Comment on Addressing Climate Change With a Comprehensive U.S. Cap-and-Trade System

• Date: 01 August 2009

39 ELR 10770 ENVIRONMENTAL LAW REPORTER 8-2009

Comment on Addressing Climate

Change With a Comprehensive

U.S. Cap-and-Trade System

by Kathleen A. McGinty

Kathleen A. McGinty is an Operating Partner of Element Partners, LLC. She is the former Secretary of the Pennsylvania

Department of Environmental Protection as well as the former Chair of the White House Council on Environmental Quality.

Prof. Robert Stavins has contributed greatly to the evo-

lution of environmental policy. He’s pioneered new

instruments for achieving environmental progress and

improved the eectiveness of traditional tools. is paper is

no exception.1 Here, Dr. Stavins oers compelling counsel

on how best to structure a c ap-and-trade policy to achieve

reductions in greenhouse gas pollution.

Several points in Dr. Stavins’ article bear further discus-

sion however. Dr. Stavins notes that the eectiveness of his

proposed policy could be inuenced by factors such as the

structure of electric markets and the generation mix in those

markets. He also notes that policies to promote renewable

energy and energy eciency are potentially promising com-

plements to a cap-and-trade policy.

However, these issues, noted only peripherally in Dr.

Stavins’ piece, really are central and should be elevated in the

design of optimal climate change policy.

e rst issue is market structure. Much has changed

with respect to how electricity is priced and marketed since

the passage of the 1990 Clean Air Act Amendments. en,

utilities were vertica lly integrated entities that generated

electricity and delivered it to end-use customers. Rates were

regulated and based on the cost to serve the customer. Today,

some 17 states and more than 50% of the load in the country

is served by load serving entities that no longer own generat-

ing assets and that now buy electricity on wholesale markets

where prices are no longer based on the cost of providing ser-

vice. In these “restructured” markets, electricity is priced at a

“market-clearing price” in which the most expensive electron

essentially sets the wholesale price for every electron ca lled

upon at any given time to meet demand.2

is is a key point in estimating the overall cost to soci-

ety in achieving emission reductions, and in determining

whether t hose costs will be borne equitably across the

1. Robert N. Stavins, 

, 39 ELR (E. L.  P’ A. R.) 10752 (Aug. 2009)

(originally published at 24 O R. E. P’ 298 (2008)).

2. Sometimes long-term contracts determine the price of some electricity deliv-

ered while short-term markets determine prices (as described here) for remain-

ing electricity delivered.

countr y. Cap-and-trade programs as well as carbon tax

policies imp ose a price on carbon, which then increase s the

price of electricit y.

In regulated markets, the increa se will be relatively

straightforward such that the cost of ser vice is increased by

the new environmental compliance cost. To the extent that

non-carbon-intensive energy sources like nuclear, hydro and

other renewables are available in the generation mix, the

overall cost to consumers will be moderated from the price

increase that would occur from coal and other carbon inten-

sive sources in the mix.

But in restructured markets, consumers will see a mag-

nied price impact. e relatively hig h compliance cost for

coal and other carbon-intensive sources will set a higher gen-

eration price that will be received by all sources. Even zero

carbon sources with no compliance costs will receive the

increased price.

e eect here is signicant. Studies show that consumers

in states with power restructuring could face price increases

well in excess of costs faced by ratepayers in regu lated states.

Generation asset owners stand to gain substantially too a s

the increased price for electricity brings enhanced revenues

to the entire generation eet, again, even to units that have

no compliance costs. Energ y consultancy Synapse nds

that, “Customers in deregulated ma rkets wi ll pay about 10

TIMES the cost of abatement,”3 and Sanford C. Bernstein &

Co. utilities analyst Hugh Wynne says nuclear operators in

deregulated states will see “supernormal prots” on the order

of billions of dollars every year.4

Policy makers have begun to grapple with this latter issue.

Auctions of al lowances are being structured essentially to

claw back some of the extra prots and revenues realized

3. Bruce Biewald, Synapse Energy Economics, Inc., Presentation to NASUCA

2008 Annual Meeting: Economics of Electric Sector CO2 Emissions Reduc-

tion: Making Climate Change Policy at People Can Live With 22 (Nov. 18,

2008), available at http://www.synapse-energy.com/Downloads/SynapsePre-

sentation.2008-11.NASUCA.Electric-CO2-Reduction-Policy.S0053.pdf (last

visited May 18, 2009).

4. Rebecca Smith, , W S. J., May

19, 2008, at A4.

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