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Commission Watch

The AGs' Global Warming Suits:
Fortnightly Magazine - October 2004

If the lawsuit is successful, those utilities' customers and investors will also face financial penalties. Such a "heads I win, tails you lose" approach to regulation is untenable, because it increases financial markets' skepticism and uncertainty about generation investments, inevitably raising the cost of capital.

A Better Approach

In answering the second prudence question, the state plaintiffs in this case are oddly silent about one proven technology that is efficient, provides round-the-clock electricity, and produces no carbon dioxide emissions: nuclear power. This is surprising, given those states' own reliance on nuclear power. New nuclear technologies, based on standardized, modular designs, will be able to provide lower-cost electricity than existing nuclear plants. Increased reliance on nuclear power would reduce the same Clean Air Act pollutants that these states' previous lawsuit attacked and reduce exposure to volatile oil and gas markets, which have buffeted the nation's economy. Therefore, not only would greater reliance on nuclear power reduce CO2 emissions, it also would reduce the demand and price of existing emissions allowances for sulfur dioxide and oxides of nitrogen.

Ultimately, it is not clear that the most efficient way to reduce greenhouse gas emissions lies with the electric power industry whatsoever. A number of economists have proposed direct carbon taxes that could be recycled in other sectors of the economy through lower marginal tax rates. Coupled with a system of tradable permits for carbon emissions, such a carbon tax would allow businesses and utilities to decide for themselves the most efficient strategies to reduce greenhouse gas emissions.

Thus, from an economic and regulatory standpoint, it's difficult to see how this lawsuit, or litigation in general, can be viewed as a prudent approach to environmental mitigation. This lawsuit is unlikely to provide any appreciable benefits to the plaintiffs. If successful, the lawsuit would reduce greenhouse gas emissions at an unnecessarily high cost and force a small group of individuals and businesses to bear disproportionate costs. Furthermore, if the lawsuit were successful, it would have a chilling effect on the financial community, exacerbating the financial uncertainty that has been felt by regulated and non-regulated generators alike, and raising the cost of capital for both.

Ultimately, there are far less costly ways to reduce both greenhouse gas emissions and criteria air pollutants. Indeed, one of the beauties of market-based mechanisms is the degree of creativity they engender. Those mechanisms have been shown to work, and work well, in addressing environmental problems-far better than politically charged lawsuits ever will. If regulated utilities must continue to operate under the standards embedded within prudence, it seems only reasonable to ask the government that regulates them to do the same.



    2. While the lawsuit implies that a 3 percent reduction represents their "fair share" of emissions reductions, nowhere does the lawsuit suggest that the utilities would be required to reduce their emissions only as part of a broader national or international emissions reduction policy.

    3. This also assumes that forecasts of the overall temperature change are accurate. See, Bjorn Lomborg, , 2001, p. 302, and references cited therein.