4P or not 4P

When the administration of Bush II decided that it wasn’t going to regulate CO2 emissions in the electric utility sector, it also postponed an important debate over the form those regulations will ultimately take, a debate with key implications for climate equity. The “4P” (four pollutant) legislation that Bush preemptively vetoed would have required rules to allocate a fixed carbon emission cap among utilities. A significant controversy had already emerged among environmental organizations over how this might be done, and this debate should not be forgotten.

Several 4P bills were introduced in the previous congress, and both reflected a consensus among the involved environmental groups that emission allocations should be set by establishing a “Generation Performance Standards.” Under a GPS, the total pollutant load of the electric industry is divided by its total output, giving an average rate of pollution per unit of generated electricity. With this baseline set, firms would then be allocated permits proportional to their output; those more efficient than the average could sell permits to those less efficient.

This is a pretty good idea. It doesn’t reward those who were previously inefficient, and it doesn’t in itself prevent new, more efficient firms from entering the generating business. In both of these regards, it’s a vast improvement over grandfathering, in which emission permits are handed out in proportion to a firm’s previous pollution, with the biggest historical polluters winning the biggest shares.

But GPS systems have two serious long-term flaws:

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The first is that, unlike a permit auction or a tax, no revenue accrues to the government. Thus there is no possibility of diverting this revenue to meet the public needs that will be associated with preventing climate change, such as increased research and development or the compensation of workers who will be harmed by the inevitable transition. This is an extremely serious problem, and an extremely bad precedent.

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Second, the GPS approach doesn’t scale to the economy as a whole, and would be an obstacle to further carbon regulation. This is because when emissions limits are finally established in sectors such as transportation or residential heating, no equivalent to a generation performance standard will be available. If, then, the enviros try to pass a carbon tax on oil and residential/commercial natural gas, they’d find that they can’t do so without rescinding the GPS-not unless they want to create an “inefficient” system in which many sectors are taxed but the utilities are, in effect, subsidized. Even if they (finally) go for a permit auctioning system, the exemption of the electricity sector would present real political and economic problems.

There are of course ways in which a system based on generation performance standards could be integrated into an economy-wide tax or trade system. There are always ways. But the simplest option would be to start with an auction-based system in the first place. This is the position advocated by Sky Trust organizers, and which EcoEquity also supports. Auctions may not be the American way (they actually require polluters to pay for emission rights) but they’re certainly fair, and they’re the best way we’ve heard to fund a meaningful just transitions program.

By the way, the newest version of the 4P bill, introduced by Senator Jeffords following Bush’s pre-emptive strike, no longer mandates Generating Performance Standards. Rather, it directs the EPA Administrator to parcel out emissions allocations to the utilities, and specifically mentions both GPS and auctions as possible methods of doing so. We believe this is a hopeful step, because it leaves the door open for auctions.

After the Bush people are gone, of course.