EPA Administrator Lisa Jackson's decision to reconsider whether greenhouse gas emissions from coal-fired power plants are subject to regulation under the Clean Air Act was inevitable, as is the eventual regulation of such emissions. Under the Supreme Court's decision in Massachusetts v. EPA, the agency has little choice but to apply Clean Air Act rules to carbon dioxide and other greenhouse gases. This will require the adoption of regulatory controls for new motor vehicles, power plants, industrial facilities, and much more, yet it does not represent a sensible approach to climate change, and will likely spur legislative action.

The problem is that the Clean Air Act was written to address more traditional, local and regional air pollution problems, and is poorly suited to the challenge of climate change. Under 300 power plants and large industrial facilities are currently subject to the Act's so-called "PSD" provisions, the provisions at issue in Administrator Jackson's most recent decision. Yet once greenhouse gases are subject to controls, that number will increase to 3,000 or more, and likely include large commercial and residential buildings. This surge could grind the program to a halt, as neither federal nor state regulators have anywhere near the resources or workforces to handle such an increase in permit applications. As the law is written, the Agency will even be required to set National Ambient Air Quality Standards for carbon dioxide, triggering regulatory obligations that will be impossible for states and local communities.

Existing and projected technologies are insufficient to meet the Administration's stated goal of an 80% cut by 2050, let alone a stabilization of greenhouse gas levels in the atmosphere. Yet the Clean Air Act's technology standards tend to discourage innovation and encourage companies to maintain older, dirtier facilities rather than upgrade to cleaner and more efficient systems. What is needed is a set of policies that will spur dramatic technological innovation, while providing companies and individuals with the incentive -- and regulatory flexibility -- to adopt cleaner technologies as they become available.

The prospect of trying to regulate greenhouse gases under existing law will likely encourage Congress to reform the Clean Air Act. The Obama Administration's preferred approach is a "cap-and-trade" system that will cover all significant greenhouse gas emitters with a national "cap" on emissions, and allocate tradable emission permits. Such proposals sound good in theory, but can be difficult to implement. Writing the rules for such a system will set off a frenzy of rent-seeking as various interest groups seek to twist the requirements for their benefit.

A better approach would be a revenue-neutral carbon tax. Placing a price on the carbon-content of fuels will provide an incentive, on the margin, for energy users to increase efficiency and adopt cleaner technologies. Tax reform of this sort would also provide an opportunity to revisit depreciation rules that discourage the turnover of capital stock, thereby slowing the rate at which newer, cleaner technologies are deployed.

To maximize the effectiveness of such a measure, it is also important to adopt other policies that encourage innovation. he climate change challenge will not be solved without dramatic technological innovation -- innovation well beyond what traditional regulations ore energy subsidies can achieve. This is best achieved by ensuring that successful innovators reap substantial rewards, both by removing regulatory obstacles to technological deployment and guaranteeing supercompetitive returns for transformative technological breakthroughs. The tens of billions the federal government has thrown at alternative energy over the past few decades have produced little of commercial value. A better approach is the offering of "prizes" for successful innovation, as was done in the past to spur needed innovations for sea and air travel. Some private foundations have begun sponsoring such rewards, but the federal government could do much more. If even a fraction of the billions pledged to energy R&D in the stimulus were packaged into prizes for commercially viable clean technology breakthroughs, we might see the sort of innovation necessary to meet the climate challenge, particularly if combined with broader legislative reforms, such as a revenue-neutral carbon tax and regulatory reforms that remove barriers to technology deployment. Such an approach would be a serious and forward-looking climate strategy, and make much more sense than relying upon a decades-old regulatory statute written for a different purpose.