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Can It Work? Economists Grade a Key Part of Obama's Climate Policy

Top economists take a look at a linchpin for President Barack Obama's new climate deal with China and say it can work, with some big "ifs."

It doesn’t sound like much, but the “Clean Power Plan Proposed Rule” is a linchpin of the ambitious U.S.-China climate goals announced this week. It’s also a lightning rod for critics and supporters of President Barack Obama’s climate policies. So far 1.5 million comments about it have been filed — and it’s still more than two weeks before the Dec. 1 deadline for feedback.

Rising above the din are 13 economists and legal experts from top universities — Berkeley, University of Chicago, U.C. Davis, Harvard, MIT, Stanford and Yale — who published their take in this week’s issue of the journal Science.

The plan can work, and cost effectively, if states use its flexibility to create regional carbon trading programs, or even a national one, the professors said. But whether the states will act, the economists said, “is an open question."

Overall, the plan is positive and “an important step for national climate change policy,” Berkeley professor Meredith Fowlie, one of three lead authors, tells It can be made more cost effective, the professors said, if states work together in regional carbon trading programs, or even a national program, where states heavy on carbon can pay states low on carbon to take some of their emissions. In the long run, this cap-and-trade system can bring emissions down across the country, the experts said.

The proposed rule boils down to this: By 2030, states would have to reduce carbon dioxide emissions from power plants by 30 percent below 2005 levels.

And since those plants account for 40 percent of all U.S. CO2 emissions, the plan could make or break the new U.S.-China goals: by 2025, U.S. emissions would be at least 26 percent below 2005 levels — tightening the previous goal of a 17 percent cut by 2020. China would boost renewable energy to make sure its CO2 emissions peak by 2030, the first time it has accepted such a cap.

Boosted by a Supreme Court ruling that it had the authority to regulate CO2 under the Clean Air Act, the Environmental Protection Agency in June formalized the proposed rule and started taking comments. The topic of power plants is a hot one: The EPA record for comments is 2.7 million, set earlier this year on proposed carbon pollution standards for new power plants.

Critics include the U.S. Chamber of Commerce and the coal industry, which would see power plants quicken their shift away from coal, the dirtiest fossil fuel.

The plan “would severely harm the economy, result in job loss, and increase electricity prices,” argues Betsy Monseu, CEO of the American Coal Council.

Emboldened by the recent election results, Republicans are poised to use those arguments in attacking Obama's policies. Sen. Mitch McConnell, representing coal producer Kentucky and likely to become Senate majority leader next session, was quick to blast the U.S.-China goals as requiring "the Chinese to do nothing at all for 16 years, while these carbon emission regulations are creating havoc in my state and other states across the country.”

The potential costs/benefits are a key area of disagreement. A central EPA estimate puts health and climate benefits in 2030 at $76 billion, with compliance costs at $9 billion — an estimate that the university experts consider indicative of “positive” net benefits, Fowlie says.

"Environmental rules are constant targets for litigation. That is the nature of the beast and surely will be again on this rule."

On the other hand, a study sponsored by the U.S. Chamber of Commerce concluded the proposed rule would, by 2030, cause the loss of 224,000 jobs annually, increase electricity costs by $289 billion, and lower household incomes by $586 billion.

Stanford energy law professor Michael Wara, another author of the analysis out Thursday, says the estimates “all have issues” because the timeframe is still a decade out. Still, he adds, the EPA seems closer to reality, in part because it has to think about surviving future legal challenges. The Chamber-sponsored study, he says, seems “quite speculative” with some assumptions that drive the costs up.

Those divergent viewpoints are what the EPA is weighing, but in the long run the rise or fall of the “Clean Power Plan Proposed Rule” could depend on other factors.

“If I had to guess I’d say this is going to come down to politics,” says Wara, “to the willingness of Obama to veto” Republican attempts to defund the EPA effort. That, he adds, “and the legal battles.”

While the Supreme Court upheld EPA’s authority to use the Clean Air Act to regulate CO2, the next battle is over whether the EPA is overreaching in how it accomplishes that.

“Environmental rules are constant targets for litigation,” says Ray Kopp, director of the Center for Climate and Electricity Policy at Resources for the Future, a think tank that has brought together experts with divergent views on the plan. “That is the nature of the beast and surely will be again on this rule.”

One of those experts is Jeff Holmstead, who headed the EPA’s air and radiation office under President George W. Bush. Now a lawyer representing power companies, Holmstead predicts the rule will be overturned.

The Supreme Court “has also made it clear that EPA can't just do whatever it wants,” he says. “It can only impose regulations that are based on the specific provisions” of the Clean Air Act, and those have “nothing to do with what EPA is now proposing.”

Wara is among those who see that possibility as well, especially since the earlier Supreme Court ruling included comments by conservative justices warning the EPA not to “overreach.”

“Many smart D.C. lawyers are going to try to show that EPA is stretching beyond the confines of the law,” he says, “and they could win.”