Constrained by Congress’s unwillingness to take up climate legislation, President Obama has done the next best thing by using the Environmental Protection Agency’s (EPA) authority under the Clean Air Act to promulgate standards for reducing U.S. electric power plant emissions while giving states and utilities considerable flexibility in how they meet them.
That flexibility is important. Economists find that ham-fisted EPA regulation would be a far costlier way to achieve emissions reductions than a market-based approach like cap-and-trade or a carbon tax. But by giving states and utilities flexibility, the President’s Clean Power Plan generates at least some of the cost savings achievable under a market-based approach. In fact, one way states can meet their obligations is by creating or joining with other states in a market-based emissions-trading program, such as the existing Regional Greenhouse Gas Initiative (RGGI).
An emissions-trading program (or a carbon tax) is the most cost-effective way for states to meet their obligations, but “putting a price on carbon” likely would raise energy prices more than a purely regulatory approach and low-income households would be affected disproportionately. The comprehensive House-passed cap-and-trade bill of 2009 (“Waxman-Markey”) and similar legislation debated in the Senate both had a robust low-income protection program funded by part of the revenue from the sale of emissions allowances. States adopting a market-based approach to meeting their Clean Power Plan obligations should consider something similar.
If states use the flexibility that the Clean Power Plan affords wisely, they can achieve significant emissions reductions at reasonable cost while protecting their most vulnerable citizens.