Because Americans and other people throughout the world are beginning to understand the importance of preserving our natural environment, a movement is afoot to reduce greenhouse gas emissions. The Indiana Municipal Power Agency supports that movement and has taken strides in reducing emissions since its inception in 1983. With careful planning on both economic and technological forefronts, IMPA believes the electric industry can continue to reduce emissions while mitigating costs to consumers.

In the political realm, the need to act has become even more urgent. Legislation is being discussed to reduce carbon dioxide emissions in years to come. Currently, Congress is considering an economic penalty on coal-fired generation facilities that will require the electric utility industry to take measures to reduce emissions.

The most likely type of economic penalty is a cap-and-trade system requiring 100 percent allowance auctions. Under this process, Congress will establish a baseline carbon dioxide emissions level and slowly decrease or cap the allowable level over time. In order to decrease carbon dioxide emissions, utilities would have to find ways to decompose or sequester carbon dioxide emissions or replace carbon emitting generation with resources that do not emit carbon dioxide. Generation resources that do not emit carbon dioxide, such as wind, solar and nuclear generation, are generally much more expensive than generation fueled with coal or other fossil fuels.

The second part of the cap-and-trade process would require electric utilities to own one “allowance” for each ton of carbon dioxide they emit. Available allowances would decline over time, in concert with the reduction in carbon dioxide emissions cap. Congress is currently considering whether these allowances should be distributed free of charge to utilities based on the levels of carbon dioxide emissions from existing and currently planned generation, or whether utilities should be required to purchase allowances. Independent studies have shown that a requirement to purchase allowances could raise the cost of electricity in Indiana and other states dependent on coal-fired generation by more than 40 percent.

Since the Clean Air Act Amendments of 1990, cap-and-trade programs have been successful in effecting significant reductions in sulfur dioxide (SO2) and nitrous oxide (NOx) emissions without imposing undue cost increases on Midwestern electricity customers. IMPA strongly supports a cap-and-trade option that distributes carbon dioxide allowances to utilities without imposing additional costs on utilities or customers. This approach will give the electric industry time to develop sound technology or transition to other types of power generation while ensuring that businesses can continue to operate and individuals are not penalized for keeping the lights on.