Reducing Carbon Emissions Through Consumer Choice

Jan 16, 2007

When it comes to environmental issues, none is more intense than energy policy and the fight over climate change. The Washington State Supreme Court recently waded into this thorny issue, ruling that Seattle City Light could not charge ratepayers for their program to reduce carbon emissions. The ruling demonstrates that if we truly want to reduce carbon emissions in a way that is effective and efficient, we need to make a fundamental change in the way we approach energy distribution.

In Okeson v. City of Seattle, customers of Seattle City Light sued to prevent the utility from passing on the costs of efforts to reduce carbon emissions to ratepayers. Rather than reduce carbon emissions from their own plants, City Light paid others to reduce their emissions. They argued, justifiably, that they could achieve the reduction more cheaply by buying “offsets” from the Washington State Ferries and others.

The court, however, ruled that ratepayers cannot be forced to pay for a program that benefits the general public, not just ratepayers. Ratepayers, they ruled, cannot be forced to pay for programs that are not associated with the delivery of energy to customers.

Ironically, this decision may hurt all ratepayers by increasing their bills if City Light goes ahead with efforts to reduce CO2. All parties in the case agreed that the goal of reducing CO2 emissions was worthwhile.

The majority ruled, however, that City Light could not pay others to “offset” CO2 emissions. They could, on the other hand, directly reduce CO2 emissions at their plants. The legal merits of this position aside, this line of thinking makes it more expensive and difficult to reduce greenhouse gasses.

Economic efficiency is built on encouraging people to do what they are best at, paying others to provide goods and services that they can offer most efficiently. People then trade goods, maximizing general benefit.

The same is true with carbon emissions. If a company can reduce their carbon emissions more cheaply than Seattle City Light, the utility should be free to pay them to do so, rather than paying a higher cost to try and do it themselves. The Supreme Court, however, ruled that City Light must only reduce CO2 itself, which is likely to be more expensive. Even if every ratepayer wanted to reduce CO2, Seattle City Light could only do it in the way that is most expensive.

I will leave the legal merits of the ruling to lawyers, but it demonstrates three things which are true no matter whether you believe climate change is modest or catastrophic.

First, the legislature must look at ways to encourage utilities to sell voluntary green energy credits to consumers. Consumers who want to reduce carbon emissions can already purchase energy from sources that do not emit greenhouse gasses. Unfortunately, utilities have no incentive to promote these programs aggressively because state law prohibits utilities from earning additional profit on these credits. In Oregon, where Green Mountain Energy markets green energy credits and earns revenue for every new customer, they have four times the customers as utilities in Washington.

The recently passed I-937 also puts hurdles in the way of voluntary credits.

Giving utilities a financial incentive to market these programs is an obvious first step. It allows utility customers who want to pay extra to reduce CO2 to do so, without passing on additional costs to other ratepayers.

Second, this case shows the danger of putting environmental decisions in the hands of judges. The courts can only rule on a case as it is presented to them. In the case of Okeson v. City of Seattle, it may have made an entirely appropriate legal judgment.

That decision, however, is unlikely to encourage CO2 reduction or keep electric rates low. While legislators cannot be experts in all issues, they are not bound by the limits of a particular case and can make changes as necessary rather than waiting for an appropriate case to come before them.

Finally, this case demonstrates the limits of a regulated monopoly.

In the absence of consumer choice, monopolies are held to a strict standard of consumer protection. Utilities that desire to achieve other goals (environmental or otherwise) are hamstrung. Providing more consumer choice would give utilities leeway to offer options that provide energy and environmental benefits. In a deregulated market, City Light could have continued to pursue reduction of greenhouse gasses, giving consumers the choice to vote with their feet if they disagreed.

Energy deregulation is a complicated issue, and there are many obstacles, but we should recognize that a deregulated market can provide environmental choices not available in the current system.

Environmental activists have repeatedly turned to judges and top-down government regulations to achieve their goals over the past three decades. As this case shows, a new strategy, one based on voluntary consumer choice is needed or else ratepayers and environmental activists will find themselves paying more and achieving less.