Coal faces more uncertainty than any other base-load generating source. Two new factors, hitherto irrelevant to the U.S. industry, will shape future generation investment—imports of liquefied...
The Politics of Carbon
The 2008 elections portend federal regulation of greenhouse gases by 2010.
the basis of past production— i.e., grandfathering—at least on a temporary basis. This will shift more of the burden of the costs of reducing GHGs to consumers (as the government will lose tax revenues from the sale of permits that could be used to offset the higher costs of carbon-intensive goods or reduce other taxes) but it will not undermine the integrity of the caps or the price of carbon.
In principle, either Congress or the executive branch acting through the Environmental Protection Agency could establish a cap-and-trade system for greenhouse gases. However, the obstacles to a cap-and-trade system are much higher for EPA than for Congress, and for that reason any action is much more likely to come from Capitol Hill. Congress has clear precedent for such a system with the passage of the Clean Air Act Amendment of 1990, which established a successful cap-and-trade system for sulfur dioxide emissions. The path to a carbon cap-and- trade system for the EPA is much murkier because the agency’s powers to regulate are not well suited to pollutants like carbon dioxide. By law, the agency must rely on the states or consortia of states to implement national pollution standards. Sections 108-110 of the Clean Air Act give the EPA power to establish national ambient air quality standards (NAAQS), which the states must then comply with through state implementation plans (SIPs). However, because concentrations of GHGs are determined by global outputs, state efforts to meet a standard inevitably would fail. If the states failed to implement the standards, then EPA would have the authority to establish a federal implementation plan that included a cap-and-trade system. 5 In such a situation, however, the EPA or the president might be reluctant to impose such a system.
Recent developments favor the passage of federal legislation regulating GHG emissions soon. Global warming and its economic and environmental costs are becoming increasingly self-evident. There is growing public awareness of global warming and rising concern about its effects on the environment and the economy. Concern is much greater among Democratic than Republican voters. According to a recent Economist/YouGov poll, 53 percent of Democrats cite global warming as the greatest environmental problem, whereas just eight percent of Republicans do the same. Many more Democrats are willing to impose taxes to curb GHG emissions as well. 6
Nevertheless, both parties’ presumptive nominees for president support a cap-and-trade system. Many businesses now see profit opportunities in controlling GHGs, whereas before they saw only burdensome regulation. 7 Also, initiatives by the states to limit GHG emissions and recent federal court rulings that GHG emissions from automobiles can be regulated under the Clean Air Act have increased regulatory uncertainty, putting pressure on the federal government to harmonize state and federal policies. The other major industrialized nations of the world, all of which have limits on GHG emissions, are lobbying the United States to bring its emissions under control as well. Finally, the American Climate Security Act (S 2191)—generally known as Lieberman-Warner—which would limit GHG emissions through a cap-and-trade system, recently passed the