What are the basics of the recent energy policy proposals in Congress?
There are two energy bills moving through Congress right now: The American Clean Energy and Security Act in the House of Representatives (*cosponsored by Waxman-Markey) and the Clean Energy Jobs and American Power Act in the Senate (**sponsored by Boxer-Kerry). The meat of both energy policy proposals is a Cap and Trade program for carbon dioxide emissions — a principal greenhouse gas to which climate change is attributed — in the US. Cap and Trade is a program for capping total carbon dioxide emission and creating a market for carbon dioxide (CO2) emissions among potential polluters. Regulators decide the total amount of CO2 society desires (the Cap) and then allocates permits or allowances to emitters totaling that amount. These allowances are fully marketable commodities (the Trade)***.
Read on to find out the potential economic impacts of Cap and Trade and why Ohio (and you) should care...
What are the potential economic impacts of a national CO2 Cap and Trade system?
There is no way around the reality that a Cap and Trade system (or any CO2 reduction regulation for that matter) will raise carbon-intensive energy prices and this rise in energy prices will trickle through in some way to most end products. As with the production of any final product, raising the price of an essential input — which in this case, CO2 can be thought of as an essential input into the production of energy and most other final products — will raise the price of the final products. This is not necessarily a bad thing, as the new prices will, if designed correctly, reflect the full social cost of energy production, including the costs of climate change.
Preliminary results from National Science Foundation-funded research that I have been involved in with Professors Bhavik Bakshi and Prem Goel indicates that a carbon allowance price of $.05 per kilogram of carbon — a carbon price consistent with the price increase expected under either the House or Senate version of the Cap and Trade program — will result in a 15 percent increase in the price of coal-fired electricity and a 10 percent increase in the price of petroleum-fired electricity.
Why should Ohio care?
The three sectors most impacted by a carbon pricing scheme, manufacturing, transportation and coal fired electricity, constitute 24 percent of Ohio’s GDP. Comparing that to the national average for these three of 17 percent, it is clear that Ohio is heavily invested in impacted sectors relative to other states****. Ohio is currently among the nation’s least invested states in renewable energy production. A strong case can be made for carbon allowances to be allocated in such a way that the resulting redistribution of revenues from energy production results in increased investment in renewable energy production in Ohio, thereby reducing the economic burden.
*Editorial deletion #1: nicknamed ACES
**Editorial deletion #2: with the much less pronouncable acronym CEJAP
***Editorial deletion #3:
Emitters who can reduce a unit of CO2 cheaper than the going market-determined price for allowances can sell their allowances on the market to emitters who find reducing CO2 more expensive. In contrast to traditional regulatory approaches to pollution, which frequently either dictate the technologies to be used for pollution reduction on dictate the amount any individual polluter can emit, Cap and Trade ensures the total desired pollution reduction in met, while affording the emitters the ability to reduce emission at least cost. In other words, despite sounding like a bad breakfast cereal parody, Cap and Trade is the least expensive way of achieving any particular level of CO2 reduction.
I guess they didn't find that funny...or informative.
****Editorial deletion #4:
While these results can be interpreted as a call for Ohio’s Representatives and Senators to oppose Cap and Trade legislation on the grounds that Ohio bears a disproportionate burden of the costs, I would offer an alternative interpretation: These results call for careful consideration be given to the initial allocation of carbon allowances and the resulting redistribution of revenues. Ultimately, carbon pricing will provide incentives to shift from carbon based energy production to other, renewable forms of energy production.