Pricing Carbon Emissions
A bill before Congress may prove a costly way to reduce greenhouse gases.
- Friday, June 5, 2009
- By Kevin Bullis
Experts are applauding a sweeping energy bill currently before the United States Congress, saying that it could lead to significant cuts in greenhouse-gas emissions and improve the likelihood of a comprehensive international agreement to cut greenhouse gases. "It's real climate-change legislation that's being taken seriously," says Gilbert Metcalf, a professor of economics at Tufts University. But many warn that the bill's market-based mechanisms and more conventional regulations could make these emissions reductions more expensive than they need to be.
The bill, officially called the American Clean Energy and Security Act of 2009, is also referred to as the Waxman-Markey Bill, after its sponsors, Henry Waxman (D-Ca.) and Edward Markey (D-Mass.). The legislation would establish a cap and trade system to reduce greenhouse gases, an approach favored by most economists over conventional regulatory approaches because it provides a great deal of flexibility in how emissions targets are met. But it also contains mandates that could significantly reduce the cost savings that the cap and trade approach is supposed to provide.
In a cap and trade system, the government sets a cap on total emissions of greenhouse gases from various industrial and utility sources, including power plants burning fossil fuels to generate electricity. It then issues allowances to polluters allowing them to emit carbon dioxide and other greenhouse gases; total emissions are meant to stay under the cap. Over a period of time, the government gradually reduces the cap and the number of allowances until it reaches its target. If companies' emissions exceed their allowances, they must buy more.
Economists like the system because companies can choose to either lower their emissions, such as by investing in new technology, or buy more allowances from the government or from companies that don't need them--whichever makes the best economic sense. It is meant to create a carbon market, putting a value on emissions.
In the proposed energy bill, the government will set caps to reduce greenhouse-gas emissions by 17 percent by 2020 (compared with 2005 levels) and by 80 percent by 2050--targets chosen to prevent the worst effects of climate change. Setting caps will make electricity more expensive, as companies turn to cleaner technologies to meet ever lower caps or have to spend money to buy allowances from others with lower emissions. But the bill has some provisions for cushioning the blow, especially at first. For one thing, it gives away most of the allowances rather than charging for them, and it also requires that any profits gained from these free allowances be passed on to electricity customers. It also allows companies to buy "offsets" that permit them to pay to reduce emissions outside the United States.
If the program is designed right, there are fewer allowances than the total emissions when the program starts. At first, when the caps are relatively easy to meet, the prices for allowances on the carbon market will be low. But eventually, they will get higher as the allowances become scarcer. In an ideal world, companies will predict what the price of the allowances will be, and plan accordingly.