[Editor’s Note: On Wednesday, Niskanen Center adjunct fellow David Bailey participated in a panel discussion at the annual meeting of the American Legislative Exchange Council (ALEC) to discuss how states ought to respond to the EPA’s Clean Power Plan. He argued that some states would be well advised to adopt a carbon tax as the centerpiece of their state implementation plan (SIP). The text of his comments follow.]
Many thanks for inviting me to speak before you today. I am pleased to be here representing the Niskanen Center–a new think tank found by former Cato Institute Vice President Jerry Taylor–which aims to find Libertarian solutions to political problems. And this one is a doozy.
I was a twenty-something in the Thatcher era in the UK and had the privilege of seeing her in action first hand. So I am a free market guy. I have also worked most of my life in the fossil fuel industry, first in coal in the UK, then in oil and gas, first in Europe and Africa, and then for the last 17 years in the United States. I am not here to tell you that fossil fuels are a bad thing. On the contrary, they have allowed incredible advances in society and lift billions of people out of poverty all over the world. We need to continue to grow the economy and we need to address the risks of climate change, but we can’t afford to regulate away the market economy in the process.
I am going to sidestep the wider issue of whether climate change is taking place, though I believe it is, because the real issue here is not what the climate is doing, but what EPA is doing, and more particularly, options for how states can respond to it.
Let me also say that my business partner in Element VI and I have been on the record since Obama’s Georgetown speech two years ago, saying that the EPA’s Clean Power Plan (CPP) will not work–at least in the timeframe Obama suggested–and that it risks tying the nation’s electricity supply system in chaos for the next decade or more. We didn’t exactly get a lot of love from the administration or its friends for saying that. The plan–because it is trying to operate within the constraints of the Clean Air Act authority–is also convoluted, relies on questionable assumptions, and is about as far from a free market approach as you can get. But we are where we are.
There’s a significant chance that the CPP gets killed somewhere in the courts (especially if they don’t fix the more obvious legal snafus in the pre-requisite regulations for new electric utility plants and the current draft rule). Even if it happens, it could take until 2020 or later, and whatever EPA does in response to a court defeat could be even more disruptive than the CPP, given that we will have international commitments from Paris that cannot be met without action–perhaps even greater action–in the power sector. Meantime, states and electricity providers have decisions to make.
Bad news: Congress is not going to step in and end EPA’s greenhouse gas (GhG) regulatory authority. There aren’t, and won’t be, the votes to do it in the Senate. Even a new Republican president in 2016 would find it almost impossible to stop EPA regulating power GhG emissions, for reasons I’d be happy to discuss later.
But that’s a way off. Now, there are three choices for states; submit no state implement plan (SIP), submit a SIP which EPA will reject, or submit a “conforming” SIP.
The first two routes lead to a federal implementation plan (FIP), and given EPA’s limited legal reach, any FIP they propose will have to rely on massive fuel switching, and will likely impose a cap and trade system that you are not going to like. A whole new round of litigation, probably for another decade or more, will follow.
A conforming plan can use all four elements of the EPA’s program; heat rate adjustments, gas burn increases, energy efficiency, and renewables. Given the targets, most plans will need to use every available mechanism. EPA explicitly says that current state legislation doesn’t meet their targets so every state legislature will likely be asked to pass new legislation. That’s one of the many reasons we think the EPA SIP timetable is not going to be met.
We think there’s a case for taking a look at a state carbon tax in that process. EPA has indicated that state carbon taxes are an acceptable compliance option and we believe that will be made clearer in the final rule. EPA has also set out the electricity sector carbon tax rates it thinks are equivalent to its proposals, though they are buried in a model run output in a technical annex to the draft plan. Not surprisingly they are all over the map, ranging from zero for Vermont and a couple of others, (usually because of lack of coal capacity or existing programs) to over $101/ ton of CO2 for West Virginia. We don’t have a lot of confidence in the numbers, mostly because they assume that all the efficiency requirements in Building Block 4 are achievable (which we doubt), but that is what EPA says, officially, is enough. For the lower rated states–and there are 12 where the rate is below $15/ton–we think there’s good argument for those states to consider proposing a SIP that says, in effect: “we will enact a carbon price in line with your (EPA’s) model.”
The advantages of a state carbon tax compared to the CPP’s approach are:
- It is the most economically efficient–i.e., the cheapest–way to get the required reductions.
- It’s clear, simple, and everyone–ratepayers and voters, and electricity regulators alike–knows the rules and the cost.
- Money stays in the state and can be used to address the impact on poorer consumers.
- Utilities can plan new capacity with complete certainty.
- It avoids the vast majority of the CPP bureaucracy.
This is absolutely not for everyone, as there are some states where EPA’s compliance cost seems ridiculously expensive (like West Virginia), but we think it is worth considering for many.