Santa Clara, CA - A novel approach to greenhouse gas regulation is described in a paper recently published in Energy Policy, titled “A decarbonization strategy for the electricity sector: New-source subsidies”.

Does it make sense to limit emission reductions to a predetermined, politically comprised target?
According to recent global warming simulations, the end-of-century global temperature is expected to rise to levels nearly double what the world can afford to avert catastrophic climate change.  These projections are based on the assumption that “industrialized and developed countries enact every climate policy they have proposed at the point” and not “worst-case” projections.

The cap-and-trade legislation before the US House and Senate would impede attempts to achieve emission reductions beyond the cap target. Author Kenneth Johnson proposes a pragmatic alternative policy approach that continues to minimize emissions within defined limits of cost acceptability. This “best-effort” policy paradigm is embodied by pricing instruments that maintain stable price incentives without imposing an aggregate taxation burden on regulated industries.

The Regulatory Approach
The Energy Policy paper describes a regulatory approach for facilitating expedient decarbonization of the electricity industry by imposing carbon fees and applying the revenue exclusively to subsidize new, low-carbon generation sources. Since there would initially be no “new sources,” fees would be substantially zero at the outset of the program. Nevertheless, the program would immediately create high price incentives for low-carbon capacity expansion. Fees would increase as new, low-carbon sources gain market share, but price competition from a growing, subsidized clean-energy industry would help maintain moderate retail electricity prices. Subsidies would automatically phase out as emitting sources become obsolete.

How it Works
The regulatory mechanism would be similar to a “Refunded Emission Payment” scheme that has been used with success in Sweden to reduce nitrogen-oxide emissions. A similar approach applied to greenhouse gas emissions in the electricity sector would amount to a carbon tax, but with all revenue being returned to the taxed industry in proportion to generation output. The net revenue flows would be similar to carbon trading, with low-emitting sources deriving a net subsidy and high-emitting sources incurring a net loss – although the loss would be much less than a conventional carbon tax. Johnson's proposal goes a step further in minimizing industry costs by only subsidizing new generation capacity (in a manner similar to feed-in tariffs). This would make it possible to create a very high price incentive for new, low-carbon generation (and commensurate disincentive for new high-carbon generation) without imposing high costs on industry or consumers.

Author’s Biography: Kenneth Johnson is an independent climate policy analyst based in Santa Clara, California. He has been collaborating with the Western Environmental Law Center on advocating progressive regulatory climate policy in the context of California's AB 32 legislation and pending federal legislation