How Obama’s new carbon rules could raise your electric bill

Give him credit for trying.

With Congress locked in a state of disputatious paralysis, President Obama has once again resorted to executive action to address a national problem. New rules proposed by the Environmental Protection Agency will significantly reduce carbon emissions, marking a first step toward seriously addressing climate change by the world’s leading economy.

The new rules will remake the U.S. power sector, however, which means there will be winners and losers. Consumers could end up in both categories. An EPA analysis of the complex regulation claims the typical consumer's electricity bill will fall by 8%, on average, by 2030. Yet the same analysis predicts the cost of producing electricity will rise. The savings to consumers, supposedly, will come from greater efficiency and new conservation methods that will lead to lower energy usage overall, thereby lowering their out-of-pocket spending on electricity.

That could happen, but the EPA projections rely on lots of variables and depend to a large degree on cheap and abundant natural gas, which could become more costly than expected if demand picks up and U.S. exports rise. “If this is going to result in a much greater pace of coal plant retirements than we’ve already seen, then certainly there will be upward pressure on gas prices,” says Paul Flemming of research firm ESAI Power. And Obama’s disproved claim about his health-reform plan — “if you like your healthcare plan, you can keep it” — is a fresh reminder that the promises of government officials don’t always pan out.

The EPA law is meant to reduce the emission of harmful greenhouse gases associated with health problems such as respiratory and cardiovascular conditions, along with rising global temperatures. To do that, the rule will require power plants to cut carbon emissions by 30%, compared with 2005 levels. The rule, which won’t go into effect for at least a year and could change as interest groups lobby for modifications, would give states considerable leeway in terms of how they meet the targets — a decentralized approach that has drawn praise from some energy analysts.

A misleading claim?

But the idea that consumers won’t feel any pain is probably misleading. For starters, the rule will put a heavy burden on states that rely most heavily on coal for electricity, including West Virginia, Kentucky, Indiana, Missouri, Wyoming and Utah. Coal produces the most carbon when burned, so states heavily dependent on coal will either have to build expensive new power plants relying on other fuels, or find other ways to lower emissions. To balance the burden, the rule sets lower reduction targets for coal-dependent states, but compliance will still be costly. Those costs will inevitably be passed on to consumers, whether through taxes or fees, higher electricity rates or some other mechanism.

Other states have already weaned themselves off coal or never depended on it much in the first place, including most New England and West Coast states, Nevada, Idaho, Mississippi, Alaska and Hawaii. “States that have already done that work, or are blessed with hydropower, are not going to experience a big increase in electricity prices,” says Adele Morris of the Brookings Institution. Although adjustments in those states will be relatively minor, some of them already have high electricity costs, on account of expensive upgrades already made.

In the rest of the states, the direction of electricity rates will depend to a large extent on market forces and consumer behavior. President Obama is a big fan of renewable energy sources such as wind and solar power, but those technologies are still expensive relative to their output, and aren’t economically viable in all places. (Wind power doesn’t work very well in hilly locales such as Vermont, or crowded places including Los Angeles, and solar power requires more sunlight than some areas get.)

In many states, the most cost-effective alternative to coal will be natural gas, which America now produces in abundance, thanks to new hydraulic fracturing drilling technology. But a surge in demand for anything always pushes up prices, unless supply rises by more. So the question is whether U.S. gas production — now the largest in the world, after Russia — will keep pace with rising demand, especially as exports of natural gas take off. The U.S. government must approve some gas exports, but plans are already underway to build several costly export terminals, reflecting a long-term commitment to shipping gas overseas.

A surprise price shock

Some analysts think there’s so much gas in the U.S. that prices will stay flat for years. But a surprise energy supply shock occurred this past winter when the cost of propane skyrocketed, and gas prices rose by more than expected as frigid temperatures boosted demand and supplies fell short. Some business groups would like to see a limit on gas exports to assure supplies remain abundant here at home, and prices low.

In its 376-page analysis of the new rule’s impact, the EPA explained how conservation efforts could help lower costs for consumers. The best way to cut down on carbon emissions is to simply burn less carbon, which will give states new incentives to conserve. There could be tax rebates or other inducements for households to install more-efficient lighting and appliances or cut back in other ways. If the money saved through cutbacks exceeds price increases, consumers will be better off, on balance.

Even if the new carbon limits do raise prices for consumers, they might still represent prudent policy. Economists generally accept the idea that there are important “social costs” that can’t be measured as easily as a line on a utility bill, such as lost productivity or quality of life degradations due to illness. So less carbon in the air could benefit millions. Voters have a right to know the cost of progress, however, and they’ve rightfully learned to doubt what government officials tell them.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.