David Sokol Responds to NRDC Criticism of Cap Without Trade Plan

| by David Sokol

NRDC’s criticism in OpposingViews.com of my May 19 Washington Post op-ed, “Let’s Have Cap and No Trade” fundamentally misstates what I proposed, and it reveals a basic lack of understanding about how electric utilities function. Let’s get the facts straight:

Fact #1: MidAmerican’s proposal has the same 2020 – 2050 carbon caps as the Waxman-Markey bill. NRDC says that my op-ed calls for “allowing utilities to opt out of putting a cap on dangerous carbon emissions.” Now read what I said: “Keep the cap and remove trading from the equation: Mandate that the industry… limit its emissions to the same levels proposed in the Waxman-Markey bill.” MidAmerican’s proposal wouldn’t let utilities opt out of the cap. It would let them opt out of trading. It would let states either reach the emission reductions goals in the Waxman-Markey bill through cap-and-trade or through an alternative compliance mechanism to reduce reliance on coal-fired electric generating units.

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Fact #2: An allowance trading market doesn’t reduce greenhouse gas emissions by one ounce. Emissions caps do that. The trading market is simply one way to enforce caps. We think there are better alternatives for our customers. NRDC says that, “trading carbon pollution permits creates the price signal needed to help utilities determine the pace of their low carbon investments.” Now, which carbon price signal is it that a European utility should use to make its “low carbon investment decision”? The 14-Euro price in February 2008 or the price 64% higher five months later? The 11-Euro price in January 2009 or the price that was 280% higher just six months earlier?

Markets and Wall Street thrive on volatility, but electric utilities need clear, certain and predictable rules in order to make sound long-term and least-cost decisions. But how does a utility make wise 40-year investment decisions in the face of six-month price swings of nearly 300%? It can’t. Relying on an allowance trading market to set what NRDC calls a “year in and year out” price to trigger investment decisions – a mechanism that will require an entirely new infrastructure, will create substantial frictional and administrative costs, and will encourage volatility – will make rational utility planning virtually impossible.

Fact #3: Federal oversight of markets cannot prevent catastrophe. The Waxman-Markey bill “calls for aggressive oversight of… carbon markets,” says NRDC. Well, a carbon trading market is no different from any other commodity market where supply and demand create price fluctuations and under Waxman-Markey, utilities will be forced to compete for allowances with Wall Street investment banks, hedge funds and speculators, which don’t generate any electricity at all. Will the bill’s market protection provisions help? If we’ve learned anything from securitized mortgage trading, credit default swaps and other gimmicks that nearly froze U.S. financial markets in 2008, it’s that market regulation has not prevented abuses, no matter how aggressive the oversight. Why are we to believe that Congress can foresee abuses in the carbon market when hundreds of government regulators did not properly oversee Fannie Mae and Freddie Mac?

Fact #4: If consumers are paying for allowances as well as for the measures that actually reduce greenhouse gas emissions, then they are needlessly paying twice. Whether you want to label allowance purchases “short-term” and generation infrastructure upgrades “long-term,” as NRDC does, it doesn’t change the fact that utility customers pay twice under cap-and-trade. Moreover, that first payment – for billions of dollars worth of auction allowances that will not reduce greenhouse gas emissions by one ounce – will increase ratepayers’ bills so much that it will impede utilities’ ability to develop a less carbon-intensive infrastructure.

My thesis runs considerably less than the 932-page Waxman-Markey bill: If de-carbonizing the electric power sector is the goal, then let’s keep the caps but give states the option to bypass the trading by using the existing state regulatory framework to determine the most efficient ways to meet the caps. This is not a proposal to circumvent the environmental goals of Waxman-Markey. It’s a proposal to reach those same goals over the same time period, but at a lower and more predictable cost to consumers by setting up a realistic glide path to better accommodate customer affordability and technological availability. This alternative gives no free pass to electric utilities. Instead, it tackles the real problem – reducing greenhouse gas emissions – and eliminates the costly and useless trading of allowances.

Read the original article from the NRDC, Cap Without Trade Won't Reduce Global Warming