Benefit of Counsel: On global warming and the power industry

Mark Perlis, Dickstein Shapiro Morin & Oshinsky

By most measures, electricity generation accounts for approximately one-third of total U.S. greenhouse gas emissions, far outstripping other industrial sectors. It is no wonder that many in the industry applauded President Bush’s decision to reject ratification of the Kyoto Protocol. However, the rest of the industrial world is poised to ratify the Kyoto Protocol and to submit to the first binding international restrictions on national greenhouse gas emissions.

At first glance, it might appear that the U.S. electric industry has been spared the burdens of helping the world slow global warming. However, even though we will not ratify the Kyoto Protocol, the electric industry is still being forced (or pushed) into reducing emissions of carbon dioxide and other greenhouse gases. One source of this push is pending environmental legislation. In Congress, Senators McCain and Lieberman lead the charge toward direct regulation of utility sector carbon emissions. While their bill is given little chance of passage, consensus has developed around the desirability of sharp reductions in levels of SO2 and NOx emissions. The Administration’s Clear Skies Initiative and many other bills propose significant reductions in SO2 and NOx emissions from electric generating units. Eventual enactment of amendments to the Clean Air Act SO2 and NOx programs seems likely.

Reductions in the nationwide or regional “caps” on allowable SO2 and NOx emissions will indirectly reduce carbon emissions. Tighter caps on coal-fired plants’ emissions creates economic incentives for utilities to become more fuel-efficient. Such “efficiency” gains directly reduce carbon emissions per kWh of electricity. The environmental community certainly appreciates that it can achieve significant carbon reductions indirectly by forcing down levels of other pollutants that necessitate energy efficiency gains in the industry as a whole. In addition, the Bush Administration has not entirely closed its eyes to the problem of global warming. The Administration continues to sponsor a “voluntary” program, aided by federal research dollars, to reduce the carbon intensity of the U.S. economy.

Emissions trading is the centerpiece of both the mandatory acid rain program and for voluntary carbon emissions reductions. The Clean Air Act’s innovative “cap and trade” program has a successful 10-year track record of achieving faster, larger, and cheaper emissions reductions than would have been possible under traditional “command and control” programs, such as the New Source Review (NSR) program. And emissions trading has proven far less contentious than NSR.

Emissions trading is also the key to carbon emissions reductions under both the Kyoto Protocol and under any voluntary program, such as the Administration’s Clear Skies Initiative. The costs of reducing carbon emissions varies tremendously across the U.S. economy and across the world. There are many ways of reducing carbon intensity of production and some means of sequestering carbon through land management and forestry. Greenhouse gas emissions trading allows affected entities and nations to find the cheapest source of global emissions reductions. Since carbon emissions have a global impact through atmospheric concentration, it matters not at all where or what the source of carbon emissions reductions is.

The electricity industry stands to gain from legal recognition of any carbon emissions reductions, whether from a more efficient power plant in a less developed nation,

planting and preserving forests, or from investments in renewables, such as wind farms. Hence, the electric utility industry has played a major role in encouraging the Administration to develop better means of measuring, verifying, and recognizing greenhouse gas emission reductions. The Administration’s voluntary carbon emissions reduction program calls for improvements in registration of emissions reductions, so that electric utilities and other energy companies that lead the way in achieving reductions—in the U.S. or abroad, in electric generation or through land management—may gain recognition of those reductions in a tradable credit.

Thus, many electric utilities and other energy companies see both monetary and public relations values in taking proactive steps to reducing their carbon emissions and by financing emissions reductions elsewhere. These values are enhanced by being able to monetize even voluntary greenhouse gas emissions reductions. With tradable credits in hand, some U.S. companies may even find ways to participate in the global carbon emissions market that is expected to emerge as the Kyoto Protocol goes into effect.

Perlis is a partner with Dickstein Shapiro Morin & Oshinsky LLP in Washington, DC, focusing on energy and environmental matters. He can be reached at 202-775-4703 or perlism@dsmo.com.

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