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Senate Energy Bill Less Costly than Alternatives

Economists and utilities say the draft legislation could help avoid costly regulations.

A proposed climate bill unveiled last week by senators John Kerry (D-MA) and Joe Lieberman (I-CT) is getting the support of some economists and utilities as a relatively inexpensive way to reduce carbon-dioxide emissions that will initially have almost no impact on electricity prices. The supporters, however, worry that the legislation won’t be passed, which would open the way for far more expensive regulations from the U.S. Environmental Protection Agency (EPA).

Fossil future: Coal-fired power plants, such as this one in Colorado, are major sources of greenhouse gas emissions. A proposed bill would limit them.

The bill, called the American Power Act, is designed to reduce greenhouse gas emissions and lay out a national energy strategy. Last year Congress seemed to be moving quickly on passing a climate and energy bill after the House passed such a bill in June, but Senate versions stalled. It’s not clear when the Senate will officially take up the new bill, which was put together with the help of Lindsey Graham (R-SC), who recently withdrew his support. Meanwhile, the EPA is drawing up regulations for controlling greenhouse-gas emissions that could go into effect in January if Congress fails to pass a climate bill.

The new bill seeks to reduce greenhouse gas emissions by 17 percent as of 2020 and by 83 percent by 2050, compared to 2005 levels, by limiting the amount that major emitters can release into the atmosphere. These limits will be enforced via a type of cap-and-trade system. This would require utilities, and eventually heavy industry and refiners, to obtain allowances for emissions, some of which will be given out, and some sold. Companies can decide to either reduce emissions or buy enough allowances to cover their emissions. The allowances can also be traded between emitters. Some of the proceeds from purchasing allowances will go to pay down the federal government deficit, some will go directly to consumers in the form of rebates, and some will fund programs to encourage the development of new technologies.

The bill includes incentives for nuclear power, natural-gas vehicles, and carbon-dioxide capture and storage technology, which would be most useful for coal power plants. It funds R&D for renewable energy and advanced vehicles, and includes a variety of measures to help decrease petroleum consumption. It includes incentives for offshore drilling, but states that could be affected by oil spills can veto projects.

Unlike the bill passed by the House last year, the Senate bill does not require utilities to use renewable energy, but such provisions exist in a separate energy bill sponsored by Sen. Jeff Bingaman (D-NM), and they could eventually be incorporated into the new bill. Another key difference with the new bill is the introduction of the rebate program for consumers that will offset the costs of the bill.

Support for nuclear power, oil drilling, and carbon-dioxide capture and storage was included to bring in Republican support for the bill. But the oil spill in the Gulf, and an uncertain political climate, could make it particularly difficult to pass the bill this year, says William Bonvillian, the director of MIT’s Washington, DC, office.

The bill’s chief weaknesses, says Robert Stavins, director of the Harvard Environmental Economics Program, is that “it’s unnecessarily complex, ” which could increase the cost of reducing emissions. For example, it places emissions caps on only selected parts of the economy, it applies caps to different sectors at different times, and it uses different approaches to allowances in different sectors. He says, however, that the legislation would be effective at reducing emissions to the target levels. “These agreements are going to be changed over time. But it’s a very sensible starting point for the U.S.,” he says.

Stavins says that the bill is better than the alternative–regulation by the EPA. Under the bill, companies would be free to select the cheapest methods for reducing emissions. They could also decide to buy allowances from other companies that have found cheaper ways of reducing emissions. Regulations typically aren’t as flexible, which makes them more expensive. “The regulatory approach is going to be hideously costly,” he says.

Based on an initial review, Duke Energy, a large utility in the South and Midwest, also supports the bill, says Kevin Leahy, the company’s managing director for climate policy and economics. That’s because it sends a clear signal about what kinds of power plants and efficiency measures the utility should be investing in over the coming decades. Its approach to reducing greenhouse gas emissions is “the most cost effective and the least harmful.”

The utility wants to have a clear greenhouse gas policy in place, he says, because “it’s not in your interest, when you’re investing a billion dollars in a power plant, to have new regulations sprung on you that may force you to shut it down in five years.” He says that the bill is “quite an improvement over previous bills,” because of measures to ensure that costs will rise gradually over time, rather than jump suddenly. For example, the bill directs more money raised from the sale of allowances to consumers and businesses, to help offset costs. “There’s no economic shock in any one year,” he says. “Initially, our analysis shows almost no electricity rate impact in the Carolinas, and a very small impact” elsewhere, in areas that rely almost entirely on coal for power, he says.

If the bill doesn’t pass, Leahy says, electricity rates could go up either because of EPA regulations or because uncertainty about future regulations will require the utility to hedge its bets by investing in a variety of power plants, some of which won’t prove to be the cheapest in the long run.

Critics of the bill say there should be more incentives for businesses and consumers to conserve energy by making them pay more for carbon-intensive energy. By offsetting higher electricity prices with rebates and other measures, “you’re sending about as confused a message as you can imagine,” says Michal Moore, a senior fellow at the Institute for Sustainable Energy at the University of Calgary in Alberta.

Supporters of the bill have been presenting it as a way to reduce petroleum consumption, particularly in light of the ongoing oil spill in the Gulf of Mexico, but Gilbert Metcalf, a professor of economics at Tufts University, says that’s just a “sideshow.” The primary impact of the legislation will be reducing carbon emissions from coal, he says. The proposed bill’s caps on greenhouse gases affect coal far more than oil, because burning coal emits more carbon dioxide. And the caps will do their job well, he says. “The short-term goals are achievable at a cost that won’t be noticeable to households, for the most part,” he says. The long term goals “depend on technology that doesn’t exist yet,” he says. “But this is a strong nudge to get us going.”

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