The Environmental Protection Agency (EPA) today moved forward with a campaign pledge of President Obama’s and proposed new emission standards that would effectively end the era of cheap coal power in the United States. The proposed rule would tighten emission standards on carbon dioxide to a limit that would be nearly impossible for coal plants to meet unless they are fitted with expensive carbon control equipment. Here’s a story on the EPA’s proposal.
Three points I would like to make from an economic perspective about the proposed rule: (1) any rule that increases the cost of electricity, a basic household staple, is regressive. The impact of these costs will be felt most severely by the lowest income earners; (2) higher electricity costs will in turn lead to higher cost of goods as electricity is a cost of production for nearly every good produced. This rule is inflationary, which itself is regressive; (3) the rule addresses an issue of negative externalities from carbon use because a greater share of the costs of coal will now be borne by the private parties involved in the transaction. In other words, rather than society paying for the costs associated with the negative externalities of coal pollution – health care costs come to mind – while we all eat up incredibly inexpensive coal power, this EPA rule moves us toward a cost structure where the consumers of coal power bare a greater burden of the costs as the new coal plants will be more expensive to operate (and I predict that soon existing plants will be brought under these same standards), and these expenses will be passed along in your utility bills.
For my two cents, if we are going to control carbon dioxide emissions, this is the way to go about it. I view cap and trade as a game to enrich politicians, NGOs and corporations, and Pigovian taxes – a tax levied on any activity that generates negative externalities – as simply letting corporations pay their way out of responsibility for cleaning up the externality (pollution in this case). I prefer the EPA’s proposed method over these first two as it the most direct, the most certain, and the least likely to create additional market distortions.