The opposing challenges of higher gas prices and rising environmental concerns have put utility regulators in a difficult position: How can they bring rate stability while minimizing environmental...
GHG Compliance Complexities
Greenhouse-gas regulation will impose vastly greater compliance difficulties than did the Acid Rain program.
The cap-and-trade mechanism in the Clean Air Act Acid Rain legislation represented a path-breaking shift in environmental regulation, by moving from command and control to market mechanisms. Industry was given the freedom to meet SO 2 reduction targets using least-cost options, with financial incentives to reduce emissions below caps and to sell the resulting credits. According to some estimates, this saved 55 to 75 percent of initially projected program costs.
Regulation of greenhouse gases (GHG) differs dramatically. Instead of 110 power plant sources (263 units) initially affected by the SO 2 regulations, millions of sources emit GHG in many industrial sectors. Rather than the single gas regulated in Phase I of Acid Rain, there are multiple GHGs to regulate. This makes the problem of accurate measurement, enforcement and validation dramatically more difficult. And the expected costs are in the hundreds of billions of dollars to replace or retrofit coal-fired generating plants. If the regulations are crafted poorly, this could lead to major disruptions and dislocations in the U.S. economy..
Additionally, special interests failed to undermine the Acid Rain legislation, which kept the program simple and easy to administer. So far, climate-change regulation appears likely to be far more complex by comparison, with set asides for multiple special interests, limitations on the use of market options such as offsets to meet caps, and auctions for allocations that would impose huge punitive costs on coal-based power.
As presently drafted, for example, the Lieberman-Warner bill could make the climate-change regulatory program a bureaucratic nightmare to administer, and eliminate the incentives for reducing emissions below caps—a feature that proved important in Acid Rain regulation. Plus, carbon markets inherently are more complex than the Acid Rain market, given their international components.
In short, the impacts of proposed climate-change legislation dwarf the costs of the Acid Rain program.
While most utilities now agree that GHG regulation is necessary to fight global climate change, such regulation will lead to a vast sea change, with major impacts on the U.S. economy. The technology required to enable this transition, unlike scrubber technology in the 1990s, has not yet been shown economically viable.
Carbon-based fuel has been the engine of the industrial age for 150 years. With the complexities inherent in the transition from a carbon-based economy to a carbon-free economy, any GHG regulation must be developed with an eye toward fairness, and implemented in a gradual transition.
In the words of Michael Wilson, vice president of governmental affairs with Florida Power & Light (FP&L), “Congress needs to take more time, hold more hearings and do more in-depth modeling of the consequences before acting.”
Acid Rain vs. GHG Regulations
The experience of Acid Rain regulation provides valuable lessons for industries anticipating GHG regulation. There are shared regulatory structures