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June 5, 2009

FLASHPOINT: The impact of proposal on Indiana coal

Cap-and-trade offers workable energy solution

By J. Allen Wampler

President Obama’s environmental proposals generally have been well-received. But on one key point, at least, we should be very wary.

In calling for a new climate-change treaty to replace the 1997 Kyoto Protocol, the president has proposed a sweeping cap-and-trade program that would demand serious actions at considerable cost to the U.S. economy. If Congress approves the cap-and-trade scheme in its present form, electricity consumers in the Southeast and Midwest that rely heavily on coal to power their economies will wind up footing a large part of the bill. That certainly would be the case in Indiana, where coal is the mainstay of electricity generation.

President Obama’s plan aims to curb U.S. greenhouse-gas emissions 20 percent below 2005 levels by 2020, with a mid-century target of 83 percent reductions. It is even more ambitious than legislation proposed by Democratic leaders of the House Energy and Commerce Committee who want a 14 percent reduction by 2020.

At first glance, the administration’s cap-and-trade plan appears logical and equitable. Using a market-based approach, it would set limits on the amount of carbon dioxide that industries can emit, and allow companies to buy and sell rights to emit those gases. The program would auction off carbon emission allowances to companies and then use the estimated $646 billion in revenue mainly to reimburse consumers through tax rebates and to finance the development of clean energy sources.

One problem with the president’s plan is that no comprehensive economic evaluation has been conducted of cap-and-trade. Yet it would directly affect 85 percent of the U.S. economy. Even with tax rebates to help ease the costs of carbon reduction, consumers can expect to pay more for fuel, food, electricity, and goods and services they use every day.

That’s because auctioning allowances sharply increases costs by requiring companies to pay both for the costs of reducing emissions and for the allowances they will need even after these reductions have been achieved. One allowance equals one ton of carbon dioxide emissions, and annual emissions in the United States exceed 5 billion tons. Most of these costs would be passed along to consumers.

Electricity generation is right between the cross-hairs. It accounts for about 40 percent of the nation’s carbon dioxide emissions, with more than four-fifths of the utility emissions coming from coal plants.

In the near term, utilities have limited options for achieving the needed reductions. A combination of conservation and renewable energy sources will be helpful. But for base-load electricity, utilities can build new nuclear power plants or use natural gas plants more of the time, since natural gas has lower carbon content than coal. Longer term, more alternatives will become available, possibly techniques for capturing and storing carbon emissions from coal plants in deep geologic formations. But introducing clean technologies is an expensive process, and utility ratepayers can expect significant rate increases and perhaps some sudden price shocks.

This would be unfortunate, because the cap-and-trade process can be structured differently to ease the impact on consumers. Instead of initially auctioning all of those emission allowances, local electricity distribution companies should be given 40 percent of the allowances (equal to their level of U.S. carbon emissions), with a gradual transition to a full auction. The value of those allowances would then be conveyed to electricity consumers residential, commercial and industrial customers under the oversight of state utility regulators. This would help electricity companies offset the cost of the transition to a low-carbon economy, while cushioning the economic impact on electricity users, particularly low-income families and energy-intensive industries. There would also be long-term benefits from investments that the utility industry would be able to make in non-emitting technologies.

State regulators already have plenty of experience in distributing the value of emission allowances. For nearly two decades they have administered the allowances under a highly successful acid rain program, using a similar cap-and-trade system that led to a sharp decline in sulfur dioxide emissions at a much lower cost than had been projected.

As a transition mechanism, allocating allowances has gotten widespread support. The U.S. Climate Action Partnership an alliance of major businesses and leading climate and environmental groups favors this approach, as do the Pew Center on Global Climate Change and the National Association of Regulatory Utility Commissioners, representing the nations utility regulators.

For the United States and globally, cap-and-trade offers a potentially workable solution to the greenhouse-gas problem and an opportunity to reach a comprehensive strategy for carbon mitigation. Properly modified to protect consumers, it would be the most cost-efficient way to guarantee emissions reduction, to everyone’s benefit.



Allen J. Wampler is an energy consultant to government and industry and formerly assistant secretary of the U.S. Department of Energy for fossil fuels.

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