How states can best promote clean power

The U.S. Environmental Protection Agency has finalized new rules requiring states to curb greenhouse gases from America’s power sector. The Clean Power Plan gives each state the ability and flexibility to use their own ideas on how best to achieve these reductions. One proven, cost-effective approach is the use of market forces to drive innovation and efficiency.

Five years after the demise of congressional efforts to tackle climate change through a cap-and-trade program, no one expects a federal market for carbon emissions anytime soon, much less a carbon tax. However, putting a price on carbon is one of the clear options available to individual states as they consider ways to meet their Clean Power Plan targets.

{mosads}Smart states will give this option serious thought.

The options available to states go beyond creating or joining a cap-and-trade program or instituting a carbon tax. Pieces can be put in place, such as common definitions, measurement and verification processes, so that states or companies could be in a position to trade within their state or across borders. Modest programs that allow companies to trade carbon credits could be explored.

Economists consistently advise that the most efficient, cost-effective way to reduce greenhouse gas emissions is to put a price on them. Give companies a clear economic incentive to cut their emissions and – theory says – they will innovate and find the quickest, cheapest way to do it. 

The theory is validated by growing real-world experience. Carbon markets are working in 10 states, including California. In 2013, the first year of California’s program, companies covered under the cap cut emissions nearly 4 percent. Pacific Gas and Electric and other utilities have aggressively increased supplies of renewable energy and continued to help customers be more energy efficient.

Meanwhile, California has one of the nation’s best job growth rates. In the first year and a half after cap-and-trade went into effect, the state added nearly half a million jobs.

In the Northeast, nine states in the Regional Greenhouse Gas Initiative, another cap-and-trade program, have cut carbon emissions from power plants 40 percent since 2005. More than $1 billion in program revenues have been invested in energy efficiency, renewable energy and other efforts that are expected to lower energy bills by $2.9 billion.   

Markets have been successful in driving down other emissions as well. The reason we don’t hear much about acid rain anymore is that the U.S. significantly reduced sulfur dioxide pollution through a cap-and-trade program created by a bipartisan Congress in 1990. Emissions were cut about twice as fast as predicted and at a fraction of the cost of traditional regulation. 

None of this is to pretend that carbon reductions won’t come with a cost. Transitioning to new, more efficient, cleaner energy technologies will inevitably entail significant new investment. It’s also vital to avoid any potential risks to electric reliability. The point is that carbon pricing provides companies the incentive and flexibility to innovate and ensure that technology decisions and investments are made as efficiently as possible. That is why a growing number of companies are voicing support for carbon pricing, including recently the CEOs of Shell, BP and four other major oil and gas companies. 

Driving smart energy investments will also have benefits beyond progress on climate change. Upgrades to the nation’s energy infrastructure, for example, will support jobs, improve efficiency, lead to better safety and reliability, and ultimately a stronger foundation for growth and competitiveness. 

The good news is some state and business leaders are showing interest in state or regional carbon markets as a real option on the road ahead. At a recent conference hosted by the Center for Climate and Energy Solutions on implementing EPA’s new rules, carbon pricing was one of the most talked-about strategies.  

It’s too soon to predict how state plans will evolve but several things are clear: The EPA approach provides flexibility for states and companies to use markets and we know markets work to foster lower costs and innovation. States, cities and business should work together to make that happen. 

Earley is chairman, chief executive officer, and president of PG&E Corporation, a San Francisco-based energy company whose subsidiary, PG&E Company, provides power to nearly 16 million customers in northern and central California.

Perciasepe is president of the Center for Climate and Energy Solutions, an Arlington, Virginia-based nonprofit, nonpartisan organization, and is former deputy director of the Environmental Protection Agency.