Will the US seize the high ground in curbing emissions?

The timing seems right for Barack Obama's Clean Power Plan

This article is reprinted from Knowledge@Wharton, the online business analysis journal of the Wharton School of the University of Pennsylvania, which holds the copyright to this content.

The Clean Power Plan US President Barack Obama announced on August 3 tackles the problem of climate change on several fronts. Broadly, it aims to cut carbon emissions from power plants and energy stations across the US by 32% of 2005 levels by 2030.

It directly targets carbon emissions from power plants, which are the worst offenders; and it allows states flexibility in achieving the targets, among other features.

The plan is bolstered by the fact that several large corporations have become vocal advocates of curbing carbon emissions, and so have many in the millennial generation, which now outnumbers baby boomers.

Yet, Obama's plan faces the prospect of legal and political challenges. Owners of power plants are sure to protest, especially coal-fired plants and others that need to invest in emissions controls or switch to cleaner fuels.

If the proposal goes through and becomes law, the US could try to reclaim a leadership role in the global fight against greenhouse gas emissions. That would be significant in the run-up to the UN climate change conference set for November-December this year in Paris.

"The general cry of alarm that [firms] are all going to be put out of business [by the regulations] is not going to happen," says Wharton professor of legal studies and business ethics Eric W. Orts, who is also director of the Wharton/Penn Initiative for Global Environmental Leadership. He expects the Clean Power Plan to survive any legal challenges.

Orts notes that the regulations will have the effect of "changing the game" in the pursuit of clean energy by putting in place permanent incentives, rather than temporary subsidies, for solar and wind energy producers.

"The investments will have a longer-term pay-off horizon that you could rely on, and that should attract investments," Orts says.

The Clean Power Plan's goals are "eminently achievable", according to Wharton professor of legal studies and business ethics Sarah E. Light: "They are big and bold, but they need to be big and bold."

Light notes that in recorded history, 14 of the past 15 years were the warmest, with 2014 being the hottest. "Climate change is an urgent problem with potential health risks and major costs," she says. "If we don't act now, it will become more expensive to address some of these emissions problems [in later years]."

In tackling climate change, a mix of several approaches is required, says Orts, referencing a recent paper, "The New Insider Trading: Environmental Markets within the Firm", which Light published in the Stanford Environmental Law Journal on the subject.

The general cry of alarm that [firms] are all going to be put out of business [by the regulations] is not going to happen

ERIC W. ORTS

According to Light, "No single magic bullet exists", adding that measures are required at multiple levels – federal, international, state, regional and local – to reduce greenhouse gas emissions.

"That being said, this is the big one," Light says of the Clean Power Plan's focus on electricity generation, adding that power plants comprise the single largest portion of greenhouse gas emissions, followed by the transportation sector.

She notes that the Obama administration has already addressed emissions by the transportation sector with higher fuel economy standards for cars, light duty vehicles and trucks.

In addition to cutting carbon pollution, the plan aims to lower by 2030 sulphur dioxide pollution from power plants by 90% compared with 2005 levels, and emissions of nitrogen oxides by 72% during the same period.

 A long-term commitment

The long-term commitment to curbing greenhouse gas emissions will help position the US "as a leader" in the forthcoming UN climate change meeting in Paris, says Light.

She notes that the failure of the US to ratify the 1997 Kyoto Protocol of the UN "pushed the US off of the world stage" in being a leader in combating climate change. "The [Clean Power Plan] puts us back, front and centre."

In that context, Light sees the significance of the US and China reaching an agreement last November on climate change. She says that China has surpassed the US as the single largest contributor of greenhouse gas emissions, though at a per capita level, US levels are higher than those for China.

Between 2005 and 2013, the US has cut its greenhouse gas emissions by 9%, Light says, citing the latest available data. Much of that progress is because of a boom in the natural gas industry in the US; natural gas is a cleaner fuel than coal, she adds.

 Flexibility for the states

Going forward, the Clean Air Plan could accelerate US efforts in emissions control. According to Light, two big enablers in the plan will be the flexibility it affords states and the so-called "building blocks" proposed by the Environmental Protection Agency (EPA), which will implement the plan.

The three building blocks are improved efficiency at power plants; shifting generation from higher-emitting coal to lower-emitting natural gas power plants, and shifting generation to zero-emitting renewables.

States will get flexibility in choosing between demand reduction programs, a switch to renewable energy and the use of an interstate emissions trading system, says Light. She notes that the plan recognises that electricity generation is interconnected and states do not operate as islands.

States could create their own emissions trading systems or plug into existing programs such as the Regional Greenhouse Gas Initiative (a consortium of states in the north-east and the mid-Atlantic) or they could create their own regional cap-and-trade systems, says Light.

"This [plan] is a market-based system that guarantees an overall cap on the amount of pollution, but gives participating states or firms the flexibility in how to reduce [emissions]."

Light explains how the cap-and-trade mechanism would work: Regulators would set an overall cap on pollution – water, air or greenhouse gas emissions – and then allocate allowances for emitters to emit a certain amount of the pollutant within a specified area.

Parties (or emitters) within the area can trade their allowances among themselves. If it is more expensive for a polluter to reduce pollution, it could hold on to the allowance. If it is cheaper to reduce pollution, the emitter could reduce its pollution and sell the allowance to another party that needs it. Over time, the overall cap will be progressively lowered.

 Support from the private sector

"This is not going to shock the private sector," Light says of the plan. "The private sector already understands that carbon regulation is coming and is something it needs to take into account."

Light notes that at the beginning of August, 13 major global firms including Microsoft, Alcoa, Bank of America, Berkshire Hathaway and General Motors pledged investments totalling US$140 billion in low-carbon technologies and to develop 1600 megawatts of clean energy.

She also notes that in May, major oil companies including Shell, BP and Total wrote to the UN Framework Convention on Climate Change, requesting that carbon pricing be adopted at the forthcoming Paris meeting.

According to Orts, though the US Chamber of Commerce and several oil and coal companies oppose the Clean Power Plan, "it is not true that [all] business is against it". He points to supporters of the plan such as Nestle, eBay, Mars, Northface, Timberland, Adidas, Unilever, General Mills, Gap and Levi Strauss.

'The private sector already understands that carbon regulation is coming and it is something it needs to take in to account'

- SARAH E.LIGHT

Of course, the Clean Air Plan will entail costs for some polluters, Orts notes. "Almost every time when a serious anti-pollution regulation is proposed or goes into effect, you are going to hurt somebody," he says.

That being said, he points out that in formulating the plan during the past two years, the EPA has consulted with environmentalists, public utilities and businesses.

Shifting demographics

On the timing of Obama's announcement, "it seems like the stars are aligning", says Orts. He notes that Pope Francis, who is scheduled to visit the US in September, has spoken strongly on combating climate change. On the market front, the cost of renewable energy has fallen significantly in recent years, making it more affordable for homeowners to switch from conventional energy sources, he says.

Light adds that new business models allow homeowners to lease solar panels, and pay for them from the resulting energy savings.

Orts believes that even as the Obama plan faces opposition from political rivals, longer term demographic changes will drive the shift to cleaner fuels.

"The millennials get it and don't think it is a debatable issue," he says. "The demographics are shifting on this."