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Grabbing the Carbon Elephant

Opinion column for Energy Markets
Paul Anderson
Chairman and CEO
Duke Energy

The energy sector is at crossroads on the issue of global climate change. And if we don’t take action to shape public policy others will do it without us.

Today, few scientists disagree that the climate is changing, though there is much debate about the cause and effect. Nevertheless, there is general agreement that climate change is likely being influenced by human activity—primarily, by the use of fossil fuels that emit greenhouse gases like carbon dioxide.

Whatever the ultimate outcome of the scientific debate, reducing greenhouse gas emissions has become a worldwide political and social imperative—and governments at various levels are reacting.

Much of the developed world is already addressing this issue through the Kyoto Protocol. In the U.S., six states have enacted climate change legislation, and others are considering following suit.

We can’t afford a patchwork of inconsistent state or local regulations that will complicate and increase the cost of compliance. But a patchwork is exactly what we are getting. Our industry would be far better served by a uniform federal approach.

That’s why I believe we must be proactive on the issue of global climate change. We can no longer ignore the elephant in the room. From a business standpoint, it makes sense to advocate a federal policy approach that addresses the issue in an equitable, efficient manner.

What we need is an economy-wide solution that provides incentives for companies and individual consumers alike to reduce the carbon they emit from all sources.

The best approach to drive these reductions—and the technological innovations that will help achieve them—is a broad-based carbon tax, which addresses carbon dioxide emissions from all sectors of the economy, including transportation, manufacturing and power generation. Here’s why:

A well-crafted carbon tax that starts at a modest rate and increases gradually and predictably over time can establish incentives throughout the U.S. economy to reduce carbon dioxide emissions with minimal disruption. First, it would provide incentives for everyone to conserve. Second, it would promote higher utilization of existing power plants that are low emitters of carbon and encourage low-carbon fuel choices for the future. And third, it would encourage the development of new technologies.

A carbon tax would allow us to share the cost of reducing greenhouse gas emissions across all sectors of the economy—and minimize the disruption of any one area.

An economy-wide carbon tax is the least prescriptive policy approach as it does not mandate reductions in any one sector. Compared to other market-based approaches, such as “cap-and-trade” policies, a carbon tax provides greater certainty regarding cost impacts. A carbon tax would not mandate targeted reductions from one sector or another, but would instead send economic signals that enable businesses and individuals to make informed decisions. For this reason, many economic experts believe that a carbon tax is more efficient than a cap-and-trade policy for addressing climate change over the long-term.

To be clear, adoption of a carbon tax need not increase the overall tax burden—instead, revenues from a carbon tax could support reductions in inefficient existing taxes on productive labor and investment.

And even if climate change turns out to be less of a problem than many might think, a carbon tax is a “no regrets” policy that will result in lower overall air emissions and the benefits of greater energy efficiency.

Why would the CEO of a large energy company advocate less energy consumption? Because it’s important to take the long view on environmental as well as economic issues.

And it’s also where my faith in American innovation comes in. A mandate to benefit the environment will spur the kind of technology innovation that we saw in the last century. Innovation that propelled us to become the world’s leading economy. Set the right goals and Americans can and will lead the way.

Our international competitors—motivated by mandatory emissions reductions—have gotten a head start. Japan is the world leader in solar power and hybrid cars, and Europe leads in wind power. Their economies will benefit from greater energy efficiency, and ours will be disadvantaged if we lag behind.

As an industry we will do our part, but what we need now is to understand what the rules are going to be—which behaviors will be rewarded and which will be penalized. Only then will we know how to invest in the right solution.

Let’s put climate change on the table; discuss equitable, market-based policy solutions like an economy-wide carbon tax. It is critical that the energy industry help shape policy as it is being developed instead of waiting for the policy to shape our business and define our future.

Mr. Anderson is Chairman and Chief Executive Officer of Duke Energy, a diversified energy company with a portfolio of natural gas and electric businesses, both regulated and unregulated, and an affiliated real estate company. Duke Energy is headquartered in Charlotte, N.C.