Always Leading Green

 “When Is Cap and Trade Effective? In the EPA’s experience, cap and trade programs have proven highly successful in the context for which they are best suited: reducing emissions on a regional or larger scale from multiple sources that exhibit a range of control costs.”
– www.epa.com

The great state of California has once again lived up to its environmentally friendly reputation. And rightly so. Ever since it became the leader of the global climate change pack by signing the groundbreaking piece of legislation known as AB 32 in 2006, the state has been aggressively pursuing and identifying best practice strategies to achieve its equally aggressive goal of returning to the state’s 1990 emission levels by 2020—approximately 30 percent from “business as usual” levels projected for 2020, or about 15 percent from today’s levels. The state affirmed its green crusader reputation just recently, when, on December 11, 2008, the California Air Resources Board (CARB) approved a scoping plan that provides for implementing a cap and trade program for the electricity generation sector.

The main selling point of this scoping plan is that it will ultimately link the California cap and trade program to Western Climate Initiative (WCI) partner programs, founded by five Western state governors, including California’s in early 2007, thereby making it the cross-border initiative that the Environmental Protection Agency (EPA) and industry insiders have deemed the most viable approach to cap and trade systems.

Game Time: WCI Battles Emissions

The WCI consists of four Canadian provinces and seven U.S. states, including California, that are all key players in the emissions reductions game. Individual WCI jurisdiction emissions reduction goals vary, and details on the distribution and auction of emissions allowances will be established by each individual WCI jurisdiction. Linking California’s plan to WCI’s regional system will permit emissions allowances to be traded across state and provincial boundaries, potentially providing greater early success for California and more stable carbon prices throughout the region. Essentially, a win-win situation for all involved.

As with any cap and trade program, the WCI’s primary goal is to ultimately trigger an increase in the price of carbon-based electricity, so that energy efficiency and low-polluting electricity will be relatively less expensive. Market forces, reinforced by complementary public policies, will promote energy efficiency and clean, renewable energy sources to supplant carbon-intensive, fossil-fuel-based electricity. Making renewable energy sources more attractive will provide a significant benefit to California on both an economic and carbon basis and will go a long way towards fulfilling its 2020 emissions reduction goal.

Timeline = Time to Plan

Compliance obligations under California’s proposed cap and trade program will not go into effect until 2012. The first phase of the cap and trade program doesn’t begin until January 1, 2012, and will cover emissions from electricity consumed in the state, including imported electricity not covered by a WCI Partner jurisdiction, industrial combustion at large sources and industrial process emissions for which adequate measurement methods exist. The second phase begins in 2015, when the program expands to include transportation fuels and residential, commercial and industrial fuels not otherwise covered. Based on the requirements of AB 32, regulations to implement the cap and trade program need to be developed by January 1, 2011, and a rulemaking process will begin late January.

Essentially, this gives California and the WCI two years to leverage the lessons learned in a number of existing regional initiatives, such as the European Union and the Regional Greenhouse Gas Initiative, or RGGI (pronounced "Reggie"), as well as the draft plan created by the WCI, in order to discern best and leading practices for the cap and trade program for the region, ultimately to be implemented by each state. 

Guinea Pigs: Across the Pond…

In 2005, the European Union implemented a cap and trade program, the EU Emissions Trading System (EU ETS), initially covering 15 countries and subsequently expanding to 27 EU countries. In its first phase, the program covered the electric power and major energy-intensive industrial sectors. This program has been criticized for setting overly generous caps for polluters and giving away most allowances to utilities that increased consumer prices to account for carbon emissions, resulting in huge windfall profits for power generators. It goes without saying that this result would not be a possibility among enforcers of AB 32 in California. To their credit, however, the EU is making adjustments for the next phase of the ETS, which extends from 2008 through 2012. As a global leader in climate change policy, a California cap and trade program will most likely learn from the EU’s experience and implement strong design principles from the outset to avoid these mistakes.

And Right Next Door

California also has the fortuitous opportunity to closely monitor the first mandatory regional cap and trade program in the United States. Put into effect only a few weeks ago, on January 1, 2009, the Regional Greenhouse Gas Initiative (RGGI) is a market-based cap and trade program that targets power plant emissions “back East” in Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Delaware and Maryland. The annual regional cap is 188 million tons of CO2. This was the projected level of emissions from those plants in 2009, based on data available when the states set the cap in 2005. Emissions will be capped at that level through 2015, and reduced by 2.5 percent annually over the next four years, to achieve a 10 percent reduction in emissions by 2019. This emission level was projected to be 37 percent below a "business as usual" scenario. Each state receives a fraction of the cap (an "emissions budget") roughly corresponding to the historical emissions from power plants located in that state.

The states have established a nonprofit, nongovernmental organization, RGGI, Inc., to handle the program's administrative and technical functions. As the first mandatory cap and trade program for CO2 emissions in the United States, RGGI can provide a wealth of information for California that should inform the design of its cap and trade programs. Additionally, in the Midwest, six more states are starting work on a regional carbon-trading scheme. Florida also is developing a program. This is all to say that California will not be left wanting in the way of precedents.

WCI: Elevated Standards, Promising Results

Ambitious as RGGI is, the cap and trade system being developed in the West is even bolder. The Western Climate Initiative is targeting not just carbon dioxide—by far the biggest culprit in global warming—but five other greenhouse gases as well. What's more, WCI isn't limiting its scope to power plants. It's attempting to bring all major industries, transportation fuels and even the fuels destined for use in private citizens' furnaces, stoves and hot water heaters into an emissions-trading regime that covers 20 percent of the U.S. economy and nearly three-quarters of Canada's. Within WCI, only California and British Columbia have laws in place explicitly authorizing a cap and trade system. The rest will have to pass legislation for the system to fully take effect before trading begins in 2012.

Based on economic analysis, extensive stakeholder consultation and extensive study of existing programs, the WCI-proposed cap and trade design is intended to lower the cost of achieving emission reductions and mitigate the economic impact on consumers and businesses. In crafting its cap and trade program, the WCI Partners carefully assessed the designs and performance of programs such as the EPA’s Acid Rain program and the EU ETS. The design recommendations take into account lessons learned from existing programs and reflect the diversity of the WCI Partner economies, including their respective energy production and consumption patterns

By including features such as allowance banking and offsets, the design recommendations support a strong, balanced cap and trade program that takes advantage of a broad set of economic opportunities from the reduction of greenhouse gases. Allowances will be distributed to WCI partner jurisdictions, and those jurisdictions will auction a minimum of 10 percent of those allowances in 2012, increasing to 25 percent auction by 2020; each jurisdiction, however, may auction more than the minimum amount. Companies covered by the rules may be able to buy and sell allowances on secondary markets or bank them for future use. In certain cases, companies also may be able to purchase a limited number of offset credits that reflect reduced carbon emissions elsewhere. They may also be able to purchase allowances from other comparable cap and trade programs approved in the future. To be sure, California has most certainly picked a winning team in the war against climate change if the WCI lives up to its high goals.

Faith in the Great Green State

Still, there will be challenges. Without broad federal legislation in place and with an aggressive timetable necessary to build consensus, California will need to use the lessons learned by other regional schemes and leverage their participation in, and the research conducted by, WCI to put a “best in class” cap and trade program on the books. Given its stature in the global climate change community and the full-frontal war that it has waged against emissions, California will certainly rise to the challenge as the de facto federal standard to which all states and even countries should eventually aspire.

*Footnotes