Speaking at Resources for the Future this afternoon, Kathleen McGinty, Secretary of the Pennsylvania Department of Environmental Protection, outlined an “all things in moderation” approach to managing carbon, looking at the relative benefits and challenges of (1) a carbon tax, (2) cap-and-trade programs, and (3) corn-based ethanol.

Secretary McGinty began by underlining the “essential role” for a carbon tax in driving interest and investment from Wall Street, but noted that, unless the tax is set high enough to overcome the inherent advantages of the wholesale electricity providers, that it will be ineffective. McGinty described the equally “essential” need for a cap-and-trade program, which is a “fundamental building block” for carbon management, but expressed concerns about these programs’ capacity to resolve the climate crisis, as the world’s carbon demand quickly escalates in the U.S., China, and elsewhere.

Using Pennsylvania as an example, McGinty described three advantages of legacy electricity generators, which would have to be recognized in the price of carbon under a tax or cap-and-trade program.

• The first, the Reliability Pricing Market (RPM), a direct add-on to consumer electricity bills, was designed to support the development of new generation capacity, but which has effectively handed existing facilities in Pennsylvania more than $2 billion in additional assets (in 2007) without requiring follow-up construction of new facilities.

• The second, the locational marginal price (LMP), is approach that sets the price of all units of a commodity at the cost of bringing the “last unit” into the market. In Pennsylvania, where more expensive natural gas is used to meet demand, the cost of electricity from coal may be raised to the price of natural gas, which is generally the “last unit” in the market.

• The third advantage is the discouragement of awarding long term contracts (LTK) to clean generation facilities, which creates a significant barrier to the development of new energy projects, since there is no guarantee of financing to support the facility.

Returning to the theme of “moderation,” McGinty acknowledged the shift in popular support towards cellulosic ethanol, but argued that corn-based ethanol “shouldn’t be thrown out completely,” based on its environmental and energy security benefits. McGinty noted that significant improvements in energy balance can be achieved by growing corn in a no-till system combined with cover cropping.

McGinty concluded by urging the audience to “rethink” the current energy paradigm and to support a broad array of alternatives, so that time is not lost while researchers seek to identify “ever more environmental friendly” solutions to the climate change challenge.

For further information about this topic, please contact Akin Gump.