U.S. policymakers at the federal, regional and state level are discussing market-based policies to reduce carbon dioxide (CO2) and other greenhouse gas (GHG) emissions. Below are answers to commonly asked questions about the scope of such legislation and the costs and benefits for business.
Rather than regulating all GHG emissions, most approaches focus on the largest sources. This typically involves large “smokestack” emissions (e.g., from electric power plants), as well as the upstream bulk sale or import of fuels (e.g., petroleum) that emit GHGs when used. This helps limit the number of facilities under direct regulation while still covering most GHG emissions—approximately 80 percent in some cases. Facilities that are not directly regulated would still have a cost incentive to reduce their indirect GHG emissions (e.g., from electricity consumption) where compliance costs are passed through from regulated fuel and electricity suppliers.
Recent legislative proposals in the U.S. Congress seek to regulate facilities that emit 25,000 metric tons of CO2-equivalent per year which is roughly equivalent to the CO2 emissions of a 4 MW gas turbine running at full load with 98 percent availability. These “covered entities” would include electric power plants and large industrial facilities. Federal legislative proposals would also cover GHG-emitting fuels sold by natural gas utilities (local distribution companies) and petroleum refiners and importers. For more information on the point of regulation, see WRI’s federal climate policy summary.
In addition to federal proposals, there are regional and state programs a business may need to consider. Regional and state climate policies vary in their respective points of regulation. For more information on regional programs, see WRI’s summary on regional cap-and-trade programs.
Beginning in 2010, a new mandatory GHG reporting rule went into effect that requires large “smokestack” and other selected sources to report emissions to the U.S. Environmental Protection Agency (EPA). For more information on this rule, see the EPA’s FAQ document on GHG emissions reporting.
In addition to the EPA GHG reporting rule, individual states may also have reporting requirements. For example, the Regional Greenhouse Gas Initiative (RGGI) requires energy generation plants larger than 25MW to report GHGs.
Compliance costs depend on how efficient a facility is in reducing its GHG emissions and what policy mechanisms or programs are implemented to reduce costs. A regulated facility would need to weigh the various costs of these options to understand full compliance costs. In a cap-and-trade program, for example, covered facilities would need to hold GHG allowances equal to their annual emissions, so costs depend on how much the facility emits and the price of GHG allowances (estimated to be about $32 per ton CO2e in 2020 according to a Department of Energy analysis of a recent federal proposal1). The trading option would allow entities to buy and sell allowances (meant to encourage the most cost-effective emission reduction options and lower overall compliance costs).
Most federal proposals provide these or other flexibility options (including allowances allocated for specific purposes in early years or tax incentives) to reduce costs and encourage investment in GHG emission reduction projects. For more information, see WRI’s Bottom Line on Cost Containment.
Facilities that are not directly regulated by climate policies may see upstream costs passed down from energy providers and other suppliers. Costs could be high for facilities that source from suppliers that are major GHG emitters. Meanwhile, costs could be minimal for facilities that source from suppliers that produce few or zero GHG emissions.
Both regulated and non-regulated facilities could see new market opportunities and competitive advantages. Facilities that produce clean, low-GHG emissions technologies could see increased market demand for those products and services. Price signals and funding programs may provide additional incentives for GHG reduction projects, such as both supplyand demand-side efficiency upgrades, fuel switching from more carbon-intensive to less carbon-intensive fuel sources and clean energy equipment. In general, facilities that reduce their GHG emissions—as well as upstream (supplier) and downstream (customer) emissions—can optimize competitive positioning.
According to analyses of recent federal proposals, climate legislation will increase the price of producing energy from resources that emit GHG pollution (e.g., coal and petroleum). Higher energy prices or electricity rates, however, do not always translate to higher energy bills. Facilities that reduce total energy use by increasing their energy efficiency or that purchase power from low-GHG energy sources can mitigate energy costs or reduce energy bills.
The table (see PDF) presents estimates from the Energy Information Administration (EIA) for how energy prices could change under the American Clean Energy and Energy Security Act (ACESA) that passed the House of Representatives in 2009.
Climate policies often incorporate additional incentives and financing programs to assist facilities in reducing GHG emissions. These can involve funding for federal, state and local programs. These funds are generally distributed in the form of competitive grants, rebates and tax credits. Below are a few examples of activities typically eligible for such support:
This issue builds on topics and policy mechanisms discussed in previous issues:Bottom Line on Climate Policy Terminology