Introduction

Clean energy or dirty energy? The choices made today will affect the health, welfare, and economic well being of Americans today and tomorrow. A clean energy policy would deliver not only environmental benefits but economic ones as well. Such a policy also could help to stem the potentially staggering costs of climate change. While the terrorist attack of September 11 has naturally deferred debate in Washington over energy and environmental policy, the issue is likely to re-emerge before long, especially if the war on terrorism increases concerns about U.S. energy independence.

To address the issue, this paper shows how we can achieve a cleaner energy future, outlining a set of principles for environmental legislation in the power sector. As a foundation for discussion, it examines first why market-based methods are needed to reduce emissions from the power sector and why we support programs that cap emissions and promote allowance trading.

Emissions from the Electricity-Generating Sector

The electricity-generating sector produces a disproportionately high percentage of our nation's air pollution -- about one-third of the total U.S. emissions of nitrogen oxide (NOx) and mercury, and it is responsible for an even higher share of sulfur dioxide (SO₂) and carbon dioxide (CO₂) emissions. Emissions of these substances are linked to some of our most pressing environmental problems-acid rain, exposure to fine particles, smog, and regional haze, as well as global climate change.

In response, momentum has grown recently in Congress to create comprehensive market-trading programs for SO₂, NOx, and CO₂ and to regulate mercury. Legislators have introduced at least four comprehensive emissions bills, and power industry groups have proposed several others.

The Progressive Policy Institute (PPI) has long championed the idea of using market-based regulation instead of prescriptive standards to achieve public goals. In that regard, PPI has endorsed the concept of emissions trading and has advanced a proposal to cap and trade greenhouse gas from utilities and industry (Naimon and Knopman, 1999). PPI also supports the development of energy policies that promote clean growth. Those policies are summarized in a companion paper (Fox-Penner, 2001).

To illustrate the effectiveness of a cap-and-trade system, the paper draws from the successes of the Environmental Protection Agency's (EPA) SO₂ emissions trading program, as well as from ideas contained in the various four-pollutant trading bills and proposals. Although it draws from these bills and proposals, this paper does not endorse any one specific emissions cap-and allowance-trading plan.

The Acid Rain Example

During the late 1970s, the problem of acid rain loomed large on the nation's agenda. This problem is largely caused by the SO₂ emissions from the utility industry, which, citing cost concerns, resisted congressional efforts to place a limit or "cap" on its emissions. The former Bush administration broke the deadlock in 1989 by proposing an emissions reduction system that has since proven that a cleaner environment need not be inordinately expensive. The Acid Rain Program sets a single tonnage limit or "cap" on the emissions of SO₂ from all utilities. Those who can control SO₂ cheaply can sell emissions trading allowances to those who find reducing emissions more costly. This combined approach is far less expensive than "first generation" laws that regulate emissions from each source separately. By combining an emissions cap with allowance trading, a stringent environmental result was achieved at relatively low cost. The expected costs of the Acid Rain Program have decreased since it was debated in Congress from early estimates, ranging from $400 to $1,500 per ton of SO₂ removed, to a current price of only $200 a ton -- far less than estimated benefits (Carlson, 2000).

The "Four-E" Approach

The cap-and-trade system that has been so successful in controlling SO₂ emissions holds the promise of reducing pollutant emissions further and of addressing a problem that looms even larger: climate change. Many scientists believe that the accumulation of carbon dioxide in the earth's upper atmosphere will change the earth's climate (IPCC, 2001). Initiatives to cap carbon here at home and for the United States to participate in efforts to curb greenhouse gas emissions internationally stalled this past year. Those opposed to regulating CO₂ have employed the same argument used by those who resisted attempts to reduce acid rain: the cost of controlling greenhouse gas emissions is too high. Ironically, many electric utilities and a growing number of members in Congress now view the price of not developing a comprehensive strategy to reduce power plant emissions as too high.

Two key aspects of the comprehensive emissions trading approach are worth mentioning at the outset.

The first is the need to include carbon dioxide. It appears likely that the White House will support a program to cap-and-trade the three pollutants, minus carbon. Yet excluding carbon from emissions reduction efforts now simply means that utilities will later need to make costly modifications. Moreover, it means that the United States will miss the opportunity to harness market forces to stimulate the development of technologies to reduce CO₂ emissions, forces which have proven so successful in the case of SO₂.

The second is that a comprehensive emissions reduction package must integrate existing provisions for new sources under the Clean Air Act's New Source Review (NSR) with a cap and trade program. Congress created those provisions to ensure that air quality would not deteriorate when industry built new facilities or "sources." The NSR provisions require new plants to undergo a lengthy permitting process before being built. They also require older plants to secure approval for major modifications that can affect air quality.

NSR's provisions require sources to install "Best Available Control Technology" (BACT) and, in some instances, state of the art emissions controls to attain "Lowest Achievable Emissions Rates" (LAER). Such requirements can reduce incentives to bring new power online and to upgrade older generating facilities. To correct these deficiencies, Congress should integrate the two standards by eliminating these NSR standards for those sources that are covered under the emissions cap. Once these caps are imposed, NSR no longer provides any significant emissions reductions, and eliminating these NSR provisions for new sources has the potential to actually boost cleaner energy technologies by equalizing the economic burden for pollution control placed on old and new sources.

Principles for a Four-Pollutant Approach

The following principles can guide decision-makers as the various three- and four-pollutant proposals move forward:

• Make the strategy comprehensive. A multi-emissions strategy makes the best economic sense over time and delivers significant environmental benefits that can be expected to far exceed the costs of control.
• Cap carbon now. An emissions reduction strategy must include carbon to ensure a clean energy future. Capping carbon now gives generators more certainty about how to address regulatory requirements and stimulates investment in a diverse mix of clean energy technologies and mitigation techniques that will form the basis of our modern energy supply.
• Use emissions caps, not end-of-pipe rate standards. Effective market-based strategies such as emissions caps outperform "first generation" approaches such as end-of-pipe rate standards that end up dictating technologies to sources and control emissions after they are created.
• Establish phased reduction targets. We should adopt emissions caps with integrity, but give sources reasonable time to meet them. Doing so will help the United States maintain a diverse fuel portfolio, including advanced coal technologies, yet spur development of alternative fuel sources and technologies.
• Replace redundant requirements. Eliminate new source review provisions only for those sources whose emissions are placed under mandatory, four-emissions caps.
• Distribute trading allowances equitably. Select allowance distribution methods that cover sources equally -- old and new, large and small -- and use methods that promote efficient energy production.

Blueprint Keywords: Extra CO2

Byron Swift directs the Center for Energy, Economy and Innovation at the Environmental Law Institute in Washington, DC. Jan Mazurek directs the Center for Innovation and the Environment at the Progressive Policy Institute in Washington, DC.