This blog was written by John D. Wilson, former Deputy Director for Regulatory Policy at the Southern Alliance for Clean Energy.

Guest Blog | November 18, 2011 | Climate Change

This blog is one of a series of posts about how the “power of free markets” may be able to help solve climate change. You can view the rest of the posts here.

Former Congressman Bob Inglis’ essay calls for conservatives to believe in the “power of free markets” and support a tax swap that creates a carbon tax because operators of power plants should be accountable for their actions. Inglis writes,

Because conservatives know that there’s no such thing as a free lunch, we know that we’re paying for those deaths and illnesses. We pay for them through government programs for the poor and elderly, and when the costs of the uninsured are shifted onto the insured. We pay all right, but just not at the electric meter.

Coincidentally, in the days between the publication of Bob Inglis’ essays in USAToday and then Bloomberg Businessweek, economists Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus emphasized this point with dramatic findings.

Considering economic impacts from air pollution alone, they found the economic damages associated with the health effects of coal-fired electric generation “range from 0.8 to 5.6 times value added.” As summarized by ThinkProgress’ Brad Johnson, “In other words, instead of being ‘cheap’ and ‘affordable,’ coal is actually the costliest fuel for electricity.”

The barriers to action are broader than economics

Energy policy decisions aren’t just a simple matter of comparing the benefits of burning coal with the costs, even if we account for health impacts and dig deeply into the nuances of “free market climate policies.” The decisions carry a greater weight because today’s investment in polluting technology makes tomorrow’s emissions all but inevitable. As the International Energy Agency put it in describing the implications of “locked-in infrastructure,”

“Delaying action is a false economy: for every $1 of investment in cleaner technology that is avoided in the power sector before 2020, an additional $4.30 would need to be spent after 2020 to compensate for the increased emissions.”

Yesterday,  I described the role of utility regulation in giving “locked-in infrastructure” like coal plants a financial advantage not unlike a subsidy over energy efficiency and renewable energy resources. In addition to direct grants, regulators confer financial benefits by requiring that customers guarantee cost recovery for utilities, even for surplus power plants. And when energy developers are left unregulated, as Paul Krugman observes, “that special treatment … makes a mockery of free-market principles.”

Recently, David Roberts of Grist put the subsidy “debate” in a context that recognizes that, “To switch from fossil fuels to renewable energy … is to build a new world.”

The simple fact is that modern industrial society was built by, around, and for fossil fuels. The assumption of cheap, concentrated sources of energy is embedded into all of our institutions and practices. Maintaining our status quo industrial infrastructure — a cost that absolutely dwarfs direct subsidies to fossil fuels — is an investment in fossil-fuel dominance.

Climate action isn’t too expensive, what is too expensive is taking action and paying for the status quo, such as the retired coal plant, as well. Paying for good and bad futures all at once is pretty pricey.

“What if we believed in the power of free markets?“ Is the solution to climate change simply a matter of connecting price signals with consumers and ending energy subsidies?

I think not. But not because I reject “free markets.”

Rather it is because such a large, ambitious economic and environmental endeavor cannot truly be said to have a “win-win” solution for the owners of coal plants, coal mines, and tar sands development. I’m hardly the first to recognize that the owners of fossil-fuel infrastructure are not interested in going away quietly while new industries take their place. But the cost of paying them off won’t really look like a “free market” solution to Bob Inglis.

The “free market” solution isn’t just a fight against the “status quo.” While SACE’s objectives of certainty in greenhouse gas emission reductions and flexibility in how those reductions are achieved is a direct challenge to the energy sector “status quo,” our objectives are not a fully developed economic roadmap.

What will the national security implications be of creating an “free market” for energy? How fair will carbon taxes (or cap-and-trade revenues) be? What kind of jobs will be created, and who will fill them? SACE recognizes that when choosing the “best” policy, it is necessary to struggle with diverse questions that stray widely across the economy, far from the science and economics of global climate change.

Engaging deeply with people who have urgent needs that offer direction to answer these diverse questions will help us build the strength and unity we need to take on powerful interests who have something to lose. Economists understand that solving climate change can be achieved at not only an acceptable cost, but at a necessary cost. Yet their economic models do not measure the fight to achieve what is necessary.

Choosing solutions means picking fights (carefully)

It is necessary that we fight to get prices right. It is time to restart the federal debate on a comprehensive strategy to send the right price signals to drive accountability for greenhouse gas pollution. And because we cannot reduce greenhouse gas emissions enough using only narrowly targeted regulations, those price signals will affect emissions … and they will affect people deeply.

Dealing with those effects means that elected officials will need bold ideas that draw together not just environmental solutions but also engage a transformation of our economy. The best market-based solution may not be the one that reduces greenhouse gas emissions most smoothly, but surely it is the one that satisfies the broadest concerns about our economy and our future.

It is necessary that we solve market problems that foster wasteful energy consumption. Today, too many people lack the opportunity to make informed choices about energy use.

Even though the United States is a world leader in setting energy efficiency standards for appliances and implementing energy efficient building codes, there are areas where we fall short, and states that have failed to implement energy efficient building codes.

Utilities know more about connecting people with energy than nearly anyone, and we must reward utilities that actively work in partnership with government and private companies to help energy users avoid waste.

It is necessary that we accelerate energy innovation, which means federal and state support for R&D to bring new energy technologies to market. We can’t leave innovation in the lab, however, and must support their transition into the marketplace.

It is necessary that we reform basic concepts of utility regulation. Customers are unknowingly providing financial guarantees that the status quo will be maintained. Perhaps this super-subsidy is the biggest obstacle to climate action.

In fact, subsidies can be valuable tools for our strategy because they illuminate the opposition and clarify the fight. Because the status quo is incompatible with a better future, it is necessary to identify which subsidies cannot remain if we are to guarantee reductions in greenhouse gas emissions.

But above all, it is necessary to act quickly, because the costs of climate change are mounting, and that free lunch won’t be coming.