Having outlined ideal utility policy in part 5, we move now to ideal environmental policy. As a reminder, this is not the policy that could be accomplished tomorrow given political realities, but rather the long-term goal we ought to shoot for. If the only thing that mattered was good environmental policy guided by responsible principles, this is what we’d do. It is the long-term goal, but not necessarily the politically-possible next step.

Ideal environmental policy reforms

  1. Immediately convert all emissions regulations to an output basis, per unit of electricity (MWh) and/or thermal (MMBtu) energy produced. Under present regulation, the less fuel you burn the less pollution you are allowed to produce, putting energy efficiency paradoxically in conflict with environmental compliance. Shifting to an output-standard would allow all regulated sources to use energy efficiency as a pollution control device.
  2. Set the output-based standard to be technology-independent. Getting output-based standards right requires more than just an algebraic tweak. Today, many jurisdictions set different emissions standards for different combustion processes. The idea is to drive all technologies to their maximum (economically-attainable) level of performance, but the unintended consequence is that you can sometimes find it easier to permit dirtier technologies. (For example, a gas turbine is allowed to release less pollution than a reciprocating engine, even though a “clean” reciprocating engine is, on most fronts, dirtier than a “dirty” gas turbine.) This problem is innate to our current pass/fail permitting models, which are eliminated with the changes outlined herein, and therefore we do not need to have technology differences in permitting. If the standard is set to X lbs/MWh, that should apply for all power generation technologies.
  3. Provide an initial allowance for output based-standards at 90 percent of the current average, and consistently announce plans to ratchet down over 5 year forward intervals. Then eliminate all grandfathering. Our pass/fail model depends upon grandfathering if we are ever to tighten standards; the regulator, in exchange for being allowed to tighten standards in the future, gives any permitted source the right to emit at their permitted level in perpetuity. The result is that new, clean sources must pay for modern pollution control equipment but sell into a market dominated by dirty old sources, tipping the economic playing field in favor of the dirtiest sources. This can be fixed by setting an initial pollution allowance (in lbs/MWh, lbs/MMBtu as appropriate), and then stipulating a 5 year decline in that allowed level. Start with a level just below the current average to ensure a steady reduction in pollution, and add another year every 12 months to ensure there are always 5 years of forward visibility. This will give businesses time to plan for evolving regulation and immediately eliminate the need for grandfathering.
  4. Set up tradeable markets for all regulated pollutants, and allow any regulated source to meet their permitted obligation through any combination of actual reductions or purchased emissions reductions. This would immediately eliminate the pass/fail nature of current regulations. Suppose that a given pollutant has an allowed pollution level of 2 lbs/MWh, and suppose further that one source has the ability to cost-effectively lower their pollution to 1 lb/MWh while the other cannot get below 3 lbs/MWh. In the current, pass/fail architecture, the 3 lb source doesn’t get built and the 1 lb source has no particular incentive to exceed the 2 lb/MWh threshold. However, with tradeable permits, both sources can be built so long as the 3 lb/MWh source is willing to pay the 1 lb/MWh source enough money to justify their marginal reduction. We still end up with 2 lbs/MWh, but have created a economic pain for the dirty guy and economic gain for the clean facility — and a clear incentive for both to continue to drive their emissions down as fast as possible — not just as fast as policy makers can set lower targets, as is the case in the current paradigm.
  5. Exempt any costs associated with pollution compliance for regulated monopolies from rate-recovery, except at the level stipulated by the regulated allowance. In the current paradigm, an environmental permit is a prerequisite for power plant operation, and therefore the costs associated with pollution abatement are added into the total amount of capital to be recovered under utility rate setting. However, since the changes above allow one to emit above or below allowance levels (with financial penalties and rewards accordingly), any combustion source owned by a regulated monopoly will be improperly incentivized if it is allowed (or required) to pass those costs (or savings) along to its customers. To avoid, require utility regulators to only allow recovery of that capital required to meet the allowed level of pollution, such that any revenues or costs associated with the purchase or sale of pollution allowances accrue directly to asset owners.
  6. Appoint an independent scientific panel to calculate the societal costs associated with the release of regulated pollutants and use that value to set an “escape valve” on tradeable permit markets. The only possible case in which a tradeable market for pollution reduction would lead to outcomes that are contrary to the public interest is if the calculated cost of compliance in those markets (set by supply and demand of pollution reduction) exceeds the societal cost of pollution; if a ton of pollutant X imposes a $100,000 cost to society, it is socially beneficial to spend $90,000 eliminating it’s release, but if it costs $110,000 to eliminate it’s release, we would be better off simply spending the $100,000 to abate the cost. In order to maximize economic efficiency, we can rely on the fact that the latter number is calculable. Indeed, the National Academy of Sciences has already done just this analysis for most regulated air emissions. Create a commission like this one to annually calculate the cost imposed by all regulated pollutants and use that as an escape valve, such that if a polluter cannot reduce their pollution or procure pollution offsets at a price below that value, they simply pay the calculated amount to the federal government. The government agency that receives this money should be mandated to spend it solely on abating those costs caused by the pollutant in question.
  7. Eliminate NSR. Recall from part 2 that our current environmental policy is shaped by the formulation: pass/fail regulation + input-based standards = grandfathering + NSR. Recall also that NSR (new source review) ensures that pass/fail regulation is not gamed, but in so doing serves to effectively criminalize investments in energy efficiency at any existing, permitted plant. The problems with NSR have to be eliminated, but can only be done if we eliminate the formulation within which NSR exists — which we have done above. We’ve shifted pass/fail regulations to differential rewards and penalties via the use of tradeable permits. We’ve converted input-based standards to output-based standards, so that efficiency can be treated as a pollution control strategy rather than a major modification. And we’ve eliminated grandfathering, by projecting 5 year forward reductions in output-based pollution allowances. The net result is that NSR becomes redundant and can be eliminated.

Next: a final set of policy reforms to address the lengthy list of outmoded laws at federal, state, and municipal levels that act as unwitting barriers to clean energy.