Center for Business & Public Policy
Collaborative blog exploring the relationship between market forces and public policy.

Recent debate at the state and national level has focused on whether to enact a climate policy to control greenhouse gas emissions such as carbon dioxide.  The fact is, however, that we already have policies that affect such emissions, whether we like it or not.  Such policies can be coordinated and rational, or they can be piecemeal, inconsistent, and counter-productive.  Almost any policy designed to improve energy security, for example, would likely affect oil prices and energy efficiency, just as any policy to encourage alternative fuels would also affect energy security, electricity prices, consumer welfare, and health!  Here is a guide for thinking about how some of these policies work, and which combinations might work better than others.

The most obvious existing policy that affects carbon dioxide emissions is the gasoline tax that applies both at state and federal levels.  If that tax encourages less driving and more fuel-efficient cars, then it also impacts urban smog and global warming as well as protecting us from the whims of oil-rich nations with unstable governments.   In fact, with respect to the price at the pump, a tax on emissions would look a lot like a tax on gasoline, and vice versa.  Averaged over all state and federal taxes, the U.S. gasoline tax is about $0.39 per gallon, far less than around the rest of the world.  Most countries in the OECD have a tax over $2/gallon.

For the most part, the U.S. has chosen to avoid tax approaches to energy and environmental policy and instead uses various mandates, standards, and subsidies.   Cars sold in the U.S. are required to meet emission-per-mile standards for most local and regional pollutants like fine particles, sulfur dioxide (SO₂), nitrous oxides (NO_X), and volatile organic compounds (VOC) that contribute to ozone smog.  Those rules make cars more expensive but have successfully cleaned the air in major cities and around the country.  They also have the side effect of reducing greenhouse gases.  Another mandate is the “Corporate Average Fuel Economy” (CAFE) standards that require each auto manufacturing company to meet a minimum for the average miles-per-gallon of their fleet of cars sold each year.  For each big gas-guzzler they sell, the company needs to sell more small fuel-efficient cars to bring the average back down.  To meet this standard, every car company must raise the price of their gas guzzlers (to sell fewer of them) and reduce the price of their small fuel-efficient cars (to sell more of them).  The effect is the same as having a tax on big cars and subsidy on small cars.

These energy and environmental policies are also intricately related to other tax policies, as well as government spending!  For any chosen size of government and overall tax bite, any dollar not collected in gasoline tax is another dollar that must instead be collected from payroll taxes, income taxes, corporate profits tax, or state and local sales tax.  When looked at through that lens, gasoline taxes may not be that bad – or at least not as bad as some of those other taxes we must pay instead. 

Every state and local government is also worried about the pricing of electricity by huge electric companies that might naturally have monopoly power over their customers.  Production efficiency requires a large plant, so a small remote town might be served only by one power company (with no competition from neighbors far away, since too much power is lost during transmission).  So the public utility wants to regulate electricity prices, perhaps with block pricing that helps ensure adequate provision to low-income families.   Yet the pricing of electricity inevitably affects electricity use, which affects coal use, urban smog, and greenhouse gas emissions.  These policies are intricately related.

And these policies are related to government spending, since they affect car and gasoline purchases and therefore required spending on roads and highways as well as train tracks and mass transit in cities.  These environmental and energy policies affect human health, and therefore health spending by government – as necessary to pay for additional illness caused by emissions from cars, power plants, and heat from burning fossil fuel. 

We have no way to avoid these inter-connections.  You are a consumer who wants lower gas taxes and electricity prices, but you also own part of the power company and auto manufacturers through your mutual fund or pension plan.  You pay other taxes on income and purchases, and you breathe the air, so you are affected by emissions and need health care.  We might as well think holistically and act for the good of everybody, because we are everybody!

What is that, a gastrointestinal disorder?   No, it’s the title of one of my recent research papers  (joint with Dan Karney and Kathy Baylis) about unilateral efforts to reduce emissions of greenhouse gases (GHG).   When worldwide agreement is not possible, then the question is whether GHG abatement policy might be implemented by only one country, or bloc of countries (or region or sector).   The fear of any one country or bloc is that they would only raise their own cost of production, make themselves less competitive, and lose business to firms in other countries that may increase production and emissions.  When only one country limits their emissions, any positive effect on emissions elsewhere is called “leakage”.

Yes, that’s a word in economics, see http://en.wikipedia.org/wiki/Leakage .

In efforts to “abate” or to reduce GHG emissions, the fear of lost business has pretty much deterred any attempt at unilateral climate policy.  That positive leakage might be called a “terms of trade effect” (TTE), because unilateral policy raises the price of exports and reduces the price of imports.   But our recent research paper points out a major effect that could offset part of that positive leakage.  The “negative leakage” term in the equation might be called an “abatement resource effect” (ARE).   That is, one additional thing happening is that the domestic firms face higher costs of their emissions, and so they want to substitute away from GHG emissions and instead use other resources for abatement – such as windmills, solar cells, energy efficient machinery, hybrids, electric cars, and even “carbon capture and sequestration” (CCS).  Thus they have at least SOME incentive to draw resources AWAY from other sectors or other countries.  If that effect is large, the result might shrink those other sectors’ operations overall, and thus possibly SHRINK emissions elsewhere.

I don’t mean to oversell this idea, because it probably does not completely offset the usual  positive “terms of trade effect”.  But in some circumstances it COULD be large, and it COULD result in net negative leakage.  The best example is probably to think about a tax or permit price for carbon emissions only in the electricity generating sector, within one country.  For simplicity, suppose there’s no trade with any other countries, so the only choice for consumers in this country is how much to spend on “electricity” and how much to spend on “all other goods”.   Demand for electricity is usually thought to be inelastic, which means consumers buy almost the same amount even as the price rises.  If firms need to produce almost as much electricity, while substantially reducing their GHG emissions, they must invest a lot of labor AND capital into windmills, solar panels, and CCS.  With any given total number of workers and investment dollars in the economy, then fewer resources are used to produce “all other goods”.

The ability of consumers to substitute between the two goods (electricity vs “all other”) is called the “elasticity of substitution in utility.”  The ability of firms to substitute between GHG emissions and those OTHER inputs is called the “elasticity of substitution in production”.  If the former is bigger than the latter, then net leakage is positive.  If the latter is bigger than the former, then net leakage can be negative.

Okay, too technical.  But the point is that other researchers have missed this “abatement resource effect” and overstated the likely positive effect on leakage.  And that omission has led to overstated fears about the bad effects of unilateral carbon policy.  What we show is that those fears are overstated, in some cases, where leakage may not be that bad.  With some concentration on those favorable cases, one country might be able to undertake some good for the world without fear that they just lose business to other sectors.

My green choice is to get about 12 miles to the gallon.  Here is why it’s so green.

Some people think it’s obvious that I ought to buy a hybrid or other fuel-efficient vehicle.  But that’s just wrong.  Certainly some drivers should have a hybrid car to reduce emissions and energy use, namely somebody like my brother who has an hour commute each day, driving 20,000 or more miles per year.   But not everybody.   Take for example a person like me who lives near work, rides a bicycle, and doesn’t like spending hours in the car – even for a road trip to the Grand Canyon or Yosemite.  I use the car once a week for the grocery store, or a restaurant, driving less than 5,000 miles per year.

Let’s suppose a hybrid gets 50 miles per gallon, so my 5,000 miles per year would cost about 100 gallons ($300 per year).   The standard non-hybrid gets 25 miles per gallon, which would cost twice as much ($600 per year).  I’d save $300 per year in the hybrid.  But that doesn’t mean I should buy a hybrid.  A new hybrid like a Toyota Prius costs about $6,000 extra to get that great fuel-efficiency (about $26,000 instead of $20,000).    In other words, it would take twenty years for my $300-per-year savings to make up for the extra $6,000.  It’s not worthwhile for me.  If my brother drives four times as much, however, he could break even in just five years.

So far, that means I should not buy a hybrid.  Does that mean I buy the normal new car with 25 mpg for $20,000?  No!  I should buy a beaten old 8-cylinder Bonneville, which looks like a tank and gets only half the mileage!  That Bonneville may be headed for the junk heap, so it’s certainly cheaper, even if I have to pay more for gas.

But even ignoring the price of the Bonneville, I claim that the fuel-use of the Bonneville is less than the fuel use of the normal new car!  Why?  Consider the emissions from fuel used in production.  The fuel used to make the Bonneville back in 1980 is a “sunk cost”, a done deal that does not change whether that car gets junked now or later.  In other words, keeping that Bonneville off the junk heap requires no extra fuel and emissions to produce it.  But buying a new car does involve more fuel and emissions just to produce it.  Think about all the emissions from the steel mill, the tire factory, the glass furnace, and the electric generating plant that provides power for the tools and machinery to make the new car.

In other words, I can reduce total fuel use and emissions much more if I purchase the 1980 Bonneville and drive it 5,000 miles per year, than if I buy a new car with twice the mpg.  Now all I need is a bumper sticker for my 1980 Bonneville to say how green I really am!

Carbon Dioxide Causes Global Warming of Climatologists

Dateline: August 6, 2011, Champaign, Illinois

Researchers at the University of Illinois have discovered new environmental damages from the burning of fossil fuel with resulting emissions of carbon dioxide (CO₂) and other Greenhouse Gases (GHG).  In particular, when these anthropogenic emissions accumulate in the atmosphere and react with sunlight, they may cause climatologists to become hotter and hotter.  So far, this effect has only been observed experimentally in the laboratory, but these experiments confirm the theory among atmospheric chemists that continuation of such emissions for several decades is bound to result not only in global warming of these climatologists and other environmentalists, but also extreme behavioral events similar to hurricanes, floods, and droughts.  

The next key step of this research program, at the University, is to increase data collection quickly, in order to try to ascertain whether the recent aberrations in climatologists’  behavior is within the normal statistical variations or may in fact already by caused by the existing increases in atmospheric levels of greenhouse gases.  The stronger hypothesis, yet to be tested, is that the increased concentrations of these gasses in the atmosphere is not just predicted globally to cause agitation and warming of these environmental scientists, but that it is already having such effects.  Already, certain climatologists have experienced high blood pressure, increased internal temperatures above 98.6 degrees Fahrenheit, and occasional apoplectic seizures.  These extreme behavioral events could be occurring naturally, however, so the hypothesis is not yet proven that these events can be attributed to anthropogenic greenhouse gas concentrations in the atmosphere.  More research is required, and researchers at the University of Illinois are applying to the National Science Foundation for that research funding, which may require millions of dollars.

In my last two blogs, I wrote about ways to meet the Illinois state revenue needs, ways that might work better than the increase in the income tax.  This blog continues the list of possible “green taxes”.  In general, a green tax applies either directly on pollution emissions or on goods whose use causes pollution.  For raising a given amount of revenue, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.   That is, a tax on pollution might have good effects on the environment, because it discourages pollution.  In contrast, an income tax discourages earning income.

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  In my piece with Dan Karney for a recent IGPA Forum, we don’t debate what caused the fiscal crisis in Illinois, nor argue the merits of cutting spending versus raising revenue.  Instead, we just take it as given that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of a few green taxes as alternative ways to raise revenue.

While many green taxes are possible, we focus on four examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  We apply each hypothetical green tax directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation. 

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  In past weeks we covered Carbon Pricing and Gasoline Taxes.  This week we cover Trucking Toll and Garbage Fees.

Every day hundreds of thousands of vehicles crowd Illinois’s roads and highways.   Data from the Federal Highway Administration indicates that over 50,000 trucks (six tires and over) cross into Illinois from neighboring states along the interstate highway system.  While these trucks bring needed goods to Illinois, they also congest the roads, degrade the road surfaces, and fill the air with soot.  They also become involved in vehicle accidents that cost the lives of many in Illinois.  To compensate the state, Illinois can impose a toll for long-haul trucks using Illinois’s highways.  For example, a $5 per truck toll on 50,000 trucks daily would raise almost $100 million annually.  (In comparison, the existing Illinois toll road system generates approximately $600 million annually.)  The truck toll can be implemented using existing transponder technology deployed at weigh stations along the interstate highways.  (As an aside, we note, the constitutionality of state trucking tolls is not clear, because the federal government determines the rules of interstate commerce; however, major portions of the existing interstate highway system are subject to tolls, including the heavily travelled I-95 corridor in Delaware. )

Next, residents of Illinois generate approximately 19 million tons of garbage per year (or more than one ton per person per year), and 60 percent of that waste ends up in landfills.  Currently, large municipal waste landfill operators currently pay state fees that total $2.22 per ton of solid waste dumped.  But few municipalities in Illinois charge fees designed to discourage the creation of waste by residents (Don Fullerton and Sarah M. Miller, 2010, “Waste and Recycling in Illinois,” Illinois Report 2010, pp.70-80). 

However, empirical evidence shows that taxing garbage at the residential level does reduce garbage production (Don Fullerton and Thomas C. Kinnaman, 1996, “Household Responses to Pricing Garbage by the Bag,” American Economic Review, 86, pp. 971-84).  Yet the exact garbage taxation mechanism varies by program.  For instance, a fee can be levied on garbage bags themselves or on the containers that hold the garbage bags.  Regardless, a tax rate equivalent to one penny per pound of garbage would generate almost $240 million in revenue per year, or 6.3% of the expected revenue from the income tax increase.

Finally, consider a Portfolio Approach.  Remember, at issue here is not whether to raise taxes.  We presume the State has decided to raise taxes by $3.8 billion (as done already through the income tax increase).  Here, we merely explore alternative ways to raise revenue other than through the income tax. 

Anyway, instead of implementing only one of the green taxes describe above, Illinois could choose to implement several green taxes simultaneously.   This portfolio approach would keep rates low for each individual green tax, but still generate large amounts of total revenue that can add up to a large share of the total expected revenue from the recent income tax hike.  According to the numbers in all three blogs, one simple and moderate plan would combine the following green taxes and pay for more than  half of the needed revenue:  A carbon tax of $10/ton would collect $1 billion (raising electricity prices by about 7.5%), a gas tax increase of 14 cents per gallon would collect $0.7 billion (raising gas prices by about 4.4%), a trucking toll of $5 would collect $100 million, and a garbage fee of one penny per pound would collect $240 million.  Then the recent income tax increase could be cut by more than half.

Moreover, green taxes have the added benefit that they provide incentives to reduce the polluting effects of carbon emissions, gasoline use, truck exhaust, and household garbage generation.

In early January 2011, the State of Illinois enacted legislation to raise the personal income tax rate from 3% to 5% and to increase the corporate income rate from 4.8% to 7%.  Along with a cap on spending growth, these tax increases reduce the state’s projected budget deficit in 2011 by $3.8 billion (from $10.9 to $7.1 billion), according to the University of Illinois and their Institute of Government and Public Affairs (IGPA Fiscal Fallout #5).  The governor justified the tax increases on the grounds that the State’s “fiscal house was burning” (Chicago Tribune, January 12, 2011).  Dan Karney and I wrote a recent piece for the IGPA Forum, but we don’t debate the reasons for the underlying fiscal crisis in the State of Illinois, nor argue the merits of cutting spending versus raising revenue to balance the budget.  Instead, we just stipulate that politicians decided to raise revenue as part of the solution to the State’s deficit.  Then we analyze the use of “green taxes” as an alternate means of raising revenue that could mitigate or eliminate the need for increasing income taxes.

In general, green taxes are taxes either directly on pollution emissions or on goods whose use causes pollution.  In the revenue-raising context however, the basic argument for green taxes can be summarized by the adage: “tax waste, not work”.  That is, taxes on labor income discourages workers from engaging in productive activities and thus hurts society, while taxing waste discourages harmful pollution and thus benefits society.  In addition, the revenue raised from these green taxes can help the State’s fiscal crisis. 

While many green taxes could be implemented, we focus on four specific examples that have the potential to raise large amounts of revenue: carbon pricing, gasoline taxes, trucking tolls, and garbage fees.  Indeed, as we show, a reasonable set of tax rates on these four items can generate as much revenue as the income tax increase.  That is, imposing green taxes can completely fill the $3.8 billion difference between the projected baseline deficit ($10.9 billion) and the post-tax deficit ($7.1 billion). 

Yet we omit many other potentially high-revenue green taxes.  For example, the State could tax nitrogen-based fertilizers that contribute to nitrogen run-off pollution in streams, rivers, and lakes.  These omissions do not imply that other green taxes could not be implemented.  Also, the simple analysis does not include behavioral responses by consumers and businesses.  Rather, we apply hypothetical green taxes directly to historical quantities of emissions (or polluting products) in order to obtain an approximate level of potential revenue generation.  

In a short series of blogs, one per week, we now discuss each of the four green taxes and their potential for revenue generation.  This week: Carbon Pricing.

In 2008, electricity generators in the State of Illinois emitted almost 100 million metric tons of carbon dioxide (CO₂) according to the U.S. Department of Energy’s Energy Information Agency (EIA).  See the State Historical Tables of their Estimated Emissions by State (EIA-767 and EIA-906).  While the United States has no nationwide price on carbon – neither a tax nor a cap-and-trade (permit) policy – some jurisdictions within the United States have imposed their own carbon policies.  For instance, a coalition of Northeastern states implemented the Regional Greenhouse Gas Initiative (RGGI) to limit CO₂ emissions using a permit policy.  To date, RGGI’s modest effort has already generated close to $1 billion in revenue for the coalition states.

If Illinois were to adopt its own carbon pricing policy, then even a modest tax rate or permit price could raise significant revenue.  For instance, a $5 per metric ton CO₂ price on emissions from electricity producers generates about $500 million in revenue (or 14.4% of the $3.8 billion raised from the state’s income tax hike).  By way of comparison, if the extra $500 million in emission taxes were entirely passed on to consumers in the form of higher electricity bills, then the average consumer’s bill would increase by 3.75%  (where $13.3 billion is spent annually on electricity in Illinois).

Table 1 reports the possible “revenue enhancement” from the $5 per metric ton tax, along with three other pricing scenarios.  Both the $5 and $10 rates are hypothetical prices created by the authors for expositional purposes.  In contrast, the $20 per metric ton price is approximately the carbon price faced by electricity producers in Europe’s Emission Trading System (ETS).  At the $20 rate, a carbon tax in Illinois generates almost $2 billion – over half of the tax revenue from the income tax increases.  Finally, the $40 tax rate (or carbon price) is from Richard S. J. Tol (2009), “The Economic Effects of Climate Change,” Journal of Economic Perspectives, 23(2): 29-51.  It is an estimate of the optimal carbon price that accounts for all of the negative effects from carbon emissions.  At this “optimal” price, the revenue from pricing carbon in Illinois by itself could replace the needed tax revenue from the State’s income tax increase.

The usual argument against unilateral U.S. effort to cut greenhouse gas emissions and reduce climate change is that we’d impose significant costs on ourselves, with most benefits going to other countries.   Thus, we should wait for an international agreement.  By the way, an international agreement is not going to happen.  Meanwhile we wait, which means more global warming, sea level rise, and increased extreme weather events like floods, droughts, and hurricanes.   That argument may also include the claim that U.S. agricultural productivity might increase from a little global warming, and the U.S. is rich enough to protect itself against sea level rise. 

According to that logic, we can’t worry too much about damages to other countries, as we can’t take care of the whole world by ourselves.

The problem with that logic is that those costs to other countries will unavoidably become costs on us!  Take two examples.  First, a Reuters article points out that “a third of Bangladesh’s coastline could be flooded if the sea rises one meter in the next 50 years, creating an additional 20 million Bangladeshis displaced from their homes and farms.”   Some large percentage of the nation could disappear under water.  And that’s only one such nation.  Global warming and sea level rise could displace hundreds of millions of poor people.  The U.S. will find itself unable to turn its back on such a disaster, for humanitarian reasons.  Moreover, the costs would come back to haunt us in other ways, through increased wars and other political disruptions of great danger to the U.S. itself.

A second example appears in a recent NY Times article about the effects of global warming on agricultural productivity.   It starts by describing terrific recent technological advances: “Forty years ago, a third of the population in the developing world was undernourished. By the tail end of the Green Revolution, in the mid-1990s, the share had fallen below 20 percent, and the absolute number of hungry people dipped below 800 million for the first time in modern history.”  But those technological advances have leveled off, while growing demands have reflected huge growth in worldwide population and incomes.  The resulting grain price spikes have contributed to the largest increases in world hunger in decades, perhaps 925 million last year (see screen-shot).

What is the role of human-induced climate change?  The level of carbon dioxide in the atmosphere has already increased by 40 percent since the Industrial Revolution.  We are on course to double or triple this level within a hundred years.  This climate change contributes to extreme weather events.  “Many of the failed harvests of the past decade were a consequence of weather disasters, like floods in the United States, drought in Australia and blistering heat waves in Europe and Russia. Scientists believe some, though not all, of those events were caused or worsened by human-induced global warming. …  In 2007 and 2008, with grain stockpiles low, prices doubled and in some cases tripled. Whole countries began hoarding food, and panic buying ensued in some markets, notably for rice. Food riots broke out in more than 30 countries.”

The world’s population was less than 3 billion in 1950.  It is now about 7 billion, and is expected to grow to 10 billion by the year 2100. “Unlike in the past, that demand must somehow be met on a planet where little new land is available for farming, where water supplies are tightening, where the temperature is rising, where the weather has become erratic and where the food system is already showing serious signs of instability.”

Suppose the U.S. is only to look out only for itself.  Forget altruism.  Forget unilateral efforts to save the world.  Wouldn’t we merely be protecting ourselves by doing something now to reduce worldwide political instability that could result from a hundred million refugees and famines of that magnitude?

Do you recall the “Climategate” controversy from late 2009?  If not, here is a quick refresher: on or about November 17, 2009, a computer hacker stole emails from the Climate Research Unit (CRU) at East Anglia University, and posted a selection of the emails on the internet in an attempt to discredit the climate change research done by CRU.  Using these out-of-context emails, allegations of data manipulation and scientific fraud were leveled at CRU researchers along with their colleagues at other institutions.  This episode became known as Climategate and resulted in a media frenzy.  (Please see a previous CBPP blog post on this topic, click here.)

In response to the Climategate scandal, Congress held hearings because National Oceanic and Atmospheric Administration (NOAA) employees were named correspondents in the leaked emails.  Following these hearings, Sen. James Inhofe (OK-R) sent a letter to the Inspector General (IG) of U.S. Department of Commerce requesting an investigation of NOAA’s handling of the CRU email leak and to determine the integrity of NOAA’s Global Historic Climatology Network-Monthly dataset (GHCN-M).

(Note: Sen. Inhofe famously said on the Senate floor that global warming is the “greatest hoax ever perpetrated on the American people.”)

The Inspector General issued his report two weeks ago (report) and it exonerates NOAA.  The report clearly states, “In our review of the CRU emails, we did not find any evidence that NOAA inappropriately manipulated data comprising the GHCN-M dataset or failed to adhere to appropriate peer review procedures.”  Furthermore, other investigations conducted in the United Kingdom have already cleared British scientists at the CRU (source).

However, the IG’s report does criticize NOAA for not replying quickly or thoroughly enough to Freedom of Information Act (FOIA) requests, as it must do because it receives federal funds.  The report recommends that NOAA should consider “an overall assessment of the sufficiency of its FOIA process.”  This is an important point because this potential lack of transparency, even if the underlying research process is sound, can lead to undo skepticism of the science.  With the environmental and economic implications of climate change being so large, a “just trust me” approach by scientists will not work.  The IG report already demonstrates that NOAA’s science adheres to best-practice procedures, so clearly telling the public their methodologies could reduce some of the confusion regarding the data of climate change science.

The very existence of the Environmental Protection Agency (EPA) has long been a point of contention between the two political parties.  What is, and what ought to be the role of the EPA with regard to policy making?  Congress cannot possibly enact laws that contain every detail about subsequent implementation, monitoring, and enforcement.  And they should not put everything in the law anyway, in order to allow enough flexibility to deal with future contingencies.  Besides, those in Congress don’t have the science background necessary to decide all of the details of some technological aspects of pollution prevention.

The law does not say that every electric power plant must reduce emissions of each pollutant to no more than some number, like 37 micrograms per cubic meter.  Instead, the law from Congress just says that EPA should protect human health to an adequate margin of safety.

Yet some would prefer that the EPA disappear, along with every agency having any regulatory power.  This agency, which was conceived in 1970 under Richard Nixon, has analyzed and supported some of the most important pieces of legislation of the last forty years, ranging from the Endangered Species Act to – more recently – the new emissions standards going into effect this year. 

In 2007, the United States Supreme Court ruled in a 5-4 decision called “Massachusetts vs. EPA”, that the EPA could in fact regulate greenhouse gases under the Clean Air Act, on the grounds that such emissions do affect human health.  When combined with the new Republican-dominated Congress, we have set the stage for yet another ideological battle. 

Throughout the past decade, much of the discussion about controlling carbon dioxide emissions has largely centered around the idea of Cap and Trade.  That system would effectively put a price on each unit of pollution emissions.  It would create a market where the need for emissions and the cost of emissions are balanced in a way that can achieve economic efficiency.  However, the most viable attempt at this in recent years, the Waxman-Markey bill of 2009 (H.R.5454), passed the House and not the Senate.  It would not even get past the House in this term.  

The question then becomes, what exactly are the cards that the EPA retains in their deck? 

A recent article is titled “Greenhouse Gas Regulation Under the Clean Air Act” by researchers at Resources for the Future (RFF, by Burtraw, Fraas, and Richardson).  It seeks to explore the options available to the EPA, in-depth.  What they find is that the EPA can implement measures that will reduce greenhouse gas emissions significantly in a measured and cost-effective manner.  For this to happen, however, they argue that the EPA must become bold and decisive in their actions. 

Bold action may be taken as an example of government overreach, and so the EPA must be careful.

Republicans are currently in discussion to introduce the Energy Tax Prevention Act of 2011 .  They recognize that the EPA holds some powerful cards after the Supreme Court ruling in 2007, and they want to take that power away.  This Act would shift the EPA’s ability to regulate from the Agency to the legislative branch.  Yet such an action could take any decision-making ability from the scientists and put it in the hands of the politicians.  As EPA leader Lisa Jackson said, “Politicians overruling scientists on a scientific question – that would become part of this committee’s legacy.’”  Herein lies a problem with democracy.  The people in charge of making the decisions that affect us all, often have little knowledge of the actual issues at hand.  After all, Republicans from oil-rich states like Oklahoma still claim global warming is nothing but a hoax.

On Tuesday night, President Obama gave the State of the Union (SOTU) Address (transcript) before a joint session of Congress.  The speech drew upon imagery from the Cold War past in order to spur action regarding America’s energy policy.  “This is our generation’s Sputnik moment,” the President declared, and thus he will send a budget to Congress that invests “especially [in] clean energy technology, an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.”  To deal with this “Sputnik moment”, the President set forth two goals: (1) become the first country to have a million electric vehicles on the road by 2015; and (2) get 80% of America’s energy from clean sources by 2035. 

(Not quite as inspiring as President Kennedy’s urging on May 21, 1961 that “this nation should commit itself to achieving the goal, before the decade is out, of landing a man on the moon and returning him safely to the earth.”  On July 20, 1969, Apollo 11 landed on the Moon and Neil Armstrong took his first step on the lunar surface.)

I have three issues with the President’s approach.  First, the wording of the goals in the SOTU Address needs to be parsed carefully in order to understand their meaning or lack of meaning.  For instance, does “electric vehicles” mean all-electric vehicles or do hybrids count towards that goal?  Similarly, what is the definition of “clean sources”?  Fortunately, in this case we have an answer later in the Address.  As the President admits, “Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all.”  However, ambiguity still exists because clean coal and natural gas technologies can be deployed with or without carbon capture and sequestration technologies.

Second, the President did not offer details about HOW to achieve these goals.  The Address includes references to investments in clean energy technology, but it specifies neither investment level nor investment horizon required to meet the stated goals.  He did not say, for example, $10 billion annually for 10 years.  If clean energy is really a priority for the President, and given concerns about the fiscal deficit, then clarity about the needed investment level would be helpful so that other programs can be identified for cuts in order to balance the budget.  Also, the President said that “clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.”  I agree.  However, an efficient, well functioning market requires a price signal.  This brings me to my last point.

Third, the President did not directly address environmental policy when setting his goals.  If the President really means “low-carbon” or “no carbon” when he says “clean”, then the absence of a carbon policy in the Address becomes conspicuous.  Specifically, the President did not indicate if he would again push for a cap-and-trade bill.  Given the composition of the new Congress, a cap-and-trade bill or any other piece of legislation that puts either an explicit or implicit price on carbon emission seems politically infeasible.  To have a market for these clean energy technologies, where is the price signal going to come from?  

In their forthcoming book called “Accelerating Energy Innovation: Insights from Multiple Sectors”, Rebecca Henderson and Richard G. Newell look at lessons from the histories of innovation in other industries and implications for the energy industry.   The introduction says: “Taken together the histories point to three key factors as critical to accelerating innovation: (1) well funded, carefully managed public research that is tightly linked to the private sector; (2) rapidly growing demand; and (3) antitrust, intellectual property and standards policies that together promote vigorous competition and the entry of new firms.”

How many people would ‘demand’ electric vehicles at a high price, just out of the goodness of their hearts?  Or would that demand depend on the existence of a policy that raises the price of burning fossil fuels?

The President noted that when Sputnik was launched, NASA did not exist.  Yet, the Department of Energy has existed for many years, and America’s energy policy is still unclear and uncertain.