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Commentary By Lew Hay
Recently, Jim Rogers of Duke Energy wrote a commentary on climate legislation in these pages. Jim is to be commended for all his efforts to bring attention to global warming, despite running the third largest CO2-emitting company in the nation. I also commend him on calling for aggressive, mandatory, economy-wide CO2 reduction targets, and for substantial and immediate investment in the RD&D to achieve them.
But he and I have a major difference of opinion on the climate change bill introduced by Sens. Joe Lieberman (I-Conn.) and John Warner (R-Va.). Jim thinks electric power companies should be permitted to emit carbon into the atmosphere for free. I think they should have to pay for every ton of carbon that goes up the smokestack. His approach-- granting a disproportionate amount of free allowances to the biggest emitters--allows those who contribute the most to global warming to reap a massive financial windfall. Mine requires them to bear the cost.
I agree that we should not punish companies for taking actions consistent with past public policy. But coal plants built in the mid-1960s and earlier are now fully depreciated, paid for many times over, and beyond their intended lives. These facilities contribute a disproportionately high share of CO2 emissions (even among other coal plants) and need to be retired soon. Regardless of the final form of allowance allocations, none of these facilities should receive allowances for free. Moreover, basing allocations on historical emissions creates a perverse incentive to continue operating old, inefficient, high-emitting plants long past their intended lives--all in the hope of one day receiving a windfall in the form of a long-term annuity of free allowances.
Make no mistake--coal is an abundant, strategic resource important to our energy security and needs to be included in our future national energy portfolio, even after the advent of stricter environmental regulations. We must develop advanced clean coal technologies, and the best way to fund this is with a real price on carbon. Even the coal industry itself has proposed a surcharge on coal to pay for R&D supporting clean-coal technologies.
Even so, a number of electric power companies such as FPL Group, PG&E and others recognized the need to reduce CO2 emissions years ago and began to clean up their act. They shuttered old, inefficient plants, repowered with newer, more efficient generation, built new plants with more efficient, lower-carbon technologies (like combined cycle natural gas), uprated their zero-carbon nuclear facilities, deployed aggressive energy conservation and load management programs, and added renewable sources such as wind, solar and geothermal. These aren't immature laboratory technologies. They are proven and in commercial use today.
As a result, the customers of these forward-thinking power providers have been paying higher rates than those of their coal-based brethren. For example, customers in the predominantly natural gas-fired states of Florida and California pay rates 30 percent to 135 percent higher than those in coal-based Kentucky, Ohio and Indiana. In other words, customers of cleaner electric companies such as FPL already have been paying and continue to pay their fair share for reducing carbon emissions.
That's worth remembering when you hear coal-based utilities decry the cost increases their customers would see under a cap-and-trade program that auctions allowances. It also sheds a completely different light on the argument of coal-based customers "paying twice." It is actually the clean energy customers who would take a double hit, once for paying the higher energy prices they pay already, and a second time to subsidize free allowances for the companies continuing to spew CO2 into the atmosphere.
In fact, even with a 100 percent allowance auction that yields carbon prices as high as $30 per ton, electricity consumers in the vast majority of coal-based states would still pay much less than those in cleaner states. To be sure, some low-income customers in all states would find the added costs onerous. For these consumers, a portion of the auction proceeds should be recycled to provide cost assistance.
If we're honest, though, we must acknowledge that most consumers and companies need to see the price of carbon reflected in their electricity prices, as well as the price of the goods and services they purchase. This is what will ultimately drive true behavioral change. As such, the right way to target free allowances, to the extent they are needed at all, is with a rifle and not a shotgun. The companies that truly need free allowances are those in key industries that will become cost- disadvantaged because they face international competitors who operate without parallel climate regulation.
The best way to minimize disruption to the economy is not with free allowances into the distant future. It is with a safety valve that would kick in when the price of allowances reaches a level that threatens economic harm. To protect the economy, we need a ceiling on the price of allowances to ensure they don't rise too high. And to protect the environment and to provide certainty to those investors funding clean technology developments, we need a floor on the price of allowances to ensure they don't fall too low.
It is ironic that I find myself in the role of defender of cap-and-trade. After all, my personal preference--and that of most economists--is that we address the challenge of climate change with a simple fee on carbon that starts at a modest level and increases over time. But the approach before Congress at the moment is cap-and-trade, and the Lieberman-Warner bill is at the center of an intense tug of war between clean energy companies who are willing to pay for their emissions allowances and big-emitting companies who want them for free.
My view is this: the whole idea of cap-and-trade is to let the market put a price on carbon so that companies have a powerful incentive to emit less of it. Saying you favor free allowances is the same as saying companies should be allowed to pollute for free. The right response to the challenge of global climate change is cap-and-trade, not cap-and- evade.
--Lew Hay is chairman and chief executive officer of Florida-based FPL Group Inc.
COMMENTARY BY JIM ROGERS
The climate change debate has been dramatized in movies, on Hollywood's red carpets and in documentaries featuring melting ice caps. The collective effect is extraordinary, and very positive. America now stands ready to address one of the toughest challenges our nation has faced since the industrial revolution--decarbonizing our energy supply and economy. Now the hard work begins.
I strongly support federal legislation to create a mandatory and declining national cap on carbon dioxide and other greenhouse gases, with a target to reduce these emissions by 60 to 80 percent by 2050. I also applaud Sens. Joseph Lieberman (I-Conn.), John Warner (R-Va.) and many of their colleagues for their dedication to advancing climate legislation in Congress. We need both substantial and immediate investment in the research, development and deployment of technology---and straightforward regulation to address this major ecological problem.
The Lieberman-Warner climate bill correctly takes an economy-wide approach by capping carbon dioxide and other greenhouse gas emissions. Unfortunately, the approach used to meet that cap requires companies to pay for current carbon dioxide emissions using auctions. This is misguided in two ways:
First, it undermines the primary objectives of a cap-and-trade system, which is to put a declining cap on emissions, set a price for carbon dioxide and provide a transition mechanism for those adversely impacted by the cap. It significantly erodes the ability to provide a smooth transition for consumers who depend on electricity with a large carbon footprint.
Second, it proposes to raise funds for a variety of purposes unrelated to developing technology solutions. Some politicians have even called for using the funds for a middle- class tax reduction. Without new technologies, we have no hope of achieving our carbon reduction targets. We must stay focused on the mission. The funding of technology should be pursued independent of the carbon dioxide regulation under a cap-and-trade system.
Regrettably, I have used the technical term "bastardization" to describe these proposed modifications of the "cap-and-trade" regime that has worked so well for sulfur dioxide. I apologize to those offended by my rhetorical flourish, but I have not heard a credible argument as to why our approach that dramatically reduced sulfur could not work for carbon. Let's keep it simple and use what we know will work.
We should be clear--an auction of allowances is a carbon tax. Lieberman-Warner gives electric utilities in coal-dependent states no choice but to buy a substantial number of allowances from day one simply to keep their customers' lights on. This would result in unfairly placing the cost of addressing climate change on the backs of consumers in the 25 states that depend on coal for more than 50 percent of their electricity.
Our customers' power rates in the Carolinas, Indiana, Ohio and Kentucky would rise by 13 to 35 percent when the legislation takes effect in 2012, based on a $30 emission allowance price. Other states across the Great Plains, Midwest and Southeast would see similar increases.
This rate shock may result in consumers demanding to reverse efforts to address climate change, a result our environment cannot afford. Some legislators are even calling for a full auction of allowances. This would punish these consumers even more and increase rates in these regions between 30 and 63 percent.
In addition, these same consumers are going to have to pay billions of dollars when the existing power plant fleets are replaced or retrofitted when new technology becomes available. This results in an unfair "double hit" to consumers in states that depend on coal.
While rhetoric to "punish polluters" may be convenient in some circles, it ignores the fact that businesses and families will be the ones punished as they suffer from rate shock. This rhetoric also fails to acknowledge why coal plants were built in the first place.
Building coal plants was a key part of our energy policy in the 1960s and 1970s. The 1974 Arab oil embargo pushed our country toward energy independence, and discouraged the use of oil in power plants. The federal Fuel Use Act of 1978 prohibited using natural gas for new power plants until its repeal in 1985. Three Mile Island stopped the nuclear industry in its tracks in 1979.
The fact is that electric utilities were encouraged--and in many cases, directed--to build coal plants to meet customer demand. These decisions occurred decades before any widespread concern about carbon dioxide and climate change.
Finding ways to reduce carbon dioxide has been on my agenda since the beginning of the decade. It's time to move, but we must move toward solutions that work and help us bridge from today's technological ideas to tomorrow's commercial solutions. I believe the funding of technology is the indispensable key to moving to a low-carbon economy.
A more fair and transparent way to fund research and development might be a surcharge on every kilowatt-hour of electricity sold in America. A three-tenths of a cent surcharge per kilowatt-hour would raise about $11 billion annually, and cause minimal rate impact. This compares to about $1.38 billion budgeted for energy research and development by the U.S. Department of Energy in 2008.
This substantial injection of capital would advance technology across the board--in energy efficiency, renewable energy, nuclear, natural gas, clean coal and carbon sequestration--and benefit every consumer of electricity in the nation. Under this approach, customers with higher electric rates would pay a lower percentage of their bill to support technology development, while coal-dependent customers with lower rates would pay a higher percentage of their bill for these developments.
Addressing climate change should not be a partisan issue splitting Democrats and Republicans. We need to follow the example of the Clean Air Act and other major environmental legislation, which passed with broad bipartisan support. We need to embrace the politics of possibilities, and not the politics of limitations or punishment.
This issue is too important not to get it right. It took us more than 100 years to get here, and it will take decades of hard work to fix the problem.
Let's continue to move the ball forward and go to work.
--Jim Rogers is chairman, president and chief executive officer of Duke Energy Corp.
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