Putting value on carbon can lower energy use, campus experiment shows

A lounge space in Kroon Hall, home of the Yale School of Forestry & Environmental Studies. (Photo © Robert Benson Photography)

More than 600 major companies — from BP to Microsoft — have adopted carbon-pricing programs to spur energy conservation and control their carbon emissions. But the effectiveness of these efforts has not been analyzed or publicly reported.

An article published in the journal Nature on Nov. 2 provides new insights into the value of carbon-pricing incentives based on analysis of a pilot program at Yale University in 2015. The researchers highlight some of the ingredients needed to achieve successful carbon-pricing schemes.

In the paper, three Yale researchers provide an overview of internal carbon pricing strategies, including an examination of different models of implementation. Further, they illustrate how the Yale project, which has since been expanded into a campus-wide initiative, has provided empirical evidence of the effectiveness of utilizing such price signals.

What we found is that carbon pricing can be a valuable tool to help reduce emissions, especially at a time when there is little activity to reduce emissions at the national level,” said Kenneth Gillingham, a professor of economics at the Yale School of Forestry & Environmental Studies (F&ES) and lead author of the paper.

The co-authors are Stefano Carattini, a postdoctoral fellow at F&ES, and Daniel Esty, a professor of environmental law and policy at F&ES and Yale Law School.

Putting a price on carbon is considered a key strategy in the fight to limit the effects of climate change. Essentially, the idea is that offering direct incentives will promote behavior changes that encourage energy conservation and thus reduce greenhouse gas emissions. A company or institution can implement a carbon price through internal emissions trading, a carbon charge, or a “proxy price” on greenhouse gas emissions.

The Yale Carbon Charge Project, a first-of-its-kind experiment that was conducted between December 2015 and May 2016, tested four different carbon-pricing models that used behavior forces to promote energy efficiency in buildings across campus. The charges covered direct and indirect emissions from consuming energy sources, such as electricity, gas, steam, and chilled water.

For the experiment, the price was set at $40 per ton of carbon dioxide, the estimated “social cost of carbon” from the 2016 U.S. government Interagency Working Group report. Each of the 20 buildings selected to participate were randomly assigned one of four different carbon-pricing approaches: no carbon price; a pricing model in which 20% of the revenue was earmarked for energy efficiency actions; a pricing scheme in which revenue was redistributed to buildings that were able to reduce emissions by at least 1% in relation to historic emissions; and a model in which revenue was returned to buildings whose percentage reduction exceeded the average from the pilot.

According to the data, which will be been made available to corporations and other organizations, buildings that faced carbon charges reduced energy consumption by more than those that did not. The reasons, according to the new paper, included increased awareness of energy use, competition between buildings, and the higher price of energy.

In some cases building managers chose inexpensive options to reduce energy use, including turning down the heat by 1 degree C or initiating policies to turn off lights and unused electrical equipment. In other cases managers chose options with higher upfront costs, such as installing occupancy sensors, thermal window shades, or bulbs using light-emitting diodes.

Among the key takeaways from the pilot, the researchers say, is that information and incentives must be communicated clearly in order to affect behavior; that the manner in which revenue is distributed affected the effectiveness of the schemes; and that carbon pricing works better when participants believe the rules are fair.

A key factor in the success of the Yale pilot, Gillingham said, was clear communication — including monthly progress reports — to campus leaders and building managers.

The paper, Carattini said, provides a rare glimpse into the mechanisms of internal carbon pricing.

While Yale is the first university to do internal carbon pricing, companies like Microsoft introduced carbon pricing long ago. But we don’t really know much about how it works,” he said. “It’s perfectly understandable that companies don’t want to disclose their cost structures and internal policies. The great thing about the Yale experiment is that they were willing to share the data, allowing us to really observe how the policy works. They turned this experiment into a real learning opportunity.”

This emerging phenomenon has the potential to shape the next generation of regional, national, and international climate policies, say the researchers.

As someone who has worked on climate change policy for 30 years I think we’ve reached a breakthrough moment with the recognition that price signals are critical for changing behavior to reduce greenhouse gas emissions,” said Esty. “The Yale experiment with carbon charges across the campus has demonstrated the efficacy of price signals as a policy tool, and I hope the Nature article will spur both broad policy response and additional academic inquiry and research.”

And as the Yale carbon pricing initiative progresses, university faculty and students will continue to conduct a range of associated research projects, said Casey Pickett, director of the Yale Carbon Charge initiative.

To date there have been over a dozen on-campus research projects on the Yale carbon charge, many of which the authors of this paper in Nature helped to advise,” he said. “This is just the beginning. Each semester, students and faculty are discovering new productive questions to ask in our search to learn about the best practices for and benefits of internal carbon pricing.”


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