Kilowatt-hour tax is fairest approach

By Jim Rogers, Duke Energy Corp.

The climate change debate has been dramatized in movies, on Hollywood’s red carpets, and in documentaries featuring melting ice caps. The collective effect is extraordinary, and positive. America now stands ready to address one of its toughest challenges since the industrial revolution—decarbonizing our energy supply and economy. Now the hard work begins.

I strongly support federal legislation to create a mandatory and declining national cap on carbon dioxide (CO2) and other greenhouse gases, with a target to reduce these emissions by 60% to 80% by 2050. I also applaud Sens. Joseph Lieberman (I-Conn.), John Warner (R-Va.), and many of their colleagues for their dedication to advancing climate legislation in Congress. We need both substantial and immediate investment in the research, development, and deployment of technology—and straightforward regulation to address this major ecological problem.

The Lieberman-Warner climate bill correctly takes an economy-wide approach by capping CO2 and other greenhouse gas emissions. Unfortunately, the approach used to meet that cap requires companies to pay for current CO2 emissions using auctions. This is misguided in two ways:

  • First, it undermines the primary objectives of a cap-and-trade system, which are to put a declining cap on emissions, set a price for CO2, and provide a transition mechanism for those adversely impacted by the cap. It significantly erodes the ability to provide a smooth transition for consumers who depend on electricity with a large carbon footprint.
  • Second, it proposes to raise funds for a variety of purposes unrelated to developing technology solutions. Some politicians have even called for using the funds for a middle-class tax reduction. Without new technologies, we have no hope of achieving our carbon-reduction targets. The funding of technology should be pursued independent of CO2 regulation under a cap-and-trade system.

Warning: Rate shocks ahead

We should be clear: An auction of allowances is a carbon tax. Lieberman-Warner gives electric utilities in coal-dependent states no choice but to buy a substantial number of allowances from day one simply to keep their customers’ lights on. This would result in unfairly placing the cost of addressing climate change on the backs of consumers in the 25 states that depend on coal for more than 50% percent of their electricity.

Our customers’ power rates in the Carolinas, Indiana, Ohio, and Kentucky would rise by 13% to 35% when the legislation takes effect in 2012, based on a $30 emission allowance price. Other states across the Great Plains, Midwest, and Southeast would see similar increases.

This rate shock may result in consumers demanding a reversal of efforts to address climate change, a result our environment cannot afford. Some legislators are even calling for a full auction of allowances, which would punish these consumers even more and increase rates in these regions between 30% and 63%.

In addition, these same consumers are going to have to pay billions of dollars when existing power plant fleets are replaced or retrofitted as new technology becomes available. This results in an unfair “double hit” to consumers in states that depend on coal.

While rhetoric to “punish polluters” may be convenient in some circles, it ignores the fact that businesses and families will be the ones punished by rate shock. Such rhetoric also fails to acknowledge why coal plants were built in the first place.

Coal: from solution to problem

Building coal plants was a key part of our energy policy in the 1960s and 1970s. The 1974 Arab oil embargo pushed our country toward energy independence and discouraged the use of oil in power plants. The federal Fuel Use Act of 1978 prohibited using natural gas for new power plants until its repeal in 1985. Three Mile Island stopped the nuclear industry in its tracks in 1979.

The fact is that electric utilities were encouraged—and in many cases, directed—to build coal plants to meet customer demand. These decisions occurred decades before any widespread concern about carbon dioxide and climate change.

Finding ways to reduce CO2 has been on my agenda since the beginning of the decade. It’s time to move, but we must move toward solutions that bridge the gap from today’s technological ideas to tomorrow’s commercial solutions. I believe that funding technology is the key to moving to a low-carbon economy.

A fair tax

A more fair and transparent way to fund R&D might be a surcharge on every kilowatt-hour of electricity sold in America. A three-tenths of a cent surcharge per kilowatt-hour would raise about $11 billion annually and cause minimal rate impact. This compares to about $1.38 billion budgeted for energy research and development by the U.S. Department of Energy in 2008.

This substantial injection of capital would advance technology across the board—in energy efficiency, renewable energy, nuclear, natural gas, clean coal, and carbon sequestration—and benefit every consumer of electricity in the nation. Under this approach, customers with higher electric rates would pay a lower percentage of their bill to support technology development, while coal-dependent customers with lower rates would pay a higher percentage of their bill for these developments.

Addressing climate change should not be a partisan issue splitting Democrats and Republicans. We need to follow the example of the Clean Air Act and other major environmental legislation, which passed with broad bipartisan support. We need to embrace the politics of possibilities rather than the politics of limitations or punishment.

Jim Rogers is chairman, president, and CEO of Duke Energy Corp.