South-Western EconNews

AEP and Cinergy (Sort of) Jump on the Global Warming Bandwagon

Subject

Energy firms agree to announce how they intend to combat effects of global warming.

Topic

Economics and the Environment; Government and the Economy

Key Words

Regulations; Carbon Emissions; Shareholder Resolutions

News Story

While the Bush Administration remains steadfast against any increases in carbon emissions regulations, some energy firms are increasingly recognizing that global warming is a significant problem for the companies and their shareholders.

American Electric Power (AEP) and Cinergy, two of the nation's largest producers of electricity--and also two of the largest emitters of carbon dioxide--plan to announce steps they will take to reduce greenhouse gas emissions. These firms are responding to pressure from shareholder activists, who are looking not only for environmental accountability, but also for company statements about how regulations will affect financial statements.

The bulk of the power produced by these firms is created from burning coal, because coal is a cheaper source than natural gas is. Given that the companies intend to continue to produce electricity by burning coal, environmental activists view shareholder demands and the companies' responses to those pressures as a positive first step in getting firms to significantly reduce their emissions of greenhouse gases

(Updated May, 2004)

Questions

1.	Burning coal to produce electricity results in an external cost of production: carbon dioxide emissions into the air. As a result, the socially optimal level of electricity produced from coal is not the same as the privately optimal level. Use a graph of social and private marginal costs and benefits to indicate the difference between the social and private optimum levels of producing electricity from coal.
2.	By announcing ways to reduce the emissions of carbon and other greenhouse gases, these energy companies are "internalizing the external costs" and moving toward socially optimal levels of coal use. Will the social optimum likely to be reached here? Why or why not?
3.	How would a tax on carbon emissions also help reach the socially optimal level of coal-fired electricity? Use a graph to explain your answer.

Source

Jeffrey Ball. "AEP, Cinergy to Disclose Details on Ways to Cut Carbon Dioxide." The Wall Street Journal. 19 February 2004.