Regulating CO2 as a pollutant: Costly in more ways than one

Published October 1, 2001

President George W. Bush has taken a beating in the press for walking away from the United Nations’ global warming agreement, reached at July’s conference of the parties in Bonn.

A group of Senators has reacted to Bush’s stand by proposing to implement the Bonn agreement’s greenhouse gas restrictions as a domestic initiative. They have introduced legislation that would impose enormous burdens on the U.S. economy, whether or not the rest of the world follows suit. Their domestic proposal could prove to be more costly for the U.S. than the UN treaty itself.

Led by James Jeffords (I-Vermont) and Susan Collins (R-Maine), the senators want to impose the restrictions mandated by the Bonn agreement by reducing emissions from power plants. Instead of asking a skeptical Congress to ratify the treaty, they want to reinterpret the Clean Air Act to regulate carbon dioxide (CO2) as a pollutant.

But power plants are only the tip of the iceberg. Once emission restrictions have been imposed on power plants, companion regulations for automobiles and other household items would be sure to follow.

Jeffords, Collins, and other senators have introduced a bill called the “Clean Power Act” to authorize EPA to reduce power plant emissions of three pollutants–nitrogen oxides, sulfur dioxide, and mercury–as well as the greenhouse gas carbon dioxide. Jeffords claims the measure would not hurt the economy.

But new research by the Department of Energy’s Energy Information Administration (EIA) indicates Jeffords has underestimated the cost of his approach.

A costly plan

The EIA study, “Strategies for Reducing Multiple Emissions from Electric Power Plants,” measures the cost of imposing simultaneous caps on emissions of carbon dioxide and the three pollutants. The new report complements EIA’s December 2000 study on the projected costs of a three-pollutant approach that excludes carbon dioxide.

In the new report, EIA points out that over the next 20 years nitrogen oxide emissions are expected to rise slowly, sulfur dioxide emissions are expected to remain at year 2000 levels, and carbon dioxide emissions are expected to increase steadily. The agency explains that increasing demand for electricity, a growing dependency on natural gas, and the construction of a small number of new coal-fired power plants will cause CO2 emissions to rise.

According to the report, capping CO2 emissions at 1990 levels, or at 7 percent below 1990 levels, would force people to pay higher prices for electricity. Specifically, the report finds:

” . . . Electricity prices are projected to be much higher when carbon dioxide emissions are capped than when nitrogen oxide, sulfur dioxide, or mercury emissions are capped–43 percent higher in 2010 and 38 percent higher in 2020 than projected in the reference case. Consumers are expected to reduce their electricity consumption by 8 percent in 2010 and 12 percent in 2020 when faced with higher electricity prices.”

In addition, the agency explains electricity prices could be substantially higher if natural gas prices turn out to be higher than projected. If CO2 caps are imposed, both domestic production and imports of natural gas must grow to meet electricity demands.

Specifically, production of 0.8 trillion cubic feet from domestic sources and 2.3 trillion cubic feet from imports must be added over the next 20 years to meet the increased demand. This would require domestic natural gas producers to achieve record levels of output from 2005 through 2010 and would represent a serious challenge for the industry.

Regulating CO2 as a pollutant would introduce serious uncertainty into America’s energy infrastructure. Unexpected fluctuations in natural gas prices contributed to the California electricity crisis; in the future, uncertainty in markets for coal, natural gas, and renewables could cause unanticipated problems for consumers across the country. “History does not offer clear guidance as to how the various markets might respond to changes as large as those required by the proposed emissions targets,” the EIA report notes.

Capping CO2 emissions would also make coal cost-ineffective as a source of electricity over time. As more than 50 percent of domestic electricity is generated by burning coal, such regulation would guarantee that consumers pay substantially higher electricity bills in the future.

President Bush is right to oppose the Bonn agreement because it costs too much. For the same reason, he should oppose the Clean Power Act. Regulating greenhouse gas emissions from power plants will introduce tremendous uncertainty into the viability of American electricity markets. Dropping CO2 from the program would do a great deal to strip away some of this uncertainty and ensure that consumers can obtain the electricity they need during the twenty-first century.

Michael D. Mallinger is a research associate at the Competitive Enterprise Institute in Washington, DC. He can be contacted at [email protected].