Cheat Sheet for Climate Policy: Part IV – What’s Not Important for a Good Climate Bill

By and / 5.11.2010

How to tell a good climate bill from a bad one? This series will guide you through the main issues that are likely to arise in the coming weeks as the Senate takes on climate change. In previous posts, we looked at the crucial, the merely important and the negotiable elements in a climate bill. In this post, the last in the series, we highlight issues that might be popular or politically important, but which actually don’t matter that much for climate results. (To see all the posts in the series, click here.)

As with any big issue in Washington, climate policy has its share of sideshows and special-interest pet projects. If somebody’s favorite policy can be plausibly (or even implausibly) tied to climate, it’s a good bet they’ll attempt to do so. Conversely, if someone wants to hijack the climate debate, they may try to attach an unpopular issue to it. There are also a good number of perfectly well-intentioned ideas that, in reality, won’t make much difference in terms of climate policy.

Our goal in this post is to identify these issues: those that we feel are just political distractions, and those that won’t make much difference. If you’ve followed climate policy, you might find some surprises here — we include some issues that are often trumpeted as important. Not all of the policy proposals we mention are necessarily bad. Some are, but others are just not that important and will not have much effect on emissions reductions or the cost to the economy.

Category IV Issues: The Bad, the Irrelevant and the Trivial

#1: Renewable portfolio standards

A renewable portfolio standard (RPS) is a requirement that a certain percentage of electricity supplied by power companies come from renewable sources: wind, solar, geothermal and sometimes hydro or nuclear. A majority of states have an RPS in place, but there is no current federal standard. Many climate proposals, including Waxman-Markey, include an RPS.

Superficially, the idea is appealing: by forcing power suppliers to use renewables, an RPS expands the market for them. This will obviously increase their use, reduce emissions and encourage innovation in renewable techs.

The problem is that once you have a carbon price, moves to renewable energy sources should happen anyway, making an RPS redundant. Since burning fossil fuels becomes more expensive, power suppliers will shift to cleaner technologies. Some of this switching will be to renewables, while others will be to cleaner fossil fuels like natural gas – a fuel that is excluded in most renewable portfolio standards.

If the standard is set at a level lower than the amount of renewables that power companies would shift to anyway under a carbon price, then an RPS is totally irrelevant: companies would meet the standard just by acting in response to the price. But if the standard is set at a level higher than the amount of renewables utilities would use, an RPS imposes additional costs. Power companies that would like to switch to cheaper and clean(er) technology — like natural gas or nuclear (if it’s not included in the RPS) — would be limited in their ability to do so by an RPS. Instead, an RPS would force them to use more expensive renewables in their efforts to make their emissions targets. Those costs get passed on to consumers, making climate policy more expensive.

And here’s the thing: it would be costlier without providing any additional emissions benefits than what we would get under a cap. An RPS is often favored by environmental groups (and, of course, firms with investments in renewables) presumably because they think a carbon price will be too low to achieve the level of clean energy use they prefer. But this doesn’t make much sense. The cap set by a climate policy determines the environmental outcome; all an RPS would do is restrict the ability of power companies to decide how to meet that cap. In other words, an RPS doesn’t result in lower emissions. If you want that, you need to go back to Category I — set a tighter cap (or a higher carbon tax).

Note that the fact that an RPS is a bad idea doesn’t necessarily mean that government investment in R&D for renewables is unwise — such investments are responses to identifiable market failures. But an RPS would be a poor remedy for those failures.

#2 Preempting the EPA

The Environmental Protection Agency (EPA) has some authority under existing laws to regulate greenhouse gases. The Supreme Court definitively established this in its famous Massachusetts v. EPA decision in 2007. Under President Obama, the agency has already started regulating greenhouse gas emissions from cars and trucks, and is moving towards regulating emissions from so-called “stationary” sources, power and industrial facilities. If Congress fails to act on climate, the EPA will continue down this path.

If Congress does pass a new law, how should that law deal with the existing EPA authority? The majority (though not consensus) view on the Hill appears to be that new legislation should preempt this authority. Waxman-Markey would explicitly remove the EPA’s authority under the Clean Air Act to regulate greenhouse gases from stationary sources (but would leave regulation of vehicles intact). Preliminary indications are that the Senate bill would do the same.

Many environmental groups oppose this preemption, claiming that EPA authority is needed in case the climate law does not go far enough. Again, this doesn’t make sense. First, EPA authority isn’t a kind of reserve power, to be used only when a new law appears inadequate. If Congress passes a new climate law but leaves existing EPA authority intact, the EPA will still be legally required to regulate greenhouse gases. Waiting to see if the new climate bill is “good enough” before taking action won’t work: the Bush EPA advanced similar arguments in Massachusetts v. EPA and lost. In other words, preempting the EPA isn’t like discarding a useful tool — it’s like turning off a machine. New climate legislation is a better machine.

Second, where the EPA does have discretion, it needs the political will to act. The moves that the EPA is currently making to regulate greenhouse gases are highly controversial. It has taken years (arguably decades) of congressional inaction on climate for the EPA to use its exisiting authority to regulate greenhouse gases. If there is a new climate law, it will likely sap the agency’s will to act further on climate even if authority is not preempted. In that environment, it is hard to see the administration devoting resources and political capital to additional regulations (beyond the minimum that is legally required) for the foreseeable future.

In short, there are some things the EPA must do, and a new climate bill cannot change that without preempting agency authority. There are other things the EPA has control over, but action on those areas will be unlikely for political reasons once a climate law has been passed. If environmental groups feel that the climate proposals under consideration don’t go far enough, they should make an effort to convince legislators — and their constituents — of that. The move to preserve the EPA as an alternative venue for their arguments is understandable, but a little cynical. The time for the climate policy debate is now (we hope), and the venue is Capitol Hill.

#3 Preempting the states

Like the EPA, states have made moves to regulate greenhouse gases in the absence of action from Congress. California’s AB32 law (which commits California to reducing emissions to 1990 levels by 2020) and the creation of a Regional Greenhouse Gas Initiative, a regional carbon market by some states in the Northeast, are the most notable examples.

How should a federal climate law treat these regional and state efforts? Should they be allowed to continue, or should federal law preempt them?

The basic answer is similar to that for renewable portfolio standards: state-level regulation makes sense now, but is mostly useless or even counterproductive if there is a national carbon price. As Robert Stavins recently explained, state-level greenhouse gas regulation that is stricter than the national cap doesn’t reduce overall U.S. emissions — it just forces emissions out of the regulating state into one without climate regulation. This drives up prices in the regulating state without any climate benefit.

Preemption of state greenhouse gas regulations therefore probably won’t have any negative impacts for emissions and climate. Stavins points out that there still may be benefits for smaller state-level regulations in situations where a low federal carbon price fails to push beneficial changes. That’s true, but so long as the new federal law has a serious emissions cap, preempting major regulations like AB32 and regional carbon markets is fine. Industry wants this preemption since they’d rather have a single set of rules to comply with. It’s a concession that policy-makers can make at little or no environmental cost.

#4 Wall Street

Wall Street does not have a very good reputation right now. Creating a new market for carbon allowances means new opportunities for brokering trades between emitters — and with that market, possibilities for speculation, new financial instruments such as derivatives and possible opportunities for abuse. Some on Wall Street certainly see carbon as just another commodity and carbon markets as a big opportunity.

But while derivatives have been called financial weapons of mass destruction, they can play an important role in future carbon markets. Firms will need some kind of mechanism to protect against the risk of unforeseen events that cause them to be out of compliance with the cap, such as emergency fuel-switching or inaccurate emissions accounting. Since regulated firms are exposed to such risks, they will look to reduce that exposure through insurance in the form of carbon derivatives. The market must be properly regulated (the rules can be written directly into climate legislation), but assuming it is, the benefits of reduced transaction costs and improvements in liquidity that financial expertise can bring seem likely to exceed the costs of possible fraud or abuse.

Some of the criticism may arise not from a fear that the government will be unable to prevent criminal or undesired activity, but from opposition to creating a new market (and new profit opportunity) for Wall Street. As Michael Levi points out, however, somebody has to run a carbon market, and they had better have expertise. For all its recent failings, Wall Street firms have world-class market-making expertise. Oversight is necessary, but keeping the best financial minds away from carbon simply because they’re unpopular right now is likely to be costly.

#5 Drilling and energy security

One touted benefit of a climate policy that reduces reliance on fossil fuels is that it improves American energy security. This is easy to understand: oil comes from somewhere else, and if we use less oil, we won’t import as much. This improves our trade deficit and reduces reliance on unstable parts of the world for energy.

All of that is a good thing, but it’s a side benefit — it has nothing to do with climate. Indeed, policies that improve energy security might or might not have climate benefits. Putting a price on carbon certainly will, but increasing domestic oil supplies by expanding drilling won’t — it will either replace imports and have no overall effect on emissions or it may drive down (ever so slightly) the price of oil, which will increase consumption and emissions. If domestic drilling does not result in increased emissions, it is not necessarily a bad idea, but it can’t be justified on climate policy grounds.

Drilling is an energy issue, not a climate one. But climate legislation itself has been framed as being about energy (and, specifically, energy security) as much as it is about climate change. That’s not unexpected, and it will similarly be no surprise if climate legislation includes provisions to expand drilling, though how the political dynamics of the Gulf Coast oil spill play out over the next few weeks will determine what, if anything, is included. The point is that these provisions are political — they are in there to attract support for the bill or placate opponents, not for any climate benefits.

The Bottom Line

As the Senate tackles climate legislation, numerous provisions and elements are likely to be raised. Be wary if the conversation begins to get bogged down around the following questions:

  1. Does the bill have renewable portfolio standards?
  2. Does it preempt EPA authority?
  3. Does it preempt state regulations?
  4. How does Wall Street come out?
  5. Does the bill tackle our energy security problems?

These questions are largely distractions to the ultimate objective of a climate bill: reducing greenhouse gas emissions as much as possible at the lowest possible cost. If you care about climate change, keeping your eyes on that end goal will be crucial if there is to be any hope of untangling the legislative thicket and passing a meaningful climate bill this year.