SCOTUS decision on EPA is not the end of the story, economically

Reading between the trend lines with AIA’s chief economist

In deciding West Virginia v. EPA, the Supreme Court held that the Environmental Protection Agency exceeded its authority in propagating the Obama Administration’s Clean Power Plan (CPP), splitting the proverbial political aisle and narrowing the scope of the Biden Administration’s plan to regulate power sector greenhouse gas emissions. Yet, the power sector has been incentivized economically to decarbonize when it comes to coal, but there is more work to be done to shift the shares of oil and gas into renewables. “Look at supply and demand,” says Reading between the trend lines with AIA’s Chief Economist, Kermit Baker, Hon. AIA, “In terms of the share of total energy consumption, in the US renewables are not significantly different from the rest of the world. We see petroleum and gas as bridges to move to renewables, but it’s easy to mistake a bridge for a lingering addiction.”

What does West Virginia v. EPA mean for firms?

This decision is a good example of the broader issue faced by authorities in balancing political strategies and economic strategies to reduce carbon emissions. As a political strategy, this is based on presidential executive actions about what needs to be done based on a perceived mandate. The second part of that is congressional action—this whole thing is based on the Clean Air Act—and political parties interpret. That’s what they do.

So, it should be no surprise that I, and others, see an economic strategy as a more productive strategy to address carbon emissions. Coal consumption as a share of total energy in the US has been declining for quite some time, and we don’t have to rely on the EPA to say it’s a bad idea—coal just isn’t as economically viable any more. On the other hand, the US is not really ahead of the rest of the world—despite our great powers—in renewables. There’s a difference in shares from region to region and country to country, but we aren’t really doing any better or worse—not really—when it comes to wind and solar, for instance.

We seem to have made progress on coal, but why can’t we move oil and natural gas in the same direction?

The economics of coal don’t make sense any more—is it more scarce, is it more difficult to mine than it used to be, is it not as easy to extract and as profitable as natural gas? Probably all of the above. But most of the people using coal aren’t in it for the long run, meanwhile our entire economy is geared toward petroleum and natural gas—structurally speaking—and the discovery of new reserves in the US have made us an exporter rather than a big importer as we once were.

On the demand side, why aren’t businesses and consumers more interested?

Some people think renewables are the right thing to do, so to speak. Others aren’t even thinking about right and wrong, but profit margins. When we asked what share of architecture firms’ projects on a dollar basis were designed to meet a rating system like LEED, WELL, EnergyStar and so on, they reported that on average about one out of every six dollars of billings coming into the firm is for projects designed to meet a rating system—or between 17 and 18 percent.

How does that pan out with commercial versus institutional projects?

For commercial projects, owners and developers seem to have little interest. For institutional projects, ratings systems are often mandated. But, overall, when asked, architects report that many clients don’t care, they report that construction costs are going up so they need to save money where they can, or they report that the owner doesn’t want to pursue the certification process.

Let’s assume every firm in the country could do one thing in concert tomorrow to tackle this problem. What is that thing?

Do a better analysis of the full lifecycle cost of a building—on every building—and make a convincing case to owners. If you can’t make a convincing case, then go back to figure out a way before coming back to the table.