L A _ _fJ'cGBP - r - l B # L _ I _ _ ____ e- ' 1- - U ' k c j- - l To JcffKupfcr From Adele Morris Office of Economic Policy Date March 11 200 I Subject Global climate change and a possible lllulli cmissi011s strategy Thank you for the opportunity to conunent on the drflft cLimote memos The Science o Climate change is a real risk and the Administration will continue to and international pressure to take it seriously For sound scientific input b 5 For example OSTP could clarify the recent statements by Dr Hansen which 1 understand to be on endorsement of broader action to cover more emissions rather than a recarltation of the risk of global climate change Carbon Dioxide's Impact on Coal Usc and EJcctl'icity llriccs e Hcre are some clarifications about the DOE sardy to which this memo refers and its characteri zation in he options mcmo o The DOE study' evaluated vcry stringcnt caps on carbon dioxide CO z 1990 levels of utility emissions by 2005 or 2008 and 7% below Ihat by 2008 to 2012 The report notcs that less severe lim its would prod uce much lower increases in electricity prices and overall compliance costs A longer time to compliance can also reduce disruption in t he natural gas sector -vhich may experiencc inelastic short run suppJi es Although the DOE study does model C02 control s using a tax instead of a cap and trade system the economic effect on electri city prices and other key results should be the same under either system Applying a tax is a matter of modeling convenience EVAlulltilig the O ltions Neither extreme is warranted Given lhc iller-easing conclusiveness of the science on the risks of global climate change it woqlcl probabl y not be advisable to lJegalc now the idea of cvcntualmandatory reductions in greenhouse gases On the other hand there is no environmental or economic reason to inuncdiatcly launch into costly and severe reductions of CO2 by power plants o In particular a cOlllmitment to address greenllOuse gas emissions does not necessarily translate into a policy that would control carbon dioxide C0 2 lIsing the i ind o rutility-based four ellliss ion s approach embcddcd in recent legislation Many options exist and a complete ---- -------------------------- - - - - - - -- - - - ----- - - - ---- --- - - - - - - - - - - - - - - - --- - ----- - - - - -- ---- interagency analysis is important to fully identify options and to determine an appropriate level of effort A broader climate effort would be more effiCient than a sector-by-sector approach o CO 2 emissions from electric utilities comprise only 30% of all U S greenhonse gas emissions on a carbon-equivalent basis A real effort to control greenhouse gas emissions would require a broader approach both in the sectors and the gases it covers o G o Economists agree that the most efficient broad approaches to limit CO2 would apply a price signal to carbon at a level above electric utilities in the supply chain for fossil-based energy An upstream system could include a cap and trade system amongst fossil fuel producers For example a permit-to-market approach cOltlcl apply at the coal mine mouth oil and gas wellhead and the border for imports Another option is an upstream carbon tax Either approach would have the objective of making energy more costly by an amount that depends on the greenhouse gases it produces An upstream approach would regulate fewer entities for example compare the munber of oil producers 0 the number of motorists and yet provide greater application of the price signal throughout he economy A modest predictable and broad price signal would produce the greatest reductions in greenhouse gas emissions for the least cost to the economy A utility-level multi-emissions approach could lead towards inefficient and ineffective control policies in other sectors For example since oil would remain largely untouched by a utility bill enviromnentalists would call for more stringent automotive fuel economy standards That approach paradoxically can worsen emissions relative to no policy by raising the cost of replacing the oldest and dirtiest cars Regulatory uncertainty is a legitimate concern 9 Regulating carbon dioxide emissions as part of an overall clean air package can indeed reduce costs for utilities relative to first regulating conventional pollutants and then unexpectedly limiting CO 2 later Tllis is because he scrubbers used to control sulphur dioxide S02 nitrous oxide NO and mercury Hg are not effective in controlling CO 2 which generally requires switclling from coal to natural gas Under the current regulatory uncertainty utilities appropriately fear incUlTing unnecessary costs because they have incorrectly predicted government policies On the other hand the savings from resolving regulatory uncertainty about C02 for utilities now could be swamped by the costs of pre-empting more efficient climate policies that we could have developed with more time The a location of allowances in a cap and trade system is key o- -- ---------- o --- Utilities may also support a four-emissions cap and trade system because they anticipate favorable approaches to allocating the limited allowances to emit CO 2 o If allowances arc granted to utilities free of charge as opposed to th Ollgh Hl auction for example then utilities can actually be made beuer offthan they would be without an emissions control regime in place Thal is because giving them all of the valuable permits elm go beyond compensating producers for their share of the totalcosls some of wh icb passed on to consumers o Most economists recommend auctioning off emissions allowances so that the revenues can be used to reduce other dislorlionary taxes If desired some allowances could be given to producers so Ihallhcy arc no worse off than they were before the control regime o TIle allocation scheme can have other important efficiency implications At least one multi-emissions bill S J369 could act as a production subsidy for some producers possibly leading to perverse incentives and outcomes Other possible lIIotivesfor supportiltg a lIIulri-emissiolts strategy o Northeastern legislators Illay favor a four-emissions npproach becallse they may believe that only by seeking aggressive limits on C02 can they ensure the demise of coal whose SO emissions threatcn their hardwood forests with acid raid Conclusions 1l1ld Recommendations o Here are some suggested modifications to Option 2 talking points and Q A o o Recognize that whether or not carbon dioxide is properly deemed a pollutant under the Clean Air Act contl'Ol ing it would be an i1movalive enough policy step to warralll new carefully crafted lcgislatioll Tllis could sidestep a distractil1g debate about intcl prcling the eAA o Carbon dioxide is a compound 011 which life depends Pedants could poilll out thal carbon dioxide is lIot aIL elcmeld - -- --- ---------- -------- -- - ------ -- o CI -- ----- ---- - b 5 The President recognizes the value of reducing tile regulatory uncertainty Ihat makes long term planrting difficult but he believes that iUs appropriate to take the time to the - 'P to the issues raised climate challf e b 5 This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu