security Act Discussion Draft (April 2009), 

www.eia.gov/oiaf/servicerpt/acesa/index.html; Patrick Sullivan 

and others, Comparative Analysis of Three Proposed Federal Renewable Electricity Standards, Technical Report NREL/TP-6A2-45877 

(National Renewable Energy Laboratory, May 2009), 

www.nrel.gov/docs/fy09osti/45877.pdf; and Alan J. Krupnick 

and others, Toward a New National Energy Policy: Assessing the 

Options (National Energy Policy Institute and Resources for the 

Future, November 2010), http://nepinstitute.org/publications/

toward-a-new-national-energy-policy-assessing-the-options/.

3. For documentation on NEMS, see Department of Energy, Energy 

Information Administration, “The National Energy Modeling 

System: An Overview” (October 2009), www.eia.gov/oiaf/aeo/

overview/index.html; on ReEDS, see National Renewable Energy 

Laboratory, “Regional Energy Deployment System” (no date), 

www.nrel.gov/analysis/reeds/; and on Haiku, see Anthony Paul 

and Dallas Burtraw, The RFF Haiku Electricity Market Model

(Resources for the Future, June 2002), www.rff.org/RFF/

Documents/RFF-RPT-haiku.pdf.
16 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

CBO

Table 2-1. 

Effects of Seven Potential Federal Renewable or Clean Electricity Standards

Continued

Model Used

Final Year of Projection

Unique Policy Features

Without Policy (Baseline)

Billions of kilowatt hours 472 699 471 558 788 423 423

Percentage of electricity sales 10 14 10 12 18 9 9

With Policy

Billions of kilowatt hours 887 867 1,001 1,005 1,151 613 905

Percentage of electricity sales 20 18 22 22 26 14 20

Renewable

Wind 41 81 106 30 8 157 373

Biomass 360 14 410 125 117 33 100

Geothermal Energy 6 18 8 3 * 3 6

Solar Energy 8 55 7 6 4 0 0

Nonrenewable

Coal with Carbon Capture

and Storage 0 0 0 0 0 0 0

Coal -257 -161 -298 -234 -228 -102 -275

Natural Gas -150 1 -223 -216 -38 -84 -194

Nuclear Power -31 0 -41 283 127 -63 -94

West 50 76 96 19 5 74 174

Plains 115 20 156 59 51 92 154

East Central 65 38 85 31 28 5 59

Southeast 146 30 153 45 45 24 83

Northeast 39 4 41 10 -1 * 12

Millions of Metric Tons of CO2 -307 -150 -375 -307 -241 -138 -355

Percent -12 -6 -14 -12 -9 -5 -14

generation generation 

Energy baseline

against which

policy is

Policy-Induced Change in Generation in Final Year of Projection, by Source 

Amount of Qualifying Generation in Final Year of Projectionc

small utilities small utilities

exempted exempted

nucleara

NEMS ReEDS NEMS

(NREL) (RFF) (RFF)

measured

2030 2030 2030

triple credits; credits for triple credits;

receives receives

Selected Credits for Selected None

(EIA)

$50 ACP

With 

ACP

Without

$50 ACP

With 

(RFF)

$50 ACP

With 

25 Percent RES 25 Percent CES 20 Percent RES

(RFF)

and $50 ACP

With Natural Gas 

$25 ACP

With 

(RFF)

ACP

Without

policy is

Credits for

includes

hydropower

includes

hydropower

measured

CCS and

nuclear; partial

natural gasb

NEMS NEMS Haiku Haiku

2030 2030 2035 2035

CCS and

Energy baseline

against which

Policy-Induced Change in Renewable Generation in Final Year of Projection, by Region 

(Billions of kilowatt hours) 

(Billions of kilowatt hours) 

Electricity Sector in Final Year of Projection

Policy-Induced Change in CO2 Emissions from 
CHAPTER TWO THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 17

CBO

Table 2-1. Continued

Effects of Seven Potential Federal Renewable or Clean Electricity Standards

Source: Congressional Budget Office based on analyses by the Energy Information Administration (EIA), the National Renewable Energy 

Laboratory (NREL), and Resources for the Future (RFF).

Notes: RES = renewable electricity standard; ACP = alternative compliance payment; CES = clean electricity standard; NEMS = National 

Energy Modeling System; ReEDS = Regional Energy Deployment System; CCS = carbon capture and storage; CO2 = carbon dioxide; 

* = between -0.5 billion and 0.5 billion kilowatt hours; ** = between -0.5 percent and 0.5 percent.

The amounts shown here for alternative compliance payments are for the first year of the policy; those amounts rise over time with 

inflation.

a. Facilities that began operations after the policy went into effect and produce electricity using either nuclear power or fossil fuel with CCS 

would receive one credit for each kilowatt hour of electricity generated.

b. Facilities that began operations after the policy went into effect and produce electricity using either nuclear power or fossil fuel with CCS 

would receive one credit for each kilowatt hour of electricity generated. Natural-gas-fired facilities without CCS that began operations 

after the policy went into effect would receive a fraction of a credit for each kilowatt hour of electricity generated; depending on the type 

of natural gas technology used, that fraction would vary from 0.33 to 0.59, reflecting each technology’s rate of CO2 emissions relative to 

that of a new pulverized-coal-fired boiler.

c. For RES policies, qualifying sources of electricity generation consist of renewable energy (except hydropower and municipal solid waste). 

For CES policies, qualifying sources of generation also include integrated gasification combined-cycle plants with carbon capture and 

storage, as well as advanced nuclear and (if noted) natural gas plants completed after the policy took effect. A few of the policies in this 

table include municipal solid waste as a qualifying source of generation; however, for consistency among the policies, CBO excluded that 

source from the numbers shown here.

CBO’s aims in examining the seven analyses were to 

determine general trends in generation patterns resulting 

from RES and CES policies, to identify the effects that 

particular design features would have on policy outcomes, and to examine the extent to which models that 

reflect different assessments about the underlying costs of 

various technologies would predict different effects for 

similar policies. Those findings offer insights into the 

potential impact of any renewable or clean electricity 

standard that policymakers might consider. 

Unless otherwise indicated, all of the policies examined 

here had the following features:

 Qualifying sources of energy included wind (both 

offshore and onshore), certain types of biomass, 

geothermal energy, and solar energy (both thermal and 

photovoltaic);

 Hydropower and electricity derived from municipal 

solid waste were not considered qualifying renewable 

sources and were excluded from the base to which the 

standard was applied—that is, utilities would not have 

to purchase credits for their sales of electricity that was 

generated by hydropower or municipal solid waste; 

 Both existing and new sources of renewable generation 

were eligible for credits;

 Utilities could trade credits freely but could not bank 

or borrow them;

West 1 ** 1   **  -3

Plains -3 -1 -4 ** 1 1 2

East Central 2 -1 2 2 1 2 -1

Southeast 3 ** 4 3 3 5 10

Northeast 3 ** 2 1 2 -2 -4

With Without With With With Without

25 Percent RES 25 Percent CES 20 Percent RES

$50 ACP ACP $50 ACP $50 ACP

Between 2020 and 2030, by Region (Percent) 

Average Policy-Induced Change in Electricity Prices

With Natural Gas 

and $50 ACP $25 ACP ACP

(EIA) (NREL) (RFF) (RFF) (RFF) (RFF) (RFF)
18 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

CBO

 The presence of states’ renewable or clean electricity 

standards was accounted for in the baseline (that is, 

modelers increased the amount of renewable or clean 

electricity predicted to occur in the absence of a federal policy by the amount that would be mandated by 

state policies); and 

 The federal policy would begin in 2012 and be phased 

in gradually. (All of the 25 percent RES and CES 

policies would be fully phased in by 2025; the two 

20 percent RES policies would be fully phased in by 

2020.) 

Some of the policies included additional qualifying 

sources of electricity, such as ocean energy (power 

generated from tides or waves), landfill gas, and hydroelectricity from newly constructed facilities that met very 

specific restrictions. However, those sources were not 

projected to add significantly to renewable generation 

during the forecasting period—which ran through 2030 

for analyses using the NEMS and ReEDS models and 

through 2035 for analyses using the Haiku model. 

Each analysis reported regional changes in electricity generation and prices, but they defined regions in different 

ways. For example, ReEDS predicted changes at the state 

level, and NEMS produced estimates for 13 regions. For 

purposes of comparison, CBO adapted all of the models’ 

results to the five regions used in the Haiku model (see 

Figure 2-1).4

Effects on Sources and Locations of 

U.S. Electricity Generation

The seven RES and CES policies examined here showed 

some similarities in their projected effects on the mix of 

energy sources used to generate electricity. Nevertheless, 

the effects varied significantly depending on the specific 

features included in the policies and the assumptions 

used in the models. Policy features such as an alternative 

compliance payment can cause otherwise identical policies to have widely varying outcomes. In addition, the 

three models used to analyze the policies incorporated 

different estimates of the cost of producing electricity 

from various sources in the coming decades. As a result of 

those differences, the three models would predict different outcomes even if they were used to analyze the exact 

same policy. 

Similar Patterns in Findings 

Most of the analyses concluded that the bulk of the 

increase in renewable generation caused by an RES or 

CES would come from wind and biomass (see 

Figure 2-2). Analyses conducted using NEMS predicted 

that, on average, roughly 80 percent of policy-induced 

increases in renewable generation would stem from 

increases in biomass generation and that most of the rest 

would come from wind generation. Analyses using 

Haiku, which incorporated different estimates of the 

availability of renewable resources, also found that most 

new generation would be in the form of biomass and 

wind, but in a different proportion than NEMS; they 

estimated that wind would account for nearly 80 percent 

of policy-induced increases in renewable generation and 

that biomass would account for the rest. The NREL analysis, conducted using ReEDS, estimated a significantly 

larger increase in geothermal or solar generation than the 

other analyses did. As discussed below, that outcome 

stems from specific assumptions in the ReEDS model 

about the relative cost of various forms of renewable 

generation, as well as specific provisions in the policy 

that ReEDS was used to analyze.

In general, the three models projected that most of the 

increase in renewable generation would occur in the 

Southeast, the Plains, and the West (see Figure 2-3 on 

page 21). Analyses using NEMS, which predicted that 

the bulk of new renewable generation would come from 

biomass, concluded that the largest increases would occur 

in the Plains and the Southeast. Analyses using Haiku, 

which predicted that most renewable generation would 

come from wind, found the largest increases in renewable 

generation occurring in the West and the Great Plains—

areas that tend to have the best conditions for wind 

generation (see Figure 1-4 on page 11). The analysis conducted with ReEDS found new renewable generation 

more evenly distributed across the country. However, all 

of the models predicted that the Northeast would see the 

smallest increase in renewable generation. 

The two analyses of a clean electricity standard predicted, 

not surprisingly, that because the CES would be met in 

part by increases in nuclear generation, a 25 percent CES 

would result in much less expansion of renewable 

4. Because the smaller geographic areas used in ReEDS and NEMS 

did not have boundaries that corresponded to those of the larger 

areas used in Haiku, CBO constructed weighted averages of 

the smaller areas such that their population matched that of the 

five regions in the Haiku model in the initial period of each 

projection.
CHAPTER TWO THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 19

CBO

Figure 2-1.

The Five Regions Used for Reporting Changes in Prices and 

Generation in This Study

Sources: Congressional Budget Office; Resources for the Future. 

Note: The five regions shown here correspond to the regions used in reporting results from the Haiku model used by Resources for the 

Future. The regions are aggregations of electricity markets, which do not necessarily correspond to state boundaries. 

generation than a 25 percent RES would (see Figure 2-2). 

For example, according to analyses by Resources for the 

Future, generation from wind and biomass would be 

106 billion and 410 billion kilowatt hours higher, respectively, in 2030 as a result of a 25 percent RES but would 

be just 30 billion and 125 billion kilowatt hours higher, 

respectively, under a 25 percent CES without natural gas 

(see Table 2-1 on page 16). Allowing natural gas to qualify as a clean source under a CES would reduce the net 

increase in wind and biomass generation even more. 

Effects of Policy Design Features on the Amount of 

Renewable or Clean Generation 

Variations in the details of otherwise similar policies can 

create large difference in the policies’ effects. The actual 

percentage of electricity generated from renewable or 

other clean sources under an RES or CES would most 

likely differ from the stated standard. The size of that difference would depend on specific design features—such 

as exemptions for certain utilities, preferences for selected 

technologies, and alternative compliance payments. In 

five of the seven analyses that CBO examined, the projected share of generation from qualifying sources was 

3 to 7 percentage points less than the stated standard. 

In the other two analyses, the percentage of qualifying 

generation either met or exceeded the standard (for 

reasons explained below). 

Exempting certain utilities from the standard, and 

excluding some types of generation from the base to 

West

Plains

Southeast

East Central

Northeast
20 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

CBO

Figure 2-2.

Policy-Induced Change in Renewable Generation for the 

Final Year of the Projection, by Source

(Billions of kilowatt hours)

Source: Congressional Budget Office based on analyses by the Energy Information Administration (EIA), the National Renewable Energy 

Laboratory (NREL), and Resources for the Future (RFF). 

Notes: RES = renewable electricity standard; ACP = alternative compliance payment; CES = clean electricity standard; NEMS = National 

Energy Modeling System; ReEDS = Regional Energy Deployment System; * = no significant change in generation using geothermal 

energy; ** = no change in generation using solar energy.

The final year of the projection is 2030 for the 25 percent RES and the 25 percent CES and 2035 for the 20 percent RES.

which the standard was applied, would tend to cause the 

percentage of generation provided by qualifying sources 

to be less than the standard. Two of the versions of an 

RES examined here would exempt small generators, 

thereby reducing the share of electricity sales covered by 

the standard. Both EIA and RFF analyzed a 25 percent 

RES using NEMS; however, RFF found that the policy 

would induce more renewable generation than did EIA 

(see Figure 2-4), in part because EIA assumed that small 

utilities would be exempt from complying with the standard. Further, five of the seven policies would exclude 

existing generation from hydropower and municipal 

NEMS ReEDS NEMS NEMS NEMS Haiku Haiku

0

50

100

150

200

250

300

350

400

450

Wind Biomass Geothermal Energy Solar Energy

25 Percent RES 25 Percent CES 20 Percent RES

With $50 ACP

(EIA)

Without ACP

(NREL)

With $50 ACP

(RFF)

With $50 ACP

(RFF)

With Natural Gas

and $50 ACP

(RFF)

With $25 ACP

(RFF)

Without ACP

(RFF)

* ** **

Model Used in the Analysis
CHAPTER TWO THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 21

CBO

Figure 2-3.

Policy-Induced Change in Renewable Generation for the 

Final Year of the Projection, by Region

(Billions of kilowatt hours)

Source: Congressional Budget Office based on analyses by the Energy Information Administration (EIA), the National Renewable Energy 

Laboratory (NREL), and Resources for the Future (RFF).

Notes: RES = renewable electricity standard; ACP = alternative compliance payment; CES = clean electricity standard; NEMS = National 

Energy Modeling System; ReEDS = Regional Energy Deployment System; * = no significant change in generation in the Northeast.

The final year of the projection is 2030 for the 25 percent RES and the 25 percent CES and 2035 for the 20 percent RES.

solid waste (which together account for 6.3 percent of 

current generation) from the base to which the standard 

was applied. That exclusion alone would mean that the 

share of generation provided by qualifying sources could 

not exceed 93.7 percent (100 – 6.3 percent) of the stated 

standard. RFF’s analysis of a 20 percent RES was the only 

one that did not exempt sources from the base to which 

the policy was applied and, as a result, was the only policy 

in which the share of qualifying generation was equal to 

the standard, but only if an ACP was not included (see 

Figure 2-4).

Giving preference to certain technologies by awarding 

them more than one credit for each MWh of electricity 

that they produced would allow the standard to be met

NEMS ReEDS NEMS NEMS NEMS Haiku Haiku

-20

0

20

40

60

80

100

120

140

160

180

West Plains East Central Southeast Northeast

25 Percent RES 25 Percent CES 20 Percent RES

With $50 ACP

(EIA)

Without ACP

(NREL)

With $50 ACP

(RFF)

With $50 ACP

(RFF)

With Natural Gas

and $50 ACP

(RFF)

With $25 ACP

(RFF)

Without ACP

(RFF)

*

Model Used in the Analysis
22 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

CBO

Figure 2-4.

Percentage of Qualifying Generation for the Final Year of the Projection, 

Without and With the Policy

(Percent)

Source: Congressional Budget Office based on analyses by the Energy Information Administration (EIA), the National Renewable Energy 

Laboratory (NREL), and Resources for the Future (RFF).

Notes: RES = renewable electricity standard; ACP = alternative compliance payment; CES = clean electricity standard; NEMS = National 

Energy Modeling System; ReEDS = Regional Energy Deployment System.

The final year of the projection is 2030 for the 25 percent RES and the 25 percent CES and 2035 for the 20 percent RES.

with a smaller rise in qualifying generation, increasing the 

extent to which the actual percentage of generation from 

qualifying sources would be less than the standard. The 

25 percent RES policies modeled by the Energy Information Administration and the National Renewable Energy 

Laboratory (using the NEMS and ReEDS models, 

respectively) both contained a provision that would 

provide three credits for each MWh of electricity produced using solar photovoltaic technology. Because the 

ReEDS model included relatively optimistic assumptions 

about the cost of generating solar photovoltaic electricity 

(as discussed in the next section), that triple credit led to a 

much larger increase in solar generation in NREL’s 

analysis than in EIA’s analysis (see Figure 2-3 on page 21). 

NEMS ReEDS NEMS NEMS NEMS Haiku Haiku

0

5

10

15

20

25

30

Without Policy With Policy

25 Percent RES 25 Percent CES 20 Percent RES

With $50 ACP

(EIA)

Without ACP

(NREL)

With $50 ACP

(RFF)

With $50 ACP

(RFF)

With Natural Gas

and $50 ACP

(RFF)

With $25 ACP

(RFF)

Without ACP

(RFF)

Model Used in the Analysis
CHAPTER TWO THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 23

CBO

That increase in turn contributed to the substantial difference between the standard (25 percent) and the actual 

share of generation from renewable sources (18 percent) 

in NREL’s analysis (see Figure 2-4). Providing additional 

credits for particular technologies would also alter the 

mix and location of qualifying electricity generation used 

to meet the standard.

Another policy feature that could cause the share of generation provided by qualifying sources to be much lower 

than the stated standard is allowing utilities to comply 

through an alternative compliance payment. Resources 

for the Future’s analysis of a 20 percent RES (conducted 

using the Haiku model) demonstrates the potential effect 

of an ACP. The same 20 percent standard resulted in an 

actual share for renewable electricity of 14 percent when 

an ACP of $25 per MWh was included, compared with a 

20 percent share when no ACP was included (see 

Figure 2-4). The lower that policymakers set an ACP relative to the anticipated price of a credit, the larger would 

be the difference between the actual percentage of qualifying generation and the standard, because utilities would 

have a greater incentive to pay the ACP instead of 

submitting credits. Most of the other analyses that 

CBO examined included ACPs, but those payments 

had little impact because they were set at a high enough 

level ($50 per MWh) that they affected compliance in 

few, if any, years of the projections. 

Unlike the foregoing policy features, providing partial 

credits to certain technologies could cause the share of 

generation from qualifying sources to exceed the standard. For example, in Resources for the Future’s analysis 

of a 25 percent CES in which electricity generated from 

natural gas would receive a fraction of a credit, the share 

of generation provided by all qualifying sources was 

projected to be slightly higher than the 25 percent 

standard once the policy was fully in place.5

 Providing 

partial credits for a particular technology would also 

create an upper limit on the use of that technology. For 

example, if an 80 percent CES program provided half a 

credit for each MWh of electricity generated from natural 

gas and a full credit for electricity from all other designated clean sources, the share of total generation provided 

by natural gas could not exceed 40 percent even if all 

other generation was from zero-emission sources. 

Effects of Models’ Differing Estimates of Costs 

The future cost of generating electricity—whether from 

renewable or other clean sources or from conventional 

sources—is uncertain. Models that use different assumptions about costs will yield different predictions of the 

increase in renewable or clean generation that would be 

required to comply with a policy, as well as the mix of 

renewable or other clean sources that would result from a 

given standard. Differences between models’ outcomes 

are an indication of the uncertainty about the actual 

effects of a policy. 

The extent to which any particular RES or CES would 

increase renewable generation depends on the baseline 

against which the policy is measured—that is, on the 

amount of renewable generation that is predicted to 

occur in the future in the absence of the policy. Analyses 

in which the estimated cost of renewable generation is 

low relative to the cost of nonrenewable generation 

envision a larger share of renewable generation in the 

baseline. Thus, they predict that a smaller increase in 

renewable generation would be necessary to comply 

with a given standard. For example, the ReEDS model 

includes relatively low estimates of the cost of generating 

electricity from renewable sources, and it predicts that, 

in the absence of a standard, renewable generation will 

account for 14 percent of electricity sales in 2030—

4 percentage points higher than in any of the other RES 

analyses examined. As a result, ReEDS would predict a 

smaller increase in renewable generation from any particular standard than other models would (see Figure 2-4). 

In addition to the total change in renewable or clean 

generation, the mix of energy sources that each model 

predicts depends on many different factors. An increase 

in renewable or clean generation would tend to displace 

the most costly nonqualifying generation for which it 

could serve as a substitute. If all else was equal, such 

substitutions would be cheapest to make in places that 

5. That analysis also concluded that the use of natural gas would 

decline because of the policy even though utilities would comply 

in part by purchasing credits for electricity generated at new natural gas plants. That outcome illustrates the potential efficiency 

cost associated with providing credits only for generation from 

new, rather than all, natural gas plants. The policy would give utilities an incentive to invest in new natural gas plants but not an 

incentive to operate their existing plants more than they would 

otherwise. Thus, the policy could cause new plants (which would 

generate both electricity and credits) to be built while existing 

plants were being used less. Providing credits for existing sources 

could solve that problem, but, as described in Chapter 1, it would 

also have significant distributional effects that policymakers might 

find undesirable.
24 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

CBO

required new capacity, because generators could add 

renewable or other clean capacity, rather than nonqualifying capacity, to meet that need but would not have to 

scrap existing generating capacity. Thus, differences in 

models’ outcomes will depend on differences in assumptions about the costs of all types of generation, as well as 

on projections about the demand for new capacity in 

various regions. As a result, estimates of how the mix of 

generation would change because of a policy are uncertain, and estimates of the regional effects of a policy are 

even more uncertain. 

Effects on Greenhouse Gas Emissions 

An RES or CES would be likely to reduce greenhouse gas 

emissions, but the size of the reduction associated with a 

given standard is difficult to predict. It would depend in 

part on how much additional renewable or clean generation resulted from the standard. For example, although 

EIA’s and NREL’s analyses of a 25 percent RES showed 

similar shares of electricity being generated from renewable sources (20 percent and 18 percent, respectively), 

EIA predicted that the resulting decrease in CO2 emissions in 2030 would be more than twice as large as the 

decrease projected by NREL (see Table 2-1 on page 16). 

That disparity stems mainly from differences in the 

baseline amount of renewable generation predicted by 

EIA’s NEMS model and NREL’s ReEDS model. The 

ReEDS model predicted 40 percent more renewable 

generation in the absence of a standard than the NEMS 

model did. Consequently, the analysis using ReEDS 

projected that the RES would lead to a smaller increase in 

renewable generation and hence a smaller reduction in 

CO2 emissions. 

The actual decrease in CO2 emissions that would 

result from a policy would also depend on the type of 

generation being displaced by new renewable or clean 

generation. The reduction in emissions would be greater 

if renewable generation displaced coal-fired generation 

rather than natural-gas-fired generation, because generating a MWh of electricity from coal produces roughly 

twice as much CO2 as generating the same amount of 

electricity from natural gas.6

 In general, biomass generation is somewhat more likely to displace coal-fired 

generation, and wind generation is somewhat more likely 

to displace natural-gas-fired generation (because of their 

locations and differences in their ability to provide 

base-load generation). Thus, if everything else is equal, 

models that predict that generators will rely on increases 

in biomass generation to comply with a policy will 

project larger reductions in CO2 than will analyses that 

predict greater reliance on wind generation.7

Policymakers could set a more ambitious standard for the 

amount of generation to come from clean sources than 

for the amount to come from renewable sources.The 

reason is that a CES would allow for the use of technologies—such as nuclear power and coal- or natural-gas-fired 

generation with carbon capture and storage—that could 

probably be deployed on a large scale (setting aside concerns about health and environmental effects and costs, as 

well as technological uncertainty about carbon capture 

and storage) and that could provide a reliable source of 

base-load generation. As noted in Chapter 1, the potential for large-scale deployment of renewable technologies 

is much more limited, because such technologies are typically well suited to only certain parts of the country and, 

in the case of wind and solar generation, are dependent 

on fluctuating conditions. 

Effects on Prices for Electricity 

Either an RES or a CES would raise the overall cost of 

producing electricity in the United States. Without such 

a standard, generators in competitive electricity markets 

would choose the mix of sources that maximized their 

profits, and in regulated markets, regulators would tend 

to require a mix that minimized the cost of electricity 

production. An RES or CES would induce them to alter 

that mix and produce electricity in a more costly manner 

(not accounting for any environmental or other benefits 

of changing the mix). 

6. See Alan J. Krupnick and others, Toward a New National Energy 

Policy: Assessing the Options (National Energy Policy Institute and 

Resources for the Future, November 2010), p. 99, 

http://nepinstitute.org/publications/toward-a-new-nationalenergy-policy-assessing-the-options/.

7. Some studies suggest that renewable electricity standards would be 

more likely to reduce use of natural gas than of coal. See Krupnick 

and others, Toward a New National Energy Policy, p. 100; and 

Carolyn Fischer and Louis Preonas, “Combining Policies for 

Renewable Energy: Is the Whole Less Than the Sum of the Parts?” 

International Review of Environmental and Resource Economics,

vol. 4, no. 1 (June 2010), pp. 51–92.
CHAPTER TWO THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 25

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Factors Affecting Electricity Prices in 

Different Areas

The change in the generation mix prompted by an RES 

or CES, and the fact that utilities would have to buy (or 

in some cases could sell) credits, would alter electricity 

prices throughout the country. Regional price changes 

would depend on changes in regional production costs, 

the amount of electricity and credit revenue flowing into 

and out of regions, and the manner in which prices were 

determined in each location. 

The majority of states have regulated electricity markets 

(known as “cost-of-service” markets). In those areas, 

policy-induced changes in electricity prices would reflect 

changes in the average cost of producing electricity in the 

region as well as purchases and sales of credits. Prices 

would go up in regulated areas if average production costs 

increased because of generators’ efforts to use qualifying 

sources to meet the region’s compliance obligations or if 

the region became a net purchaser of credits. Prices could 

fall in a regulated region if it became a net seller of credits. For example, electricity prices could fall in a regulated 

market under a 25 percent RES if, before the policy, 

30 percent of the region’s electricity came from wind. 

In that case, existing wind generators would be able to 

sell more credits than the region would need to comply 

with the policy, and the revenue from the additional sales 

would be passed on to electricity customers in the form of 

lower prices. 

Electricity prices could also rise or fall in the 14 states 

that have restructured their markets to give consumers 

access to competitive interstate electricity markets. Electricity prices in those competitive markets reflect the cost 

of the “marginal” supply of electricity (that is, the incremental cost of the most expensive generation used to 

meet demand). In those markets, the effects of an RES or 

CES on retail electricity prices would depend on how the 

increased reliance on renewable sources affected the incremental cost of the marginal supplier. Average costs would 

be higher with a standard, but those averages could 

include high fixed costs and low variable (and thus, low 

incremental or marginal) costs for some generation 

sources. Thus, prices based on marginal costs could either 

rise or fall in competitive electricity markets under an 

RES or CES. 

If a standard caused electricity prices to rise in a region, 

the costs of the policy would be borne by local consumers 

of electricity; but if prices fell in a region, the costs would 

be borne by electricity producers in that region or by 

consumers in other regions (areas that were net buyers of 

credits would subsidize production in areas that were net 

sellers of credits). Costs would tend to be borne by 

producers in places where wholesale electricity prices were 

set in competitive markets and where the policy altered 

the generation mix in such a way that the marginal cost 

of producing electricity in the region declined. That 

outcome was predicted for the Northeast under both of 

the 20 percent RESs analyzed using the Haiku model: 

Additional wind generation was predicted to displace 

natural-gas-fired generation there, causing the marginal 

cost of producing electricity in the region to fall. 

Although producers could bear the costs of a reduction in 

prices in a region for some time (until existing plants 

were retired), such an outcome could not be sustained 

over the very long run. Policy-induced decreases in electricity prices in a region would cause the value of existing 

capital for nonqualifying generation to decline, because 

the present value of the anticipated revenue from using 

that capital stock would be lower. That decline in value 

would cause less new capital to enter the industry and 

could cause existing capital to be retired sooner than it 

would be otherwise. Having less generating capacity, in 

turn, would decrease the supply of electricity and eventually lead to higher electricity prices. Thus, consumers 

would bear the costs of meeting the standard in the very 

long run. 

Results of Specific Analyses

All of the analyses that CBO examined reported policyinduced changes in retail electricity prices; however, they 

reported the changes for different years and different geographic areas. For purposes of comparison, CBO looked 

at average changes in retail electricity prices between 

2020 and 2030—the period when most of the policies 

would have the largest impact on prices—and mapped 

the price results into the five regions used above to compare the estimated effects of policies on the sources and 

locations of electricity generation (see Figure 2-1 on 

page 19). 

The RES and CES policies examined in this study tended 

to produce small increases in average retail electricity 

prices in the United States. Those price effects varied 

significantly, however, among models and policies. For 

example, the two 25 percent RES policies modeled by 

EIA and RFF and the 25 percent CES that excluded natural gas were predicted to reduce electricity prices in the 
26 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Figure 2-5.

Average Change in Electricity Prices Between 2020 and 2030, by Region, 

Under Seven Potential Federal Electricity Standards

(Percentage change)

Source: Congressional Budget Office based on analyses by the Energy Information Administration (EIA), the National Renewable Energy 

Laboratory (NREL), and Resources for the Future (RFF). 

Notes: RES = renewable electricity standard; ACP = alternative compliance payment; CES = clean electricity standard.

The regions used in this figure correspond to those shown in Figure 2-1 on page 19. For more information about the seven electricity 

standards analyzed, see Table 2-1 on page 16.

Plains region but to increase prices in the other four 

regions (see Figure 2-5). Including natural gas as a qualifying source in the CES caused electricity prices to be 

virtually unchanged in the West but led to higher prices 

in the four remaining regions, including the Plains. 

The two 20 percent RES policies (with and without an 

ACP) modeled using Haiku produced their largest price 

increases in the Southeast and their largest price decreases 

in the Northeast. Including the ACP significantly dampened the price changes that would otherwise result from 

that policy. 

The 25 percent RES modeled by NREL using ReEDS 

produced very small decreases in electricity prices in 

all five regions. As described above, the ReEDS model 

projected more renewable generation in the baseline than 

other models did and thus required less change in the 

West Plains East Central Southeast Northeast

-6

-4

-2

0

2

4

6

8

10

12

25 Percent RES

With $50 ACP (RFF)

Without ACP (NREL)

With $50 ACP (EIA)

25 Percent CES

With $50 ACP (RFF)

With Natural Gas and

$50 ACP (RFF)

20 Percent RES

With $25 ACP (RFF)

Without ACP (RFF)
CHAPTER TWO THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 27

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generation mix—and less additional cost—to meet any 

particular standard. That lower additional cost, however, 

does not explain ReEDS’s projection of price declines in 

all regions. Prices would drop everywhere only if producers, rather than consumers, bore the cost of the policy. 

But as noted above, such losses would manifest themselves as a reduction in the value of existing capital in 

the electricity-generating sector and would ultimately 

decrease the amount of generating capacity. That 

decrease, in turn, would eventually cause prices to rise, 

meaning that the cost of the policy would ultimately be 

borne by electricity consumers. 

The large variation in price changes found by different 

models and for different policies indicates the substantial 

uncertainty about regional price effects. The price 

changes predicted for a given policy in a given area are 

highly dependent on the baseline generation mix projected for that area, the investment in qualifying sources 

that takes place, and the manner in which prices are 

determined. Thus, although the price effects of any given 

RES or CES will inevitably vary among regions, the pattern of that variation is difficult to predict with certainty. 

Interaction of a Federal Standard with 

Existing State Standards

The wide variety of renewable and clean electricity standards that exist at the state level make it harder to assess 

the impact of imposing a federal RES or CES. Moreover, 

enacting a federal standard would alter the effects of 

states’ policies. The combined effects of federal and state 

standards would depend on details of all of the standards, 

such as whether a single MWh of renewable or other 

clean electricity generation could qualify for both a 

federal and a state credit. Because of the additional constraints that state standards could impose on the mix of 

qualifying generation, any desired increase in the overall 

percentage of electricity produced from renewable or 

other clean sources in the United States could be achieved 

at a lower cost through a well-designed federal standard 

than through a combination of a federal standard and 

numerous state standards. 

Effects on the Total Amount of Qualifying 

Generation 

If a federal RES or CES existed alongside current state 

standards, a central question in predicting the impact on 

the total amount of renewable or clean electricity generation is whether the policies would overlap (so the same 

unit of power generation could be used to comply with 

both standards) or whether they would be cumulative (so 

more qualifying generation would be needed to satisfy 

both policies). 

If the same MWh of qualifying electricity generation 

could be used to comply with both a federal and a state 

standard, the total amount of renewable or clean generation in the United States would be determined by either 

the combined effect of the state standards or by the 

federal standard—whichever was more stringent. That 

situation would arise if state governments and the federal 

government operated their own programs, issuing their 

own credits and monitoring compliance with their particular standard. That approach would allow both levels of 

government to define their own program rules and to 

ensure their own standards for monitoring and enforcement; however, it would entail duplicative administrative 

and enforcement efforts. 

If, by contrast, a MWh of qualifying generation could 

not be used to comply with both the federal standard and 

a state standard, total renewable or clean generation 

nationwide would be greater than either the amount 

required by the federal standard or the aggregate amount 

mandated by state standards. That situation would arise 

if state-issued credits could be used only to comply with 

state programs and federal-issued credits only with the 

federal program, and if each qualifying MWh of electricity could be issued a credit under either program but not 

both. For example, if utilities in Nevada simultaneously 

had to comply with that state’s 15 percent RES and a 

5 percent federal RES in 2015, and if they could not use 

the same unit of renewable generation to meet both standards, they would have to obtain enough credits to cover 

20 percent of their electricity sales, a percentage greater 

than either the state or the federal RES.

The existence of numerous state standards makes it 

more difficult to predict not only the total amount of 

qualifying generation that would occur in the absence of 

a federal policy but also the incremental increase in such 

generation that a federal RES or CES would bring about. 

As discussed above, the renewable or clean generation 

induced by state standards is typically built into baseline 

projections of the mix of generation that would occur in 

the absence of a federal RES or CES. That baseline is thus 

heavily dependent on state policies that may change over 

time. More-stringent state standards diminish the incremental impact of any particular federal standard. 
28 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Effects on Credit Prices 

State standards that motivate more renewable or clean 

generation in a state than would have occurred in the 

absence of those standards would tend to lower the price 

of a federal credit and the cost of complying with the federal program, provided that a single MWh of generation 

could qualify for credits under both programs. In essence, 

each MWh of renewable or other clean electricity that is 

generated in a state as a result of the state’s standard 

simultaneously would produce a credit for use in the 

federal program at no additional cost. That “free” credit 

would lower the cost of meeting the federal standard and 

the price of credits traded in the federal program—but 

only because the cost of producing that credit would be 

attributed to the cost of meeting the state program and be 

reflected in the price of state credits. 

Just as the existence of state programs would affect the 

price of credits traded in a federal program, enactment of 

a federal program would affect the price of credits traded 

in state programs. For example, if a federal standard 

induced more qualifying generation in a particular state 

than required under the state standard, the federal program would drive down the price of that state’s credits to 

zero. 

Effects on the Overall Cost of Increasing 

Renewable or Clean Generation 

Regardless of what increase policymakers wanted to 

achieve in the share of U.S. electricity generated from 

renewable or other clean sources, it would cost less to 

produce that increase with an appropriately designed federal standard than with a combination of federal and state 

standards. By itself, a federal standard would create a 

national credit-trading program that would allow market 

forces to determine where and how investments in qualifying sources of electricity generation would occur. The 

existence of state standards, however, would constrain 

that mix, potentially forcing higher-cost generation to be 

used for compliance than would otherwise be the case. 
CHAPTER

CBO

3

Considerations in Designing a Cost-Effective 

Renewable or Clean Electricity Standard

The overall cost of meeting a renewable or clean 

electricity standard cannot be known with certainty, but 

policymakers could help minimize those costs by adding 

various design features, such as allowing credits to be 

traded freely among interested parties, letting as many 

energy sources as possible generate credits, gradually 

phasing in the standard, and permitting utilities to shift 

credits between years through banking and borrowing. 

The seven analyses that the Congressional Budget Office 

examined in Chapter 2 assumed that credits could be 

traded and that a wide variety of sources, but not all 

potential sources, would be allowed to generate credits. 

(For example, none of the analyses assumed that electricity generated by existing natural-gas-fired plants would 

be eligible for partial credits.) Finally, all of the policies 

analyzed assumed that the standards would be phased in 

gradually but that firms would not be allowed to bank or 

borrow credits. 

If the objective is to reduce carbon dioxide emissions, a 

program in which the government set a nationwide cap 

on such emissions and created tradable emissions allowances could offer a lower-cost method of achieving that 

goal than either an RES or a CES (see Box 3-1). Such a 

cap-and-trade program could be more comprehensive 

than an electricity standard. It would also provide a direct 

incentive to curb CO2 emissions in many different ways, 

could motivate low-cost reductions throughout the entire 

economy, and could guarantee that emissions stayed 

below a defined level. By contrast, an RES or CES would 

provide direct encouragement for the use of renewable or 

other clean energy sources, but CO2 emissions would be 

reduced only as a by-product of utilities’ compliance with 

the standard. 

Effects of Credit Trading on Costs

Because opportunities for expanding renewable and clean 

electricity generation vary greatly among regions, credit 

trading would enable the nation to meet an RES or CES 

by using the lowest-cost opportunities. (That variation 

reflects, among other things, differences in the availability 

of renewable resources and the need for additional generating capacity.)

As a further step, allowing entities other than generators 

and utilities—such as financial firms—to trade credits 

could provide substantial cost savings. Having a broader 

range of participants would increase the liquidity of the 

market for credits, making it easier for utilities and generators to identify other parties with whom to trade and to 

complete large transactions without affecting the market 

price of credits. Another benefit of broad participation 

would be to improve the quality of the information 

underlying credit prices. Like traders in any market, 

active credit traders would have a financial incentive to 

study the market and the industries underpinning it, 

because their profits from providing liquidity would 

depend on their ability to forecast the future price of 

credits. As a result, those traders would bring to the 

bargaining table up-to-date information about the factors 

that would determine credit prices, such as the demand 

for electricity and the cost of adding qualifying 

generation. 

Allowing a wide variety of entities to trade credits would 

be likely to spawn a market for credit derivatives—financial contracts whose value would depend on the future 

price of credits. Utilities, electricity generators, and other 

participants in the credit market could use derivatives to 

protect themselves from changes in prices (just as farmers 

use derivatives on agricultural commodities to lock in 

prices for their crops before the crops are harvested or 
30 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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Continued

even planted). The availability of derivatives would lower 

a utility’s compliance costs by giving it a relatively low 

cost and convenient way to reduce uncertainty about the 

cost of acquiring credits in the future. In the absence of 

derivatives, utilities’ main option for avoiding that uncertainty would be to buy and hold large amounts of credits 

themselves.

At the same time, observers worry that permitting third 

parties to trade credits and allowing the use of derivatives 

could foster complex or opaque transactions, price bubbles, market manipulation, or other instabilities that 

could raise the cost of complying with the standard and 

harm the broader economy. In the case of a proposed 

national cap-and-trade program, that potential spurred 

calls to prohibit or otherwise limit certain types of market 

participants or transactions. An earlier CBO analysis of 

such proposals concluded that less restrictive limits would 

generally have a greater chance of addressing observers’ 

Box 3-1.

The Cap-and-Trade Alternative for Decreasing CO2 Emissions

Neither a renewable electricity standard (RES) nor a 

clean electricity standard (CES) could achieve a 

desired reduction in carbon dioxide (CO2) emissions 

at as low a cost as a “cap-and-trade” program could. 

Under such a program, the federal government would 

set increasingly tight annual limits on greenhouse gas 

emissions (including CO2, the primary greenhouse 

gas emitted as a result of human activity) over the 

course of several decades. The government would distribute rights (or allowances) for those emissions by 

either selling them, possibly in an auction, or by giving them away. Companies that would be subject to 

the cap—such as electricity generators, oil importers, 

and natural gas producers—would be permitted to 

buy and sell allowances after the initial distribution. 

They could also shift allowances over time to some 

degree by “banking” unused allowances for future use 

or by “borrowing” allowances designated to permit 

emissions in future years. The price of allowances 

would rise to the level necessary to ensure that the 

limit on cumulative emissions over the life of the policy (implied by the annual caps) was met. 

A federal cap-and-trade program has been operating 

in the United States since 1995 to limit emissions 

that cause acid rain, and the European Union and a 

number of U.S. states have implemented cap-andtrade programs to curb greenhouse gas emissions.1

The 111th Congress debated, but did not pass, a 

federal cap-and-trade program for greenhouse gas 

emissions.2

A cap-and-trade program could cover the whole 

economy, or it could be limited to the electricity sector. The wider the coverage, the more cost-effective 

the policy would be. Even a cap-and-trade program 

that was limited to the electricity sector could achieve 

a given reduction in CO2 emissions at a lower cost 

than an RES or CES could. A cap-and-trade program 

that covered the entire economy could achieve that 

cut at an even smaller cost. 

The main advantage of a cap-and-trade program 

over an electricity standard is that it could provide a 

direct and comprehensive incentive to decrease the 

CO2 emissions caused by burning fossil fuels. An 

economywide cap-and-trade program would cause 

the price of all goods and services to rise in proportion to the amount of emissions associated with their 

production and use. As a result, companies and 

1. For more about the U.S. cap-and-trade program for emissions that cause acid rain, see Dallas Burtraw and others, 

“Economics of Pollution Trading for SO2 and NOx,” Annual 

Review of Environment and Resources, vol. 30 (2005), pp. 

253–289. For a discussion of the European cap-and-trade 

program, see A.D. Ellerman and P. Joskow, The European 

Union’s CO2 Cap-and-Trade System in Perspective (Pew Center 

on Global Climate Change, 2008). 

2. For more details of how a federal cap-and-trade program for 

CO2 emissions might work, see Congressional Budget Office, 

The Economic Effects of Legislation to Reduce Greenhouse-Gas 

Emissions (September 2009) and Issues in the Design of a Capand-Trade Program for Carbon Emissions (November 2003).
CHAPTER THREE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 31

CBO

concerns, with fewer negative effects, than outright 

prohibitions would.1

Effects of Maximizing Compliance 

Options on Costs

A CES could bring about any specified reduction in CO2

emissions at a lower cost than an RES would: By allowing 

a wider set of qualifying sources of electricity, it would 

provide more options for reducing emissions. If technologies that emit significant amounts of CO2 were included 

as qualifying sources, the credits that each type of generation earned per megawatt hour could be adjusted to 

account for the differences in emissions. Such weighting 

would help induce cost-effective cuts in CO2 emissions 

because it would provide the largest financial incentive 

for generators to rely on sources with the lowest emissions. For example, if the price of a credit was $20, each 

MWh of electricity produced at new nuclear plants, 

which do not emit any CO2, could receive a full credit, 

Box 3-1. Continued

The Cap-and-Trade Alternative for Decreasing CO2 Emissions

households throughout the economy would have an 

incentive to take actions that cut emissions. For 

example, electricity generators would have an incentive to make efficiency improvements to their boilers, 

switch to low-emitting fuels, and conserve energy in 

the operation of their facilities (such as by installing 

more-efficient lighting). Households, manufacturers, 

businesses, government agencies, and other entities 

would face a similar incentive: They would save 

money by altering their production and consumption 

in ways that reduced emissions, including by driving 

less or purchasing vehicles that have greater fuel 

efficiency. (Such activities would decrease the use of 

fossil fuels in the transportation sector, which emits 

about 40 percent of all CO2 emitted in the United 

States.) Besides being direct and comprehensive, the 

incentive that entities faced to change their production processes or consumption patterns would be 

directly proportional to the cut in emissions that 

those changes would bring about. Finally, a cap-andtrade program could ensure that emissions remained 

below a desired level.

In contrast, the incentive to reduce CO2 emissions 

that would result from an RES or CES would be 

neither comprehensive nor direct. An electricity standard would provide a direct economic incentive to 

increase generation from renewable or other clean 

energy sources; CO2 emissions would be reduced only 

as a by-product of achieving that goal, and the scale 

of the reduction would be uncertain. 

Moreover, the design of an RES or CES would determine the extent to which the size of the incentive to 

produce electricity from qualifying sources (rather 

than nonqualifying ones) was linked to the size of 

the cut in emissions that such a change would bring 

about. A policy in which a wide variety of sources 

qualified for credits and in which the amount of credits was related to a source’s CO2 emissions would 

more closely align financial incentives with actual 

cuts in emissions than would a policy lacking those 

design characteristics. For example, if a CES included 

partial credits for both existing and new natural-gasfired generation, generators would receive a larger 

financial reward if they substituted a megawatt hour 

of emission-free generation for a megawatt hour of 

generation from a high-emitting source, such as coal, 

than from a low-emitting source, such as natural gas. 

The former substitution would result in nearly twice 

the emission reductions as the latter. 

Even in a comprehensive CES, however, financial 

incentives and emission cuts could be aligned only 

imperfectly. Although regulators could assign credits 

on the basis of a given technology’s average emissions, 

actual performance (and thus emissions) would vary 

around those averages. Further, regulators would 

need to update the amount of credits awarded for 

various technologies as the technologies changed 

over time.

1. See Congressional Budget Office, Evaluating Limits on 

Participation and Transactions in Markets for Emissions 

Allowances (December 2010).
32 THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS

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worth $20, whereas each MWh of electricity produced at 

a new natural-gas-fired plant, which emits about half as 

much CO2 as electricity generated by coal, could receive a 

half credit, worth $10. As a result, all else being equal, 

generators would be more likely to build a new nuclear 

plant (earning $20 in credit revenue for each MWh of 

electricity it produced) than a new natural gas plant 

(earning only $10 in credit revenue for each MWh of 

electricity it produced).

Another way to increase compliance options would be 

to award credits for qualified electricity savings (cuts in 

electricity use that result from efficiency improvements 

that would not have occurred in the absence of the policy). Some of the electricity standards proposed in the 

111th Congress would have let utilities, generators, and 

other entities obtain credits for qualified improvements 

in energy efficiency. 

In theory, allowing efficiency improvements to earn 

credits could decrease the cost of both complying with a 

CES and reducing CO2 emissions. Because such 

improvements reduce the total amount of electricity 

generated, they would lessen the increase in qualifying 

generation that would be necessary to meet the standard. 

(In other words, electricity savings would shrink the base 

to which the standard was applied.) Further, some 

energy-efficiency improvements would represent low-cost 

ways of cutting CO2 emissions. 

In practice, however, measuring the amount of energy 

saved through an efficiency improvement and ascertaining that the savings would not have happened in the 

absence of the policy could pose administrative challenges.2

 Calculating how much energy was saved because 

of an efficiency improvement would require determining 

a baseline measure of the energy consumption that 

would have occurred without the efficiency upgrade. 

Under some Congressional proposals, qualifying energyefficiency credits would be determined by comparing a 

facility’s energy use before and after an efficiency 

improvement (for example, comparing the electricity 

consumption at a facility that installed more-efficient 

lighting with its average electricity consumption in the 

five years before the improvement) or, in the case of a 

generating plant, by comparing the amount of fossil fuel 

used to produce a kilowatt hour of electricity before and 

after a facility upgrade.3

Even if such energy savings could be measured accurately, 

it would be hard to gauge whether generators and utilities 

would have made such improvements in the absence of 

the program—that is, whether the energy savings were 

truly “additional” or whether entities were receiving credits for improvements they would have found it profitable 

to make anyway. By allowing utilities to submit energyefficiency credits in lieu of credits earned by generating 

clean or renewable electricity, policymakers essentially 

would be agreeing to a relaxation of the CES or RES in 

return for a reduction in either the consumption of electricity (as in the case of the replacement lighting) or the 

emissions per MWh of electricity generated from a given 

source (as in the case of the facility upgrade). But if the 

activities generating the energy-efficiency credits would 

have been undertaken even in the absence of the policy, 

awarding credits for them would result in a relaxation of 

the standard but not yield a return. (In contrast, in the 

absence of energy-efficiency credits, the standard would 

be met regardless of whether generators would have 

found it profitable to install wind or biomass generation 

without a standard.) For all of those reasons, allowing 

energy efficiency to earn credits might undermine the 

credibility of the standard and could increase the net cost 

of implementing an RES or CES despite the two types of 

cost savings noted above.

Effects of Timing on Costs

An RES or CES would be less expensive to meet if it was 

phased in gradually and then held constant at the desired 

level for a long period. Gradually phasing in the standard 

would increase the extent to which generators could comply through substituting new qualifying generating 

capacity for their planned replacements or expansions of 

nonqualifying capacity. In contrast, compliance costs 

would be higher if the standard was phased in so quickly 

that generators did not have time to recoup their investments in existing capital. Signaling credibly that the 

policy would remain in place over a period of several 

decades would make it easier to finance a renewable or 

clean generating facility by providing a degree of certainty 

2. Similar challenges would arise in the determination of qualifying 

“offsets” under a cap-and-trade program; see Congressional 

Budget Office, The Use of Offsets to Reduce Greenhouse Gases, 

Issue Brief (August 2009). 

3. Those approaches were included in the Renewable Electricity 

Promotion Act of 2010 (S. 3813) and the Practical Energy and 

Climate Plan Act of 2010 (S. 3464). 
CHAPTER THREE THE EFFECTS OF RENEWABLE OR CLEAN ELECTRICITY STANDARDS 33

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about how long the facility would receive credits. Again, 

in contrast, if the policy was not expected to persist well 

into the future, the cost of adding qualifying capacity 

would be high because generators would expect that they 

could obtain credits for only a few years. Providing certainty about the policy for an extended period would also 

let utilities enter into long-term contracts with generators 

for purchases of electricity and credits.4

Allowing utilities to bank and borrow credits would 

affect the rate at which the amount of qualifying generation grew by letting utilities tailor the timing of their 

compliance to the actual cost of increasing qualifying 

generation. Banking would lower costs by allowing 

companies to save excess credits obtained in years when 

renewable or clean generation exceeded the amount 

needed to meet the standard and then use the credits in 

later years. Borrowing credits expected to be earned in the 

future could be helpful in lowering compliance costs if it 

prevented the need for existing generating facilities to be 

retired prematurely. The standard would not ultimately 

be met, however, if firms that borrowed credits declared 

bankruptcy and the borrowed credits were never repaid. 

Policymakers could reduce that possibility by restricting 

the number of credits that utilities could borrow—to 

10 percent of their compliance obligation, for example—

and by limiting how far in advance credits could be 

borrowed. 

In essence, phasing in a standard would let policymakers 

balance the desire to change the generation mix quickly 

with the fact that faster changes entail higher costs. The 

cost side of that trade-off would be based on projections 

of future conditions. Giving firms the ability to bank and 

borrow credits would let them modify the time path 

selected by policymakers. Those modifications would 

be based on unfolding information about the cost of 

changing the generation mix at various points in time. 

4. See Ryan Wiser and others, “The Experience with Renewable 

Portfolio Standards in the United States,” Electricity Journal,

vol. 20, no. 4 (May 2007), pp. 8–20.