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Fox-Penner & Schmalensee: Legislation Beats Regulation

The president has called for bold legislative action to create a clean energy economy. It would be a tragic mistake if this legislation did not include the broadest possible carbon pricing signal.

[IMGCAP(1)]This May, America got a glimpse of two different paths for reducing the greenhouse gases that are driving climate change — one would drive innovation, the other would rely on regulation. On Capitol Hill, Sens. John Kerry (D-Mass.) and Joe Lieberman (ID-Conn.) released the American Power Act, a bill that would set up an emissions trading market for greenhouse gases emitted by utilities. While not as complete as the emissions market called for by its counterpart bill in the House, it would create a substantial market.

A few blocks down Pennsylvania Avenue, the Environmental Protection Agency released greenhouse gas regulations applying to large sources of such emissions one day later. Under the new rules, which will take effect in 2011, new sources that emit more than 100,000 tons or existing sources that increase their emissions by 75,000 tons will be required to use the “best available control technologies” to reduce their greenhouse gases.

These two paths clearly illustrate the greenhouse gas choices before us. Under the legislative approach, we can create markets that send a carbon price signal — ideally, throughout the economy — which would stimulate innovations and reduce the cost of making emissions reductions. Under the EPA approach, we can try to get the job done by imposing one-size-fits-all control standards on new or expanded power plants and industrial facilities.

While EPA regulation may be better than doing nothing at all, we have experience with the disadvantages of this command and control approach. For starters, new, efficient plants are disadvantaged relative to old, inefficient plants, and the latter are thus encouraged to stay in operation as long as possible, continuing to emit greenhouse gases for free while new sources must pay to clean them up.

Once the standard for “best available control technology” is set, there will be no incentive for continued research and development or investments in technologies to beat the standard. This would only put us farther behind other countries, which are working hard to accelerate low emissions generators. Finally, the EPA rule does almost nothing to reduce emissions from existing plants, which will continue to operate for a long time, or to reward increases in energy efficiency, which also reduce carbon emissions.

To delay addressing climate change would raise the long-run costs of dealing with the climate problem. The real damage stems from the total concentration of greenhouse gasses in the atmosphere. Greenhouse gases, particularly carbon dioxide, can linger in the atmosphere for decades after they have been emitted. The higher the greenhouse gas concentration, the more climate disruption we will lock in now and for future generations.

The Earth has already warmed more than 1 degree Fahrenheit. Failing to make low-cost emissions cuts today would force us either to make more expensive cuts in the future or to see greenhouse gas concentrations rise to the point where severe damage to human and natural systems would become unavoidable. It is wiser and more economical to begin reducing emissions now.

The climate bills under development are inevitably imperfect. Conceptually, however, they represent an enormous improvement over a scenario in which the EPA regulates greenhouse gas emissions from a few plants using a few technologies, without the use of markets to seek out the cheapest solutions, stimulate innovation, and reward efficiency. These bills may be smaller steps than many people would like, but they are steps in the right direction. It would indeed be regrettable if Members of Congress, who universally prefer carbon markets over command-and-control regulation, could not enact a bill that spares us such regulation and begins to solve the climate problem.

Peter Fox-Penner is principal and chairman emeritus of the Brattle Group and author of “Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities.” He served in the Department of Energy and the Office of Science and Technology Policy under President Bill Clinton. Richard Schmalensee is the Howard W. Johnson professor of economics and management at the Massachusetts Institute of Technology and director of the MIT Center for Energy and Environmental Policy Research. He served on President George H.W. Bush’s Council of Economic Advisers.

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