by Sean Casten
Having outlined ideal utility policy in part 5, we move now to ideal environmental policy. As a reminder, this is not the policy that could be accomplished tomorrow given political realities, but rather the long-term goal we ought to shoot for. If the only thing that mattered was good environmental policy guided by responsible principles, this is what we’d do. It is the long-term goal, but not necessarily the politically-possible next step.
Ideal environmental policy reforms
Immediately
convert all emissions regulations to an output basis, per unit of electricity
(MWh) and/or thermal (MMBtu) energy produced. Under present regulation, the less fuel you
burn the less pollution you are allowed to produce, putting energy efficiency
paradoxically in conflict with environmental compliance. Shifting to an output-standard would allow
all regulated sources to use energy efficiency as a pollution control
device.
Set the
output-based standard to be technology-independent. Getting output-based standards right requires
more than just an algebraic tweak. Today, many jurisdictions set different emissions standards for different
combustion processes. The idea is to
drive all technologies to their maximum (economically-attainable) level of
performance, but the unintended consequence is that you can sometimes find it
easier to permit dirtier technologies. (For example, a gas turbine is allowed
to release less pollution than a reciprocating engine, even though a “clean”
reciprocating engine is, on most fronts, dirtier than a “dirty” gas turbine.) This problem is innate to our current
pass/fail permitting models, which are eliminated with the changes outlined
herein, and therefore we do not need to have technology differences in
permitting. If the standard is set to X
lbs/MWh, that should apply for all power generation technologies.
Provide
an initial allowance for output based-standards at 90 percent of the current average,
and consistently announce plans to ratchet down over 5 year forward intervals.
Then eliminate all grandfathering. Our pass/fail model depends upon grandfathering if we are ever to
tighten standards; the regulator, in exchange for being allowed to tighten
standards in the future, gives any permitted source the right to emit at their
permitted level in perpetuity. The
result is that new, clean sources must pay for modern pollution control
equipment but sell into a market dominated by dirty old sources, tipping the
economic playing field in favor of the dirtiest sources. This can be fixed by
setting an initial pollution allowance (in lbs/MWh, lbs/MMBtu as appropriate),
and then stipulating a 5 year decline in that allowed level. Start with a level just below the current
average to ensure a steady reduction in pollution, and add another year every 12 months to ensure there are always 5 years of forward visibility. This will give businesses time to plan for
evolving regulation and immediately eliminate the need for grandfathering.
Set up
tradeable markets for all regulated pollutants, and allow any regulated source
to meet their permitted obligation through any combination of actual reductions
or purchased emissions reductions. This would immediately eliminate the
pass/fail nature of current regulations. Suppose that a given pollutant has an allowed pollution level of 2
lbs/MWh, and suppose further that one source has the ability to cost-effectively
lower their pollution to 1 lb/MWh while the other cannot get below 3
lbs/MWh. In the current, pass/fail
architecture, the 3 lb source doesn’t get built and the 1 lb source has no
particular incentive to exceed the 2 lb/MWh threshold. However, with tradeable permits, both sources
can be built so long as the 3 lb/MWh source is willing to pay the 1 lb/MWh
source enough money to justify their marginal reduction. We still end up with 2 lbs/MWh, but have
created a economic pain for the dirty guy and economic gain for the clean
facility—and a clear incentive for both to continue to drive their emissions
down as fast as possible—not just as fast as policy makers can set lower targets, as is the case in the current paradigm.
Exempt
any costs associated with pollution compliance for regulated monopolies from
rate-recovery, except at the level stipulated by the regulated allowance. In the current paradigm, an environmental
permit is a prerequisite for power plant operation, and therefore the costs
associated with pollution abatement are added into the total amount of capital
to be recovered under utility rate setting. However, since the changes above allow one to emit above or below
allowance levels (with financial penalties and rewards accordingly), any
combustion source owned by a regulated monopoly will be improperly incentivized
if it is allowed (or required) to pass those costs (or savings) along to its
customers. To avoid, require utility
regulators to only allow recovery of that capital required to meet the allowed
level of pollution, such that any revenues or costs associated with the
purchase or sale of pollution allowances accrue directly to asset owners.
Appoint
an independent scientific panel to calculate the societal costs associated with
the release of regulated pollutants and use that value to set an “escape valve”
on tradeable permit markets. The
only possible case in which a tradeable market for pollution reduction would
lead to outcomes that are contrary to the public interest is if the calculated
cost of compliance in those markets (set by supply and demand of pollution
reduction) exceeds the societal cost of pollution; if a ton of pollutant X imposes a $100,000 cost to society, it is socially beneficial to spend $90,000 eliminating it’s release, but if it costs $110,000 to eliminate it’s release, we would be better off simply spending the $100,000 to abate the cost. In order to maximize economic efficiency, we can rely on the fact that the latter number is calculable. Indeed, the National
Academy of Sciences has already done just this analysis for most regulated air emissions. Create a commission like this one to annually calculate the cost imposed by all regulated
pollutants and use that as an escape valve, such that if a polluter cannot
reduce their pollution or procure pollution offsets at a price below that
value, they simply pay the calculated amount to the federal government. The government agency that receives
this money should be mandated to spend it solely on abating those costs caused
by the pollutant in question.
Eliminate
NSR. Recall from part 2 that
our current environmental policy is shaped by the formulation: pass/fail
regulation + input-based standards = grandfathering + NSR. Recall also that NSR (new source review)
ensures that pass/fail regulation is not gamed, but in so doing serves to
effectively criminalize investments in energy efficiency at any existing,
permitted plant. The problems with NSR
have to be eliminated, but can only be done if we eliminate the formulation within
which NSR exists—which we have done above. We’ve shifted pass/fail regulations to differential rewards and
penalties via the use of tradeable permits. We’ve converted input-based standards to output-based standards, so that
efficiency can be treated as a pollution control strategy rather than a major
modification. And we’ve eliminated
grandfathering, by projecting 5 year forward reductions in output-based
pollution allowances. The net result is
that NSR becomes redundant and can be eliminated.
Next: a final set of policy reforms to address the lengthy list of outmoded laws at federal, state, and municipal levels that act as unwitting barriers to clean energy.
Related Links:
Why Congress must revise the Clean Air Act
Policy fixes to unleash clean energy, part 3
Job losses push need for energy bill
