The 2008 elections portend federal regulation of greenhouse gases by 2010.
M. Sami Khawaja is an economist and president of The Cadmus Group, an environmental and energy consulting firm based in Portland, Ore. James I. Stewart is an economist and associate at The Cadmus Group.
U.S. power companies face increasing uncertainty because of possible government regulation of carbon dioxide and other greenhouse-gas (GHG) emissions. The most obvious sign of this uncertainty has been the postponement of investments in new power generation facilities as power companies and investors wait for regulators to act.
The federal government’s recent denial of California’s and other states’ petitions to regulate GHG emissions from automobiles, and several bills regulating GHGs pending before Congress, suggest any such regulation will come from Washington, D.C. The type of regulation enacted will affect the profitability of new power generation investments, shareholder returns, and how the economic costs of compliance are distributed between industry and consumers.
Comprehensive GHG regulation likely will emerge before 2010 because of growing public support for emissions reductions and probable Democratic and independent gains in the U.S. Senate in 2008. If GHG regulation occurs, it likely will originate in the U.S. Congress—and not the executive branch—and almost surely will take the form of a cap-and-trade system. However, the costs to carbon producers probably will be modest initially because compromise legislation will result in small and partially-binding targeted emissions reductions and the grandfathering of permits.