Clean Air and Clear Skies

The Nobel Prize Laureate Friedrich von Hayek once described his discipline, economics, as “the study of the unintended consequences of human action.” The idea that human action generates unanticipated and unintended effects has serious implications for policy makers: one who would propose legislation and regulations must be aware of their likely impact—both intended and unintended—on the incentives of human actors. The latter are often far more significant than the former.

Trade-offs between the costs and benefits of environmental legislation illustrate Hayek’s point. And clean-air legislation in particular provides a case in point. The intended consequence of such legislation as the Clean Air Act is to achieve a significant reduction in smokestack emissions, especially from coal-burning plants that produce electricity. But a major unintended consequence of such legislation has been to increase demand for clean-burning natural gas, causing its price to triple over the last six years from $2 per thousand cubic feet to $7 today. Since June 2000, the run-up in gas prices has cost U.S. consumers over $143.7 billion, according to Industrial Energy Consumers of America, an organization of large industrial gas users. The demand for a clean environment is a reasonable one, but the unintended consequence of legislation to improve environmental quality is to increase the demand for natural gas. Since this increase in demand will most likely outpace increases in supply, the result will be an even more dramatic rise in the price of natural gas in the future.

Recent history suggests why this is true. When Congress amended the Clean Air Act in 1990 to reduce smokestack emissions, electric utilities basically had two options available to them: first, they could have replaced older coal plants with newer, more efficient coal plants that emitted less carbon; second, they could have switched to natural gas. Since the former alternative was far more expensive than the latter, the utilities largely chose to switch to natural gas.

Now the Senate is poised to pass legislation that will lead to the same sort of unintended consequences as the 1990 amendments did. Senate Democrats and Republicans alike are pushing a plan that would require a 90 percent reduction in coal plant emissions of sulfur dioxide, nitrogen oxides and mercury. In addition, the plan would establish binding limits on carbon dioxide equal to 1990 levels.

Why does any of this matter to Rhode Islanders? After all, 98 percent of the Ocean State’s electricity is already generated by natural gas. But what happens to the price of natural gas if states such as Massachusetts, where natural gas provides 30 percent its electrical generation, Connecticut (13.4 percent), New Hampshire, and Vermont (one percent each) shift to natural gas, the most likely response to the proposed Senate plan, since projections for construction of clean-coal plants, with their long lead times and high cost, are little more than wishful thinking? Both industrial and residential consumers of the premium fuel would face sharp price spikes.

There is a reasonable alternative to the Senate plan that makes clean-air regulations more realistic: the president’s “Clear Skies” legislation, which calls for a more reasonable 70 percent cut in emissions of sulfur dioxide, nitrogen oxides and mercury. It would also allow utilities to use the same cap-and-trade system that has reduced sulfur dioxide and nitrogen oxides by about a third since 1990. The goal of the Clear Skies legislation is reachable, because utilities know that such emission-control technology exists.

Of critical importance, the measure would place no mandatory controls on carbon dioxide emissions. Instead the White House is sensibly earmarking $2 billion for research and development on clean-coal technologies over the next decade, including almost $1 billion for construction of an emission-free coal-to-gas power plant, with facilities for safely storing carbon underground. The Administration is also calling on companies to voluntarily reduce carbon dioxide emissions.

The principle that human action leads to unintended consequences leads to the conclusion that Congress should approve the Clear Skies legislation rather than the Senate alternative. At the same time, Congress needs to take every reasonable step it can to stimulate a balanced mix of domestic energy sources. This task is especially urgent for states like ours that are heavily dependent on natural gas.