Green: The Color Of Money

Next President's Climate Plan Comes Into Focus

Kenneth Stier

All three presidential candidates are largely in sync on the need to curb greenhouse gases and despite President Bush’s recent apotheosis on the subject, most analysts expect the landmark legislation won't become law until the next administration.

White House

At the same time, the remarkable consensus may obscure how candidates will ultimately decide on critical details of any carbon reduction plan, which could affect how much, and how quickly, electricity prices will rise, and the overall impact on the economy.

The candidates all agree on a cap-and-trade program that will use market mechanisms to establish a price for carbon that will tighten over time to dramatically reduce emissions and provide a long-term business incentive to develop cleaner energy technology.

“In the short-run we are embarking on a fairly modest experiment that gets us the easy reductions in carbon emissions at pretty low cost; in the long run, we are looking at a complete transformation of our energy economy,” says Tufts economist Gilbert Metcalf.

Metcalf co-authored a widely-cited MIT study of the Senate bill (S.2191 America's Climate Security Act 2008, co-sponsored by Senators John Warner and Joe Lieberman), a bipartisan effort that has gotten the most traction in Congress, and which many expect will provide the core of any future legislation. (Efforts in the House have yet to gain significant traction.)

Metcalf says the proposals of the presidential candidates are more similar than not and and the general election winner can expect a Congress ready to enact climate legislation.

Industry Impact

But any bill will affect some sectors of the economy more than others. Particularly hard hit will be the utility sector, which accounts for 40 percent of the country’s greenhouse gases.

Within the power sector companies most dependent on coal -- the dirtiest fossil fuel -- will be the hit hardest, particularly if they are forced to buy permits for future emissions.

“This is an abysmal policy, this is a killer for coal states,” says John Stowell of , one of the country’s largest utilities, about plans to make utilities pay for permission for future carbon emissions.

That is a key point of contention and may be the biggest difference among the candidates.

Senators Hilary Clinton and Barack Obama insist all allowances to emit carbon be auctioned off, while Senator John McCain, who has been less specific on the issue, seems to favor giving away at least a portion of them.

The Lieberman-Warner bill, which evolved from but is tougher then an earlier bill co-sponsored by McCain, calls for auctioning 25 percent of the permits. The Senate bill falls short of the emissions reduction targets Democrats – and a large body of scientists - say are needed to avoid the most catastrophic impacts of climate change. 

A full auction would cost Duke $8 billion for the first year of the program, the company estimates, to cover the 800 million tons of carbon dioxide it emits annually.

As a regulated utility Duke would pass these costs to their customers. Indiana, for instance, would see electricity prices rise 65 percent within five years, the company estimates.  A study by the National Association of Manufacturersand the American Council of Capital Formation offer a state-by-state economic impact analysis of the Senate bill.

Midwestern coal states have long argued what happens in their economies will have wider repercussions; many large manufacturers have migrated to the Midwest to benefit from it's cheaper electricity.

The new cost to carbon will force utilities to switch to natural gas, which emits half the carbon coal does. This will force up electricity prices around the country.

Economic Impact

These estimates on the general economic impact are based on a set of assumptions that may produce widely different outcomes, spanning decades.

Sen. Hillary Rodham Clinton and Sen. Barack Obama.
Chris Carlson

The MIT study, for one, forecasts initially modest economic impacts. It predicts a GDP reduction of 0.5 percent to 1.0 percent of GDP in 2015, three years after the law would go into effect.

“That’s not negligible, but it’s not a lot,” argues Metcalf, adding that the US economy will have grown to $17 trillion by that time. “The bottom line is that the costs of climate mitigation can easily be handled by our robust and diversified economy.”

Others studies predict more dire consequences. According to one by consultancy CRA International, the measures will slash 1.9 percent from the GDP in 2015.

The trouble is that there are many uncertainties that could affect the evolution of any cap-and-trade program. For that reason, the Environmental Protection Agency study of the Senate bill analyzed ten different scenarios to evaluate a range of assumptions and key parameters.

The uncertainties are reflected in the EPA's GDP-reduction estimates that range from 0.9 percent to 3.8 percent in 2030 and between 2.4 percent and 6.9 percent in 2050.

Two key areas of uncertainty relate to the development and adoption of new technology - including next generation nuclear plants -- and the degree to which large emerging-market economies like China and India also make serious efforts to curb emissions, the EPA noted.

Paying For It All

These are areas where revenues raised by the auction could be helpful. Government spending on basic R&D for clean technologies – now about $3.5 billion – should be significantly increased.

Money will also be needed to accelerate critical demonstration projects, particularly for 'clean coal' which would eventually involve pumping, or sequestering, carbon dioxide underground.  

The MIT study envisions raising $85 billion for the government in the first year of the cap-and- trade program – if there is a full auction. This is at the conservative price of $10 a ton; prices are forecasted to rise progressively higher, ranging from $50 per ton in 2015 to $200 per ton by 2050.

Senator John McCain
Mel Evans

That's a lot of money for the government and a strong incentive for businesses to squeeze carbon emission from their operations. It's critical the revenues be well spent. 

While McCain has not spelled out detailed plans, both Democratic candidates have laid out ambitious programs. Clinton wants to spend $50 billion developing and deploying clean technologies, while Obama wants to commit $150 billion over ten years.

"The amount of money that is going be needed for new technology – because most of that is not developed - is really fairly high, I mean we are in the trillions – not the billions,” says William Kovacs, vice president of environment, technology, and regulatory affairs at the US Chamber of Commerce.

Clinton and Obama also forsee funds earmarked for helping low-income customers absorb higher energy prices; more will be needed for those affected by the expected closure of marginal Appalachian mines, and to retrain younger coal miners. 

”By 2050, if we stick to our guns with the kind of cap-and-trade bill that we are talking about, nothing will be untouched by this,” says Metcalf.

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