Pricing Carbon Emissions

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Some experts believe that the price of the allowances will be enough to prompt investment in new technology. According to Robert Stavins, director of the Environmental Economics Program at Harvard University, companies will make decisions about what research to conduct and what power plants to build--plants that can last for decades--not based just on today's price, but also on what it will be later on.

But David Victor, a fellow at Stanford University's program for energy and sustainable development, isn't convinced. Overall, the price for allowances, especially early on, will not be enough to convince companies to invest heavily in the technology that will be needed in the long run. One likely scenario is that utilities could rely only on switching from coal to natural gas, which emits far less carbon dioxide--a strategy that might work until 2020--and then they might not invest at all in technologies such as solar power and ways to capture and permanently store carbon dioxide--technologies that likely will be necessary to meet the far stricter caps in 2050, Victor says.

This is where the other parts of the energy legislation become important. For example, it includes a renewable electricity standard that will require states to get 20 percent of their electricity from renewable energy sources (such as wind and solar), or they can get credit toward this by reducing electricity consumption. There are also incentives for developing ways to capture and store carbon dioxide.

These mandates and incentives will indeed prompt investment in new technology. The problem is that mandates can be expensive. Renewable sources of energy could cost more than other options for reducing carbon emissions--such as improving efficiency. Even if the technology costs far more than other technology, companies will be forced to pay the higher prices to meet the mandate. Victor says that right now, these costs are hidden within the bill. He says that the bill should include provisions for monitoring and disclosing these costs, so that if they get to be too much, the rules can be changed. He also says the government should be funding clean energy research directly. The bill funds some basic research by giving away allowances, but the value of these allowances depends on the carbon market, so this can be an unreliable source of funding, he says.

Congressional leaders have said that they hope the House of Representatives will pass the bill before December, when world leaders will discuss a follow-up to the Kyoto climate-change agreement in Copenhagen. If so, it might help convince other countries such as China and India to agree to emissions limits. Ultimately, international cooperation will be essential to preventing the worst effects of climate change. "The bill will send a strong signal to the international community leading up to Copenhagen," Metcalf says.