Did the Federal Government Just Put a Price on Carbon?

Carbon dioxide emissions costs have been possibly the great ‘unpriced externality’ for the energy business for more than a decade.

Companies have resisted complex and cumbersome government plans only to end up with regional patchworks and failed private pricing mechanisms for the greenhouse gas that scientists have held most directly responsible for the lion’s share of human-contributed global warming. Those price signals have largely been left out of forward planning by utilities, oil companies, appliance manufacturers and by the investors reviewing the futures of those companies.

Climate change action has been a tenet of the current Obama administration in the face of intransigence by Congress, but the federal government has generally shied from the kind of high-profile carbon pricing that might require legislative action or create unintentional commitments out of line with international agreements, trade policy or economic growth goals. But when President Obama promised to use the broad powers of regulatory agencies in a high-profile speech earlier this year, it became quickly apparent that to set a standard for carbon emissions reductions and evaluate its impact on regulated companies, there needs to be a price.

Enter the “microwave rule.”

Perhaps only a bureaucrat could love the idea of using a review of microwave oven standards as the thin end of a government wedge to price out and eventually constrain the growth of carbon dioxide emissions held responsible for some of the most sweeping changes in human history. To go from apocalyptic visions to a few lines of regulatory government-speak buried deep inside an Office of Management and Budget document requires a dizzying shift in perspective, but yesterday the new US Secretary of Energy Ernie Moniz implied to a New York audience that it is in the new “microwave rule” his agency is consulting on for the OMB that the US government might finally choose a price for carbon.

Moniz, speaking at Columbia University’s new Center on Global Energy Policy at the School of International and Public Affairs, backed into the carbon price discussion. Moniz’ agency is working with OMB on “speeding appliance energy efficiency” and is preparing to issue a new rule on microwave ovens. Moniz noted almost in passing that the microwave rule will include the first “interagency panel price on carbon” of $36 a ton.

Perhaps without fully intending to, the Obama administration finally stuck a stake in the ground on one of the biggest issues the presidency has faced, and done it in a way that challenging it will require lengthy and complex legal actions rather than public legislative debate. Once a body like an interagency panel comes up with a rule and it is applied, precedent kicks in on future rules. The likely outcome of a challenge to the government’s price is a deviation from it, not a complete abandonment of it.

Given the vacuum of good or credible alternatives, it is easy to see how analysts, corporate managers and regulators could adopt the federal government guidance without much refinement. Implications for companies with large emissions profiles, for engineering and manufacturing standards, for financing of crucial infrastructure are immense.

Get ready to hear a lot more about the “microwave rule.”