Sensible climate legislation

DESPITE our wounded economy, President-elect Obama is determined to address the problem of climate change early in his first term. Congressional leaders seem anxious to accommodate him by enacting legislation to control greenhouse gas emissions. But many members of Congress, on both sides of the aisle, may balk at the prospect of emission limits that could lead to increased energy prices at a time when consumers can ill afford them. Experience with one regional cap-and-trade program suggests a federal program can be enacted that avoids energy price increases, at least until the economy has had time to recover.

Massachusetts and nine other northeastern states recently required their fossil-fuel power plants to purchase allowances that match their carbon emissions. Early sales of allowances by this multistate compact, the Regional Greenhouse Gas Initiative, have resulted in low prices, slightly over $3 per ton of emissions. That translates to the equivalent of less than 2 percent of average wholesale electricity prices. These prices are the result of a regional cap on carbon emissions that is slightly above the level expected over the next few years under business-as-usual conditions. Not until 2015 does the cap begin to decrease, and then only gradually, each year through 2020. With our economy in recession, demand for electricity will grow slowly, if at all, keeping allowance prices low and avoiding carbon-related price increases, at least through 2015.

Members of Congress, not to mention environmentalists, might ask: Why bother to establish a cap that does not reduce emissions right away? The answer lies in the nature of climate change. It is not a problem that can be solved in a few years. It will take coordinated global action and vast technological changes over many years to meaningfully slow the process of climate change. We must achieve decades of modest, but compounding, changes in the way we use energy to achieve a low-carbon economy. We need the determination of the tortoise rather than the hyper-activity of the hare. Even so, there are several good reasons for establishing a business-as-usual emissions cap right away.

First, promptly enacting a federal cap-and-trade system gives all carbon emitters an unambiguous warning to prepare for a future in which emissions will count against them. A decade-long schedule of gradually decreasing carbon limits will encourage entrepreneurs and investors to intensify efforts to develop new technologies that control, reduce, and sequester emissions. Some of these innovations will need years to achieve commercial viability; the sooner their evolution begins, the better.

Second, even if allowance prices are low in the short run, emitters who can inexpensively reduce their emissions will do so, and sell their surplus allowances to those who need extras. These transactions will begin to reveal the cost to reduce emissions and provide the price signals for doing so that our economy urgently needs.

Third, setting a cap, initially, at current levels of emissions provides a low-cost form of insurance against a worst-case scenario. For example, if a technological problem required the extended shutdown of many nuclear plants, the cap would limit emissions from carbon-intensive oil and coal plants and encourage the use of carbon-free renewable energy and energy efficiency.

The northeastern states are selling most of their allowances through public auctions. The proceeds are being invested mainly in efficiency programs and in wind and solar energy. Likewise, a federal program will work best for consumers if the government sells carbon allowances and invests at least a portion of the proceeds in similar programs, as well as in the science of sequestering carbon. These investments will help keep the cost of carbon allowances low, minimize consumer price impacts, and create valuable jobs. Allowance revenues that cannot be productively used in these ways should be returned to consumers through tax cuts.

With a business-as-usual emissions cap in the early years and the strategic use of revenue from allowance sales, the president and Congress can move aggressively to limit carbon emissions, despite our weakened economy.

David O'Connor is senior vice president for energy and clean technology at ML Strategies, LLC. Jurgen Weiss is managing director of advisory services for Point Carbon AS.