Over the past decade, the United States and the European Union have taken markedly different approaches to the electricity markets that power their economies. Seeking drastic reductions in carbon emissions, the EU has emphasized rigid and extensive mandates, market interventions (including a “cap and trade” regime to reduce emissions), and subsidies aimed at promoting renewable energy. The U.S. government, as well as numerous states, while also promoting renewables and seeking lower emissions, has interfered far less. U.S. electricity markets operate more freely than their European counterparts. So, too, do other U.S. energy sectors. This has contributed to the recent boom in extraction of both oil and natural gas in the U.S.
As a result of these policy differences, electricity prices in Europe now are far higher than those in the United States, for both residential and industrial consumers. Between 2005 and late 2013, the average price of residential electricity in the EU rose by 55 percent, and industrial electric rates jumped by 26 percent. The average U.S. household now pays 12 cents per kilowatt-hourâ€”about a third of what the same amount of electricity costs in Germany. European steelmakers now pay twice as much for their electricity as do U.S. manufacturers.
EU policies have raised its electricity costs by:
- Giving large subsidies to wind- and solar-energy producersâ€”subsidies that must be paid for by consumers.
- Mandating the use of renewable energy, which is more expensive and which requires backup power for times when the sun doesn’t shine and the wind doesn’t blow. Because of this need for backup power, consumers must pay for both renewables and backup gas-fired plants.
- Implementing a flawed cap-and-trade system whose market distortions have discouraged efficiency (and, ironically, increased coal use).
For its higher electricity costs, Europe has not received the benefit of higher carbon-emissions reductions: between 2005 and 2012, U.S. carbon dioxide emissions fell more than those of the EU did. Furthermore, in 2012, Germany’s carbon dioxide emissions actually rose by 1.3 percent over 2011 levels, while U.S. emissions fell by 3.9 percent.
Despite this clear contrast between the two economies, some U.S. policymakersâ€”from the president to state legislatorsâ€”have called on the U.S. to implement EU-style electricity policies.
There is no doubt that such a move would raise U.S. electricity prices and erode, or even eliminate, this country’s competitive edge in energy. This paper estimates that the net effect of the U.S. adopting a renewable-energy goal like the EU’s would be to increase the monthly electricity bill of an average household by about 29 percent.
Californiaâ€”the U.S. state whose policies are most like Europe’sâ€”offers a case study in what not to do. Thanks to the state’s renewables mandates, cap-and-trade system, and aggressive promotion of solar power, California consumers are paying far more than their fellow Americans for electricity.
Instead of emulating Europe’s failed policies, the U.S. should:
- Eliminate its own renewable-energy subsidies.
- Remove excessive restrictions on coal-fired electricity generation plants.
- Encourage “N2N” (natural gas to nuclear) sources of electricity.
- Not impose unnecessary regulations on the process of hydraulic fracturing, which is essential to the production of natural gas from shale.
- Maintain and improve safety standards in all facets of energy production, transportation, and storage.