Why business will hate Obama’s new cap-and-trade rules

Clean Air Regulations Impact Coal Burning Plants
Photograph by Michael S. Williamson — Washington Post/Getty Images

President Obama’s new and ambitious proposal to reduce carbon emissions from coal-fired plants has already drawn heavy fire from the fossil fuel industry, which argues that his cap and trade scheme is complicated and unwieldy. They have a point.

Under the new rules, states would cap emissions and ratchet those caps gradually downward until coal plants reduce them to 30% below 2005 levels. Utilities would be allowed to reduce their emissions by installing more renewable energy, becoming more efficient or, most importantly, by starting or joining state and regional “cap and trade” programs, in which states agree to cap carbon pollution and buy and sell permits to pollute.

Many in industry—including even Exxon Mobil (XOM)—argue that a simple, revenue-neutral carbon tax would probably be as effective as Obama’s cap and trade scheme without the frictional costs and the complicated issuing and trading of carbon permits. (Carbon derivatives, anyone?) With a tax, prices of carbon based energy rise, and people will use less of it. Period.

Higher taxes, of course, are a non-starter in Congress these days. So Obama was left with the next best choice—cap and trade. Using the Clean Air Act and the enforcement power of the EPA, Obama is proposing that each state figure out how to reduce coal-plant emissions. The problem is that if you’re going to operate a cap-and-trade system, it’s best to have a national law. In 2010, the country almost took that route until the Senate shot down a bill that the House had passed with Republican support.

Now we’re stuck with EPA rules that will be subject to lawsuits. Those who opposed cap and trade can tie the agency up in the courts—creating uncertainty for business. It is true, however, that the EPA is eight for eight when it comes to major legal challenges, including the Supreme Court allowing it to treat carbon as a pollutant. The real problem by going the administrative route is that instead of a single, clear national law, the energy industry will be faced with a multitude of different state regulations.

The irony is that, because Congress refuses to act on a national carbon law, we may well end up with one in the long run, but not until we’ve suffered a lot of wasted time and energy. How so? It’s conceivable that the energy industry will eventually become frustrated by a patch quilt of state regulations and will put heavy pressure on Congress to pass national legislation.

Says Gilbert Metcalf, professor of economics at Tufts and a former Deputy Assistant Secretary at Treasury focusing on energy and environmental finance issues: “It’s similar to what happened with auto fuel economy standards. California passed a fuel economy rule and then Massachusetts did, and other states said they’d follow. At that point Detroit automakers said, ‘We give up, it’s too complicated,’ and pushed for and got a national standard for mileage.”

The best outcome would be for Congress to do what it should have in the first place and pass a national cap-and-trade law sooner rather than later. Stranger things have happened.

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