It’s Not Easy Being Green
Coal trains idled on the tracks near Dry Fork Station, a coal-fired power plant being built near Gillette, Wyo.
Published: February 9, 2013WASHINGTON
GREEN jobs have long had a whiff of exaggeration to them. The alternative-energy sector may ultimately employ millions of people. But raising the cost of the energy that households and businesses use every day — a necessary effect of helping the climate — is not exactly a recipe for an economic boom.
The stronger argument for a major government response to climate change is the more obvious argument: climate change. The continental United States endured its hottest year on record in 2012, and the planet’s 13 hottest years have all occurred since 1998. Major storms and wildfires are increasing in many regions. The air in much of China resembles soup. The seas are rising faster than forecast only a few years ago, and the costs of extreme weather are rising, too.
In Washington, the economic case for responding to climate change has made little progress, with Democrats failing to pass a sweeping bill when they controlled Congress and Republicans remaining strongly opposed. And President Obama has subtly shifted his approach, talking less about green jobs and more about extreme weather.
As he prepares to deliver the first State of the Union address of his second term, on Tuesday night, he and his advisers face some big decisions on climate policy. One is how to make the biggest dent in carbon emissions through executive-branch actions, given the long odds of Congress’s passing any substantial bill. Another is to rethink the economics of climate policy now that the early burst of green-job enthusiasm has waned.
Alternative energy may not be a solution to our economic problems. But neither is it guaranteed to make those problems much worse, despite the continuing claims of opponents. Mr. Obama has a range of options with the potential to have different economic consequences. Some may indeed do harm, but others could have economic benefits that equal their costs, particularly in a world in which temperatures, storms and uncertainty just keep rising.
The most intriguing choice facing Mr. Obama is whether to resuscitate a version of the centerpiece of the Democrats’ failed 2009 climate push: a cap-and-trade program. He has little chance of creating such an economywide program, because Republicans and some coal-state Democrats oppose it. But he may be able to create a scaled-down version specifically for power plants — no small thing, given that power plants produce about one-third of the country’s carbon emissions.
To economists, the best climate policies are those that allow market incentives to work, and the most damaging tend to be those heavy on mandates. “Telling companies they have to install this or that equipment is the more expensive way to proceed,” says Michael Greenstone, an M.I.T. economist and former Obama administration adviser. “Instead of a one-size-fits-all solution, you should allow companies to find the least-cost solution.”
Mandating that every power plant use turbines with a minimum efficiency, for instance, is likely to impose large costs on some. Perhaps the plants are designed in a way that makes it easier — and cheaper — for them to use their old turbines and reduce emissions another way. A turbine mandate could force them to raise prices for consumers more than necessary to achieve the same climate benefit.
A cap-and-trade system works differently. It requires companies to buy permits for their emissions and allows the companies to decide how best to meet their targets. A company that finds inexpensive ways to reduce emissions can sell its unused permits to companies that would have had to spend large sums to reduce emissions, lowering prices for everyone.
In previous decades, the United States reduced acid rainfall and the levels of lead in gasoline through similar approaches, both at lower costs than predicted.
White House officials have already signaled that Mr. Obama is likely to use a 2007 Supreme Court decision — which gave the Environmental Protection Agency authority to regulate greenhouse gases — to regulate existing power plants. In the first term, the E.P.A. relied on that decision to negotiate a steep increase in fuel-economy standards with automakers and to overhaul standards for newly constructed power plants. The rules for new power plants would effectively halt the construction of new coal plants.
Those rules relied mostly on mandates, like requiring automakers to have a certain average fuel efficiency across their entire fleet. And mandates can indeed reduce carbon emissions. In the second term, aides say Mr. Obama may also mandate that home appliances and office buildings produce fewer emissions.
David Leonhardt is the Washington bureau chief of The New York Times and the author of a new e-single, “Here’s the Deal.”