Regulating and Pricing Carbon
New York City--The indication over the weekend from Carol Browner that the EPA plans to move forward on regulating greenhouse gases, though not unexpected, provides indication that we are likely to see real action on climate change this year. The possibility of EPA regulation of CO2 emissions makes a cap and trade system look like the more appealing alternative. Thus, despite the conventional wisdom that you cannot impose taxes or new costs on business during a recession, it is increasingly looking like we will see action on climate change in time for the US to have a meaningful position and thus play a leadership role in Copenhagen.
Obviously as far as the climate is concerned, this is good news. However, as far as the declining economy is concerned it may not be bad news either for several reasons. First, stability and clarity with respect to the pricing and potential regulation of carbon is an improvement over uncertainty since it lets companies plan ahead. Companies that make carbon reduction technologies, alternative energy companies, and companies exploring clean coal, will have clear rules if action moves forward. And even utilities and heavy industry will benefit from clarity as opposed to uncertainty. Done right, the higher cost of some energy that will result from pricing carbon will be largely recaptured by the government through auctions in a cap and trade system or taxes in a carbon tax regime. In the current atmosphere of huge deficits and economic uncertainty, the resolution of regulatory uncertainty combined with a potential revenue source may offset the economic effects of higher energy prices.
Moreover, at this critical point in economic history, there is another reason that meaningful action and leadership by the United States is welcome. At this critical juncture, global cooperation is paramount to managing the economic crisis. The global economy has survived and even thrived cleaning up the environment. It has not survived the breakdown of global cooperation on key issues. When the history of the current crisis is written, the breakdown of global cooperation earlier in the decade--due to the go-it-alone philosophy of the Bush Administration--will be assigned a part. On the other hand, successful cooperation leading up to Copenhagen and beyond, by restoring global trust, can be part of the solution.
And of course there is the inconvenient issue of the climate. The indication that the Administration and Congress are moving forward on climate change is thus good news.
