Energy Systems

Historically, governmental management and policy have been capable of changing the North American energy system in significant ways including, for example, the creation of the Tennessee Valley Authority in the United States; construction of the U.S. national highway system and the Grand Coulee and Hoover dams; development of the National and Pacific railroads in Canada; and Mexico’s national highways development and, until recently, governmental control of Mexico’s oil, gas, and electric energy system. Governmental carbon management decisions can be identified through plans and commitments, investments in infrastructure and research and development, market-based tools, and regulations and standards at multiple levels of government. Indeed, over the past decades, there have been significant international, national, subnational or state, and city actions and commitments that have shaped the current regional carbon management system. Over the past year in the United States, however, national energy policy has been changing (EY 2017). This section reviews selected international, national, and state or subnational governmental actions in North America and their effects on energy use and carbon emissions trends.

3.7.1 International Carbon Management Decisions and National Responses

Parties to the Paris Agreement¹² are required to submit mitigation contributions that describe national targets, policies, and plans for reducing carbon emissions. The targets in these contributions are “nationally determined” and not legally binding. Over 190 countries have submitted nationally determined contributions under the Paris Agreement including GHG emissions reduction targets and related actions (UNFCCC 2015; IEA 2015a; World Resources Institute 2016a). In North America, Canada has announced a GHG emissions reduction target of 30% below 2005 levels by 2030. Mexico has announced a GHG emissions reduction target of CO₂e and short-lived climate pollutant reductions of 25% by 2030 with respect to a business-as-usual scenario, as well as additional reductions possible in the context of international financial support. Prior to the adoption of the Paris Agreement, the United States put forward a nonbinding Intended Nationally Determined Contribution (INDC) of reducing emissions 26% to 28% below 2005 levels by 2025. On June 1, 2017, President Trump announced that the United States intends to withdraw from the Paris Agreement, unless it identifies better terms for participation, and that the United States would cease implementation of this nationally determined contribution (Executive Office of the President 2017).

In 1994, Canada, Mexico, and the United States established the North American Agreement on Environmental Cooperation (NAAEC) to ensure that economic activities among the countries would not come at the expense of the environment. NAAEC provided for the establishment of the Commission for Environmental Cooperation (CEC), the first collaborative trilateral venue promoting a cooperative approach to environmental protection in the region. The strategic priorities for 2015 to 2020 include climate change mitigation and adaptation. The initiatives under this priority include developing, comparing, and implementing actions to mitigate CO₂e emissions, consistent with international commitments and piloting protocols in key sectors (e.g., waste management, the food industry, and transportation) to reduce emissions of short-lived climate pollutants, such as black carbon and CH₄ (Commission for Environmental Cooperation 2015).

In 2012, national climate action plans described commitments and strategies for reducing carbon emissions and are coordinated through policies to meet countries’ announced GHG reduction targets and actions. Mexico in 2012 became the first emerging economy to pass comprehensive climate change legislation, and in 2015 it became the first emerging economy to release its post-2020 climate action plan. Mexico is undergoing a process that further details what the announced emissions target and actions mean at the sectoral level. The country’s Energy Transition Law (Ley de Transición Energética) of 2015, as part of its energy reform program (Reforma Energética) that started in 2013, includes clean (i.e., low- or no-emission) energy targets of 25% of electricity generation by 2018, 30% by 2021, and 35% by 2024. The way in which this law is implemented will affect Mexico’s emissions pathway. Canada’s action plan includes working with provinces and territories to establish a pan-Canadian framework for addressing climate change, including carbon pricing; investments in clean energy technology, infrastructure, and innovation; and a Low-Carbon Economy Trust Fund to support provinces and territories in achieving emissions reductions and transforming their economies toward a low-carbon future (ECCC 2016a). In the United States, a number of climate action policies have been put in place to encourage energy efficiency and renewable energy generation. Recently, the United States announced an energy policy, defined in the America First Energy Plan, aimed to promote domestic energy generation, including oil, coal, and natural gas extraction and use, as part of a broader strategy of energy security and independence. Because this strategy is still under development, it cannot be evaluated in this report.

3.7.2 National Energy and Carbon Management Decisions

Investments to increase energy efficiency and lower carbon emissions were promoted in recent economic recovery acts in Canada and the United States. In the United States, the American Recovery and Reinvestment Act (ARRA) of 2009 provided US$17 billion for energy efficiency and US$26 billion for renewable energy investment. Federal support for clean energy technology across agencies totaled an estimated US$44 billion and grew to US$150 billion from 2009 to 2014 (Banks et al., 2011). These actions played a role in reducing the levelized cost of energy (LCOE) for onshore wind technologies and lowering the capital costs of wind and solar PV technologies. ARRA also funded US$4.5 billion for smart grid demonstration projects, US$700 million for alternative fuel vehicles, and US$400 million for U.S. DOE’s Advanced Research Projects Agency-Energy (ARPA-E) and allowed energy-efficiency improvements to be eligible for billions of dollars in investment for federal agencies. Within the United States, discussions of improving infrastructure have focused on roads, bridges, airports, and other public works, possibly including energy infrastructure. As highlighted earlier, rebuilding the country’s aging energy infrastructure also would increase energy efficiencies.

Similarly, Canada’s recovery plan included a 2-year stimulus package worth CAD$35 billion. Approximately CAD$12 billion was earmarked for infrastructure, launching one of the largest building projects in the country’s history (Whittington and Campion-Smith 2009). More than CAD$300 million was designated for the ecoENERGY Retrofit program, which provides financial support to homeowners, small- and medium-sized businesses, public institutions, and industrial facilities to help them implement energy-saving projects that reduce energy-related GHGs and air pollution. Approximately CAD$1 billion was apportioned for clean energy research, development, and demonstration (RD&D) projects (Department of Finance Canada 2009). As with the United States, infrastructure improvements are likely to alter future energy-use trajectories.

Although Mexico did not implement a recovery act, in December 2013 it passed an energy reform bill as part of the Reforma Energética, which opened the country’s energy sector for significant regulatory, financing, and infrastructure changes for both renewable and nonrenewable sources to meet the reform bill’s promised increase in production. The Mexican National Infrastructure Program 2014–2018, in adherence to the National Development Plan 2013–2018, promotes development of energy generation, transmission, and distribution facilities that will make use of potential renewable energy and has invested an estimated US$46 million in 138 strategic electricity infrastructure projects (PricewaterhouseCoopers Mexico 2014). Additionally, recent partnerships with private companies and finance have spurred infrastructure expansion (Zborowski 2015).

A number of market-based tools are also available to governments. At the national scale, Mexico passed a carbon tax in 2014 on fossil fuel sales and imports (natural gas and jet fuel were exempted) as part of broader fiscal reform. The tax is set at approximately US$3.50 per megagram CO₂e. Firms are allowed to use credits from a domestic clean development mechanism offset program to fulfill their tax liability, but the operating rules for this mechanism have yet to be published (ICAP 2016). Canada recently announced the implementation of a national carbon tax. Prime Minister Justin Trudeau said a minimum price of US$10 per ton of CO₂e would be implemented in 2018, rising to US$50 per ton by 2022.

The United States imposes few energy-related “green taxes” at the federal level. An exception includes the “gas guzzler” tax on new automobiles that exceed fuel efficiency standards (Cohen et al., 2015). Rather, the United States uses tax credits, subsidies, and support services to incentivize targeted investments. These include the investment tax credit (ITC), which is a key driver for solar energy. The credit provides a 30% tax credit for solar energy systems for residential and commercial buildings. The tax credit has played a role in the increase of solar investments, which have grown by more than 1,600% from 2006 to 2014 (SEIA 2014). The production tax credit (PTC) also supports the development of renewable energy, most commonly wind, though it also applies to geothermal and some bioenergy systems. The PTC provides an incentive of 2.3 cents per kWh, for projects under construction in 2015, for the first 10 years of a renewable energy facility’s operation and is adjusted over time, reducing the value of the incentive to 40% of the PTC for projects that start construction in 2019 (Union of Concerned Scientists 2014).

Subsidies are an important way that governments continue to promote their energy policy. In 2009, according to IEA et al. (2010), global fossil fuel subsidies were estimated at US$312 billion and rose to US$409 billion in 2010 (up almost 30% from 2009), six times the amount allotted for renewable energy support (IEA et al., 2011). Eliminating these subsidies globally would cut energy-related CO₂ emissions by an estimated 13% (Ball 2013). In the United States, subsidies for fossil fuels from 2002 to 2008 reached US$72 billion, with an additional set of subsidies for renewable fuels totaling US$29 billion (Environmental Law Institute 2009). Canada also subsidizes fossil fuel industries for around CAD$3.3 billion for oil and gas producers (Touchette 2015). One result of the restructuring of Mexico’s state-run energy program is that fossil fuel subsidies have dropped from US$19.1 billion in 2012 to US$5 billion in 2014 (IEA 2015c).

Governmental agencies may provide support services with goals to enhance investment, research and development, and collaboration with private-sector firms. U.S. DOE’s Office of Energy Efficiency and Renewable Energy (EERE), for example, was created to promote and sustain leadership in the transition to an economy powered by clean, affordable, and secure energy. This program’s goal is to accelerate the development and adoption of fuel-efficient and nonfossil fuel transportation technologies, renewable sources of electricity, energy efficiency in residential and commercial buildings, reductions in life cycle energy consumption of manufacturing processes, and new grid technologies (U.S. DOE 2015c). EERE’s SunShot program was developed with the goal of reducing solar costs to US$1 per watt for utility-scale solar systems (and US$1.50 per watt for residential) by 2020. However, in 2017 U.S. DOE announced that the solar industry had already achieved the SunShot Initiative 2020 solar cost targets, bringing the costs of utility-scale solar to $0.06 per kWh. Models of the impact of this price change on the U.S. energy sector suggest solar power can cost effectively provide up to about one-third of national electricity capacity by midcentury (Mileva et al., 2013). The rapid deployment of distributed generational solar power systems over the past 5 to 10 years has both highlighted challenges and demonstrated many successful examples of integrating higher penetration levels than previously thought possible (Palmintier et al., 2016). Not only is future expansion of solar possible, but this expansion potentially could provide a significant number of jobs in energy sectors of the country and the world (Wei et al., 2010; IRENA 2018b).

Regulatory approaches also can have an impact on the energy sector. The U.S. Clean Air Act (CAA), for example, was established in 1963 but strengthened in 1970 in conjunction with the creation of U.S. EPA to carry out programs to regulate air pollution nationwide. CAA authorizes EPA to set national standards for clean air, and, as of 2009, the legal foundation was established for U.S. EPA to regulate GHGs under CAA. CAA benefits have been massive, estimated to reach approximately (US$ 2006) $2 trillion in 2020 with costs of only (US$ 2006) $65 billion (U.S. EPA 2011). In 2012, Canada passed regulations to establish a regime for reducing CO₂ emissions resulting from electricity production that uses coal as a fuel; these regulations took effect in 2015.

Governments commonly use regulatory standards to enforce policy goals. Since 1987, for example, national standards for appliance efficiency have been developed and subsequently expanded to more than 50 categories of products used in homes, businesses, and industry (de Laski and Mauer 2017). Another important example in the United States consists of CAFE standards (dating back to the 1970s), which were designed to improve vehicle fuel economy. U.S. EPA and U.S. DOT’s National Highway Traffic Safety Administration (NHTSA) issued final rules extending the national program to further reduce GHG emissions and improve fuel economy for MYs 2017 through 2025 light-duty vehicles. U.S. EPA established national GHG emissions standards under CAA, and NHTSA established CAFE standards under the Energy Policy and Conservation Act, as amended by the Energy Independence and Security Act. The new standards are estimated to lead to corresponding reductions in CO₂ emissions totaling 491 Tg C during the lives of light-duty vehicles sold in MYs 2017 to 2025 (U.S. EPA and U.S. DOT 2012). As of March 2017, however, EPA reopened a midterm review of U.S. CAFE standards that would require the industry to deliver a fleet average of at least 23 km/L (54.5 miles per gallon) by 2025. The type of changes introduced to these regulations during the review and their impacts are not yet clear.

Canada established the Company Average Fuel Consumption (CAFC) targets and harmonized them with CAFE standards in the United States. The main difference between Canada’s CAFC regulations and the U.S. CAFE program was that Canada’s standards remained voluntary for 25 years. The Motor Vehicle Fuel Consumption Standards Act of 1982 set legally binding standards parallel to U.S. CAFE regulations, but lawmakers did not officially implement the program until 2007. In 2010, new regulations were the first in Canada to limit GHG emissions from the automotive sector under the Canadian Environmental Protection Act of 1999. The final Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations set fuel economy targets for passenger vehicles and light-duty trucks similar to those of the United States (Feldman 2009). In 2013, the Mexican government published final standards regulating CO₂e emissions and the fuel economy equivalent for new passenger vehicles, including cars, pickup trucks, and sport utility vehicles. The final standard will apply to vehicle MYs 2014 to 2016. Taking into account all annual credits (except credit banking and trading), the standard is expected to result in a new car fleet average fuel economy of 14.6 km/L in 2016 (ICCT 2013). These laws put all three countries on track for a target of 20.9 km/L of gasoline equivalent by 2025 (ICCT 2013).

3.7.3 Subnational Energy and Carbon Management Decisions

While U.S. federal actions discussed in the previous section have prompted changes in national carbon management and may change the direction of future trends, important carbon management decisions also happen at the subnational level in states and localities (see Ch. 4: Understanding Urban Carbon Fluxes for elaboration on the urban carbon management initiatives). For example, in Canada, the provinces have been active in setting carbon taxes, fuel economy standards, and emissions controls prior to the national government’s actions (IEA 2010). In the United States, state governments have implemented policies on energy and GHG emissions including GHG targets, caps, and pricing; renewables; CCS; nuclear power; transportation; energy efficiency; methane and hydrofluorocarbons; and forestry and land use (America’s Pledge 2017). Some states have developed and implemented several multistate carbon cap-and-trade partnerships. One of the most notable multistate programs is the Regional Greenhouse Gas Initiative, which began as a collaboration between 10 northeastern states to cut their CO₂ emissions. At the state and provincial level, renewable portfolio standards (RPS) have been implemented as a mechanism to encourage the uptake of renewable energy in the United States as part of federal policy, but the details of implementation are left to the states to choose. As of 2013, 29 states plus Washington, DC, have some form of enforceable RPS, and eight other states have nonbinding renewable portfolio goals (EIA 2012d). ­Energy-efficiency resource standards also have been popular in subnational units. In 1999, Texas became the first state to establish an ­energy-efficiency resource standard. As of 2015, 25 states have adopted such a standard. The American Council for an Energy Efficient Economy found that most states are on target to meet their goals (Sciortino et al., 2011). Many tribes are also prioritizing energy-efficiency and renewable-energy projects (Norton-Smith et al., 2016). More than 275 American cities, counties, tribes, and states have created green building codes, which have promoted energy efficiency in this sector. Leading states include California, Virginia, and Washington.

Other subnational carbon management programs include energy-efficiency standards; public benefit funds; electric grid standards; feed-in tariffs;¹³ on-bill financing;¹⁴ property-assessed clean energy; and the use of subsidies, tax credits, and rebates to promote clean energy. In Mexico, the Federal District of Mexico City has implemented Bus Rapid Transit routes and created emissions standards for vehicles (see Ch. 4: Understanding Urban Carbon Fluxes). U.S. states and Canadian provinces also have been active in promoting transportation policies, including procurement of hybrid or electric vehicles for their fleets, creating strict emissions standards for cars and light trucks, promoting low-emissions vehicle standards and zero-emissions vehicle promotions and production requirements. For example, California’s “Advanced Clean Cars Program” allows the state to set and enforce vehicle emissions standards more stringent than standards set by U.S. EPA. Whether and how this law will be affected by the revision to U.S. federal CAFE regulations is not yet clear. Finally, many states have set emissions-reduction plans to reach a goal of 30% or more reduction of CO₂e emissions by 2030 (Cohen et al., 2015). For example, New York state has implemented a plan to reduce GHG emissions by 40% from 1990 levels by 2030 and 80% by 2050 (NYSERDA 2015). In 2006, California passed the Global Warming Solutions Act and, subsequently, the Climate Change Scoping Plan as the roadmap to achieve reductions of 30% from business-as-usual emissions projected for 2020. The law spells out a range of measures to expand energy-efficiency programs; achieve a renewable energy mix; and develop a cap-and-trade program that covers 85% of the state’s emissions, such as electricity generation, large industrial sources, transportation fuels, and residential and commercial uses of natural gas. In 2014, California linked its program to Canada’s program in Quebec (Cohen et al., 2015).

In summary, a variety of policies at multiple levels of government have helped shape the patterns of energy use and carbon emissions in the region over the past decade. Recently, however, the U.S. federal government appears to be prioritizing energy resource extraction and use; how these policies will affect future trends remains uncertain.