States should explore carbon pricing to encourage clean power

C2ES President Bob Perciasepe moderates a Solutions Forum panel with (l to r): Martha Rudolph, Director of Environmental Programs, Colorado Department of Public Health & Environment; David Paylor, Director, Virginia Department of Environmental Quality; and Janet Coit, Director, Rhode Island Department of Environmental Management.

States will have tremendous flexibility to choose how to reduce their carbon emissions under the Clean Power Plan, and one idea they should explore is putting a price on carbon.

The Center for Climate and Energy Solutions (C2ES) recently brought together legal and economic experts, state environmental directors, and business leaders to explore the potential to use market mechanisms to reduce these damaging emissions efficiently and cost-effectively.

Here are three key insights from this Solutions Forum:

  1. Market-based policies are the most cost-effective way to reduce emissions.

Economists have plenty of evidence that market-based policies can achieve environmental objectives at lower overall costs. The U.S. acid rain cap-and-trade program reduced sulfur dioxide emissions from power plants about twice as fast and at a fraction of the cost of traditional regulation. Setting a price on carbon sends a clear market signal to businesses so they can make the best investment and technology decisions and seize new opportunities. Ten U.S. states are already using carbon trading programs to reduce emissions while minimizing costs. There’s also the idea of a revenue-neutral carbon tax where we’d tax something we don’t want – carbon pollution  –  while reducing taxes on things we do want, like productivity and employment.

  1. States and businesses are willing to explore the idea of being “market-ready.”

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. Martha Rudolph, director of environmental programs for the Colorado Department of Public Health and Environment, said modest programs that allow companies to trade carbon credits should be explored. Skiles Boyd, DTE Energy vice president of environmental management and resources, urged states to look beyond efforts to block the Clean Power Plan and instead seek the best solutions to implement it. “‘Just saying no’ gives you tremendous uncertainty,’’ Boyd said. “Let’s try to develop a rule base that can be the best for our customers.”

  1. State and business leaders recognize the need to talk to one another about the best ways to reduce emissions.

To achieve the goal of reducing emissions in the smartest way, states and businesses will need to work together. David Paylor, director of Virginia's Department of Environmental Quality, said his state has a preference for market-based tools. “Solutions are going to be facilitated when the business community can get behind certain ideas and say, ‘This is the thing that makes the most economic sense to us,”’ Paylor said. And Katie Ott, senior manager of federal government affairs at Exelon, said businesses recognize their responsibility to bring forward reasonable, low-cost ideas. “Markets have successfully internalized the cost of pollution before,” Ott said, “and there’s no reason why they can’t do it again, this time for greenhouse gases.”

All agreed that greater flexibility in the planning process would help states make progress in implementing market-based policies.

C2ES will continue the conversation with states and businesses on smart ways to implement the Clean Power Plan at two more events this spring. A Solutions Forum on May 18 will explore reducing emissions by using information technologies to improve energy efficiency. A June 25 Solutions Forum will examine how to finance clean energy technology and infrastructure.

By sharing insights and ideas, we’ll reach innovative, cost-effective solutions that will help us get to a clean energy future.