Without Climate Legislation, We Might Get More Regulations!

Posted by Don Fullerton on Oct 22, 2010

Filed Under (Environmental Policy, Finance)

On Tuesday October 19, the Center for Business and Public Policy (CBPP) presented a panel of experts on “Environmental Regulation: Building a Low-Carbon Economy.”  It was sponsored by the College of Business and the MBA Program with financial support from State Farm.  This blog may help tie our virtual audience to activities at the “brick and mortar” University, with a few reflections of my own.

Climate legislation recently failed in this Congress, so the U.S. will not soon adopt any cap-and-trade policy.  To provide incentives for Congress to act, however, the Obama Administration had said that otherwise the EPA will act to reduce carbon emissions using other forms of regulation under the Clean Air Act.   The key question here is what can or should be done without climate legislation.  The Panel members were asked to discuss the future of energy use, its role in creating a low carbon economy, and what future energy policies and regulations will be needed.

The first speaker was William A. Von Hoene Jr., the Exelon Corporation’s Executive Vice President for Finance and Legal.  Exelon has 17 nuclear reactors at ten locations, as well as other plants powered by hydro, wind, solar, landfill gas, and fossil fuels.  Their electricity is relatively low in carbon emissions, with 5.4 million customers primarily in Illinois and Pennsylvania.  They favor carbon pricing because it reduces overall abatement costs relative to a patchwork of tax credits for certain technologies and mandates such as “renewable portfolio standards.”   Those policies might not target the cheapest form of abatement, whereas a carbon tax or cap and trade price would provide clear and crisp signals to reduce emissions in any of the cheapest ways.  He also talked about their “Exelon 2020” business strategy of greening their operations, helping customers reduce emissions, and producing more low-emission electricity.

A problem, of course, is that none of these other technologies are very cheap.  Protections for nuclear power may prevent any new plant, and the U.S. has no long term storage plans anyway.  Other renewable options like wind or solar are not cost-effective unless the cost of coal-fired electricity is raised by a carbon dioxide tax of more than $30 per ton.

The second speaker was Mark Brownstein, Deputy Director of the Energy Program for the Environmental Defense Fund.  He talked first about “what went wrong” with climate legislation in Congress.  Divisions were not just by party but by region, since the President’s plans were offset by a coalition of Republicans and coal-state Democrats.  The recession also added to perceptions that markets don’t work, which spills over to carbon permit markets.  He also talked about “what’s next”, including renewed effort to put climate legislation back on track, with eyes on state action and EPA regulations.   Finally, he discussed “what’s the focus” at EDF.  Besides continued discussion of climate policy and EPA, they are interested in energy market reform.  For example, smart grid technology that links various electricity markets can allow more people to buy power from areas that have newer and cleaner production.

The third speaker was Jon Anda, UBS Securities’ Vice Chairman and Head of Environmental Markets.  He also extolled the virtues of carbon pricing, because it would encourage new technology that could help the U.S. compete internationally.  It would “decarbonize” production at the least cost, minimize leakage, and realize various “co-benefits” (reductions in other pollutants).   In particular, he pointed out that a carbon permit system should not apply to utilities only, because reduced emissions among utilities would be offset by increased emissions elsewhere (“leakage”).  It needs to cover all use of all fossil fuels. 

For example, carbon pricing for utilities only would raise the price of electricity, but that could discourage the use of electric vehicles.  Carbon pricing also needs to apply to gasoline, for drivers to make the right tradeoffs between whether to buy an electric car or a fuel-efficient gasoline car.