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Commission Watch

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

true motives behind this latest legal salvo, it has critical financial implications for all utilities and their customers, and that's true whether you believe global climate change is the most pressing environmental problem we face or merely is so much hot air. The reason is that litigation creates additional uncertainty and uncertainty creates additional financial risk-ultimately leading to higher costs for all utilities and their customers.

A long history of environmental battles has proven that litigation almost certainly will lead to unnecessarily costly and ineffective policies, no matter how noble the underlying cause. In that sense, therefore, regulation by litigation is imprudent: There are better ways to achieve environmental goals-in this case reducing CO2 emissions-than by ill-conceived lawsuits.

CO2 Litigation: The Worst Possible Approach?

Although the magnitude, timing, and ultimate consequences of global climate change remain uncertain, an economic insurance argument can be made for undertaking some policies that will begin reducing CO2 emissions today. What is critical is the quantity of insurance that should be purchased (i.e., how much of a reduction in CO2 to target) and the lowest-cost mechanisms of achieving such a target.

With that economic framework in mind, we can ask whether regulating CO2 emissions by litigation is a prudent regulatory strategy, in the same way that utilities' investment choices undergo prudence reviews by their state regulators. In other words, is this lawsuit, and litigation generally, a prudent approach to reduce CO2 (or other air pollutant) emissions? Alas, the answer is "no." This type of litigation is ineffective and almost surely the most expensive way to reduce pollution.

The 1990 Clean Air Act amendments recognized that market forces could be harnessed to solve non-market problems and introduced a system of tradable permits for emissions of two major (criteria) air pollutants: sulfur dioxide (implicated in acid-rain deposition) and oxides of nitrogen (a contributor to smog). Under this "cap-and- trade" system the total quantity of emissions is fixed by the government. Polluters can choose to reduce their own emissions or purchase permits from others who can reduce emissions at a lower cost. This system has reduced emissions of these two pollutants at far lower costs than could have been achieved with command-and-control regulation, including that mandated under New Source Review. The reason is simple: Markets provide incentives to find the lowest cost sources of pollution reductions, whereas command-and-control regulations do not.

Especially in the case of global warming, where the relevant market is "global," a system of international tradable permits in CO2 emissions would make far more economic sense than specific reduction mandates of the sort demanded in the states' lawsuit. Even if one wished to reduce CO2 emissions nationally, regardless of international actions, a system of tradable emissions permits would be ideal, because CO2 emissions do not have local environmental impacts. Contrast this approach for CO2 with the controversy over recent proposals to reduce mercury emissions using a cap-and-trade approach. In that case, while a cap-and-trade system would reduce overall mercury emissions at the lowest cost, one could argue that localized environmental impacts also needed to be addressed.