21 May 2009: Analysis

Regional Climate Pact’s Lesson:
Avoid Big Giveaways to Industry

As Congress struggles over a bill to limit carbon emissions, a cap-and-trade program is already operating in 10 Northeastern states. But the regional project's mixed success offers a cautionary warning to U.S. lawmakers on how to proceed.

by keith schneider

As the U.S. Congress struggles to craft a bill that puts a cap and a price on carbon emissions, much of the legislative back and forth concerns the cost and consequences of limiting carbon pollution. What’s not being discussed, though, is whether the government has the experience and technical capacity to administer a cap-and-trade program, and whether it can work.

Based on a fledgling project in the northeastern United States, the answer to both questions is “Yes” — provided the federal legislation does not repeat the chief mistake of the regional program: Weakening the program’s clout by making too many concessions to industry.

Officially launched in January, the Regional Greenhouse Gas Initiative (RGGI) — the first legally binding cap-and-trade system in the U.S. — has been operating in 10 Northeastern states. Intended as a pilot to test industrial acceptance of new regulatory limits and markets, RGGI has modest carbon reducing goals, calling for a 10 percent cut in carbon emissions from power plants that burn coal and natural gas by 2019.

The program has initially achieved one important goal: It has generated considerable revenue — $261.3 million in three initial allowance auctions — that states are investing in new energy efficiency and conservation and in clean-energy development and job-training programs.

But RGGI has fallen far short on a second, crucial objective. The aim of a cap-and-trade system is to put a sufficiently low ceiling on CO2 emissions that energy suppliers will be forced to

RGGI represents the leading edge of a new collaborative policy-making to confront global warming.

reduce fossil fuel use or buy new permits to emit carbon. But because of political pressure and fears of economic impacts, the RGGI states and utilities agreed on a high cap of 188 million tons annually. Currently, in part because of the recession, the 233 RGGI-regulated power plants are emitting 150 million tons a year, meaning that, at this point, there is no economic incentive for utilities to reduce energy use and carbon emissions.

Nevertheless, many officials and environmentalists involved in creating RGGI say that it is an important, trailblazing initiative.

“RGGI sets a good framework for a federal program,” asserts Derek K. Murrow, director of policy analysis for Environment Northeast, an environmental think tank that helped design the initiative. “Because it was the first, it was subject to political forces that caused us to make it simpler to establish and narrowed its effects. But it has proved that regulating carbon is possible, and that selling allowances and advancing the clean energy economy can be achieved.”

The Northeastern governors who pushed the creation of RGGI did so out of frustration with the Bush Administration, which had steadfastly refused to regulate carbon emissions or seriously address the problem of global warming. The agreement, which took four years to negotiate and three more years to implement, was signed by the governors — Democrats and Republicans alike — of Massachusetts, Maine, Vermont, New Hampshire, Rhode Island, Connecticut, New York, New Jersey, Delaware, and Maryland.

The RGGI framework represents the leading edge of a new kind of collaborative policy making that is emerging to respond to the threat of global warming. It is the only one of the three cap-and-trade programs in North America that is operational. The others are the Western Climate Initiative, a collaboration of seven Western U.S. states and four Canadian provinces, and the Midwest Greenhouse Gas Accord, negotiated by six states and one Canadian province.

RGGI stems from an idea that former New York Gov. George Pataki — a moderate Republican with a solid environmental record — broached with his Northeast and New England colleagues in 2001. At the time, a number of well-researched studies found that New York and most states in New England had warmed more than 1 degree Fahrenheit since 1895. Pataki was interested in addressing that issue and simultaneously generating state revenue by capping emissions of greenhouse gases, just as New York and the nation had done with the sulfur emissions that caused acid rain.

Eight years later, with concentrations of atmospheric CO2 rising to the highest levels in more than 600,000 years, establishing a national cap on carbon is now finally near the top of the nation’s economic and

States are using the revenue from RGGI auctions for energy conservation, efficiency, and clean energy development.

environmental priorities, especially in Washington, D.C. The House Energy and Commerce Committee is currently considering a bill that will likely call for reducing greenhouse gas emissions 17 percent by 2020, 45 percent below 2005 levels by 2030, and 85 percent by 2050. The major pitfall facing the so-called Waxman-Markey bill is the same one that has weakened the RGGI initiative — making so many concessions to industry that caps are set too low, or exempting too many greenhouse-gas-emitting industries.

In order to be the pioneer and win political approval, RGGI’s designers kept the program simple. The program applies its carbon limits just to fossil fuel-burning electric plants that generate more than 25 megawatts. Emilee Pierce — communications manager for RGGI, Inc., a non-profit that provides technical and administrative assistance to the 10 states in the initiative — said the program's goals were modest because “the states wanted to establish a program and prove that it could work.”

The basic rules are fairly straightforward. Utilities must purchase “allowances” to cover every ton of carbon emissions they produce over a three-year period. Allowances are sold at auction by the states. Utilities that reduce emissions below their allowance can sell the surplus to utilities that are unable to meet emission limits. A secondary trading market operates in Chicago.

In three allowance auctions since September, utilities have spent $261.3 million. In the most recent sale in March, they paid the relatively low amount of $3.51 per ton of permitted emissions. States are using the revenue — distributed according to a weighted formula that considers the level of CO2 emissions — for energy conservation, efficiency, and clean energy development. Each state is free to allocate its auction revenue as it sees fit, so long as at least 25 percent is used for “consumer benefit or strategic energy purpose.”

States have gone above and beyond this minimum requirement, opting to put nearly 100 percent of funds toward the public benefit. To date, 71 percent of the revenue — more than $185 million — has supported energy efficiency projects. New York, which has earned roughly $88 million from auction revenues, allocated 36 percent to residential heating efficiency, 34 percent to waste and wastewater efficiency, 13 percent to commercial and industrial efficiency, and 5 percent to green workforce development.

Connecticut has gained $14 million from RGGI auctions, nearly a third of which it is spending on The Connecticut Clean Energy Fund, which offers financial incentive and education program that encourage homeowners, businesses, and others to use renewable energy.

“The money we make on RGGI auctions enables us to reduce our dependence on imported oil and support energy efficiency programs,” Governor Jodi M. Rell, a Republican, said in a statement in April. “Thanks to our efforts, Connecticut and the other New England states have a real head start on the rest of the nation.”

The regional cap on CO2 emissions was set at 188 million tons a year from 2009 to 2014, a limit that utilities said they could live with. After that, the cap declines 2.5 percent annually, or a total of 10 percent by 2018, to 169 million tons. Current emissions of 150 million tons are below even the 2018 cap, but Pierce said that when the economy recovers, emissions will rise and the cap will be a much bigger factor in driving reduced fossil fuel consumption.

One of the greatest concerns about a cap-and-trade system is how much it would drive up energy prices for consumers. No data is available yet on energy price increases in RGGI states. But economic models predicted that the cap-and-trade program would raise utility rates for homeowners and businesses up to three percent by 2015.

The Waxman-Markey bill calls for replacing regional cap-and-trade initiatives with a unified national program. That plan worries state officials fearful of losing the revenues for energy conservation that a

The Obama administration includes a number of officials intimately familiar with the RGGI program.

cap-and-trade regime would generate. Ian Bowles, the Massachusetts secretary of energy and environmental affairs, recently told lawmakers that RGGI is a sound model for the federal government to emulate. “If the RGGI program is folded into a federal cap-and-trade program,” he said, “we believe it is important that the new federal system provide financing for state energy efficiency programs that would otherwise lose funding under this transition.”

It is not yet clear whether Congress will approve a cap on carbon this year, despite strong support from the White House and Democratic leaders in both chambers. But if it does, the Obama administration has put in place a number of officials intimately familiar with the nation’s only operational cap-and-trade-program, RGGI. Obama recently selected Regina McCarthy, head of the Connecticut Department of Environmental Protection and a former RGGI board member, to be assistant EPA administrator for the Office of Air and Radiation. And then there is McCarthy’s new boss in Washington, EPA administrator Lisa P. Jackson. As commissioner of the New Jersey Department of Environmental Protection from 2006 to 2008, Jackson was a member of the RGGI board.

POSTED ON 21 May 2009 IN Biodiversity Climate Climate Forests Policy & Politics Central & South America Europe North America 

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