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Regional CO2 Reductions

Advocates, opponents turn to state cap-and-trade programs as climate-change bill falters in Congress

by Jeff Johnson
October 18, 2010 | A version of this story appeared in Volume 88, Issue 42

Credit: U.S. Power Generating Co.
A shift to greater use of natural-gas-fired power plants, such as U.S. Power Generating Co.’s Mystic 8 & 9 outside Boston, has led to a reduction in CO2 emissions in the Northeast.
Credit: U.S. Power Generating Co.
A shift to greater use of natural-gas-fired power plants, such as U.S. Power Generating Co.’s Mystic 8 & 9 outside Boston, has led to a reduction in CO2 emissions in the Northeast.

With the apparent death in Congress of a national cap-and-trade program to reduce U.S. greenhouse gas emissions, the attention of cap-and-trade advocates—and opponents—has shifted to a handful of regional emissions reduction programs just now getting under way in the Northeast, Midwest, West, and California. Furthest along is the Regional Greenhouse Gas Initiative (RGGI) that brings together a coalition of 10 northeastern states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

Only in its second year, RGGI is a mandatory program that covers the states’ electrical utilities. The program’s goal is modest: a 10% reduction in carbon dioxide emissions by 2018 from 2005’s emissions baseline (C&EN, Feb. 1, page 23).

In comparison, the moribund national program proposed a 17% reduction in emissions by 2020 from the same base. By either measure, RGGI appears to be off to a flying start: The region’s CO2 emissions have already plummeted by one-third since 2005.

This achievement shows that cap and trade works, stresses Anthony Paul, an energy fellow at the nonprofit think tank Resources for the Future (RFF). “The failure of the federal government to pass a greenhouse gas cap-and-trade bill will raise the importance of RGGI and other regional programs,” he says, and “will help them flourish.” He underscores that RGGI—as the only operating U.S. cap-and-trade program—is a test-bed for cutting greenhouse gases.

The possible expansion of regional cap-and-trade programs scares Phil Kerpen, vice president for policy at Americans for Prosperity, a funder of the Tea Party political movement and an opponent of cap and trade and other programs to limit greenhouse gas emissions. On Fox News last August, Kerpen warned of the expansion of RGGI, charging that money raised through selling emissions allowances to utilities was lining the pockets of Wall Street investment bankers and that the program would lead to skyrocketing energy prices for consumers. A look at what has happened with RGGI shows both allegations are wrong, but nevertheless, Kerpen’s group has mounted efforts in New Jersey and California to block regional cap-and-trade programs.

That battle aside, it is clear CO2 emissions in the RGGI region have declined. But it is difficult to determine why: Has RGGI been a highly successful experiment to reduce CO2 emissions, or has it profited from conditions beyond its control? The answer seems to be a bit of both.

In 2009, RGGI’s first year of operation, regional CO2 emissions covered by RGGI fell a whopping 34% below historic levels, with little impact on the region’s electricity prices. In fact, RGGI supporters say the price of electricity in some parts of the region actually dropped. And overall, consumers in the 10 states participating in the program have seen their utility bills increase just 0.4 to 1.0% as a result of their utilities’ purchase of emissions allowances. That works out to a sparse 73 cents more per month for the average household electricity bill.

On the other hand, the funds generated through selling greenhouse-gas allowances to utilities has generated $729 million in state revenues. More than half of these revenues have been used to fund state-run energy-efficiency programs, many of which have created new jobs in the region. The energy-efficiency spending is also expected to result in less energy use and lower CO2 emissions in the future, a “virtuous cycle” in the words of one advocate. The rest of the funds have gone mostly to a mix of other state energy programs.

RGGI covers the region’s 230 fossil-fuel electric power plants, explains Peter Shattuck, a policy analyst with Environment Northeast, a Maine-based nonprofit research and advocacy organization that tracks RGGI. RGGI’s cap-and-trade program works like this: Through a quarterly auction, utilities must buy allowances to emit greenhouse gases in sufficient quantities to cover their emissions. The first compliance period includes 2009 through 2012, when plant owners must demonstrate that they have bought enough allowances to match their emissions.

The goal, according to Shattuck, is that utilities will begin to consider CO2 allowances and emissions as a “commodity” and a regular part of their business, like buying fuel and controlling other operating parameters. They will plan ahead and buy allowances in advance on the basis of their projections of economic growth, electricity demand, and success in cutting CO2 emissions.

“They can make purchasing decisions on projected need, same as they do for natural gas, coal, and other ingredients necessary to run a power plant,” he says.

But when RGGI states set the emissions cap in 2005, Shattuck notes, they were unaware of the flood of natural gas that was about to come on the market as a result of new hydraulic-fracturing natural gas operations in the eastern U.S. and new gas wells in the West. Natural gas, then, was soon to be more plentiful and cheaper than the RGGI states had figured, confounding their calculations.

Hence, the region’s fossil-fuel utilities began to shift from burning residual fuels (mostly diesel) and coal to using natural gas, which emits about half the carbon of coal. By 2009, the region’s coal use dropped by 30% from 2005 levels and oil use by 90%, according to a study by Environment Northeast. As a result, CO2 emissions from RGGI power plants in 2009 totaled 124 million tons, 9% below 2008 levels and 34% below RGGI’s regional cap of 188 million tons.

It appears the region has beaten its emissions cap without doing much. Many economists have looked at the situation and attribute the CO2 drop to the switch to natural gas, reduced electricity demand because of the rotten economy, a host of energy-efficiency efforts in the region, and milder summer weather.

But as a consequence, the demand for and price of CO2 allowances in the region has plummeted. In the most recent auction in early September, allowances went for $1.86 per ton, and one-quarter of the available allowances were not sold. In 2009, the allowances were twice this price, and bids exceeded available allowance tonnage by two to three times, according to reports by Potomac Economics, which monitors the program for RGGI. For comparison, the proposed national program anticipated the cost of auctioned CO2 allowances to exceed $15 per ton.

Shattuck acknowledges the cap is too high, but he sees many other benefits from the early years of the program. He says RGGI, by casting a spotlight on CO2 emissions, has provided an added incentive for utilities to shift to less carbon intensive 
fuels and spurred other plant-specific innovations to cut carbon. The experience also shows that significant CO2 reductions can occur while using the existing infrastructure. The shift to natural gas took place by firing up the region’s idle gas power plants and shifting some power plants to technologies that allowed them to burn gas rather than oil or coal, Shattuck says.

Also the RGGI data show that emissions can drop without much cost to consumers while raising significant funds for future energy-efficiency efforts. The auction generated some $358 million for weatherization and other energy-efficiency programs while at the same time creating jobs.

With RGGI’s emissions reductions already exceeding expectations, “it seems like a lower cap level would be more appropriate for RGGI,” Shattuck says, and he is joined by other RGGI supporters in that view. But the decision to change the cap, he adds, is up to the states.

In 2012, the RGGI states will reexamine the program, explains Jonathan Schrag, executive director of RGGI Inc., which administers the program. “Everything will be on the table,” he says, including the cap. The original RGGI agreement set the initial three-year period as a sort of shakedown to stabilize the emissions baseline, he adds, and beginning in 2014 emissions were to begin a 2.5% annual drop, achieving a 10% reduction in 2018. Schrag would not comment on whether the states may change the cap before the meeting.

RGGI was designed from the outset not to be too stringent, says RFF’s Paul. “In the early years, the cap was to be just a little bit below a business-as-usual emissions level. The motivation of RGGI states was not so much to significantly reduce emissions in the region but to build political momentum. In other words, to put in place a program, design the mechanisms—like the auction—make them work, and show they can work. It provides a laboratory to learn about cap-and-trade programs.”

He notes that the Northeast is not a carbon-intensive part of the country in terms of energy production. About half of the region’s electricity comes from non-fossil-fuel sources and the rest from RGGI-regulated facilities. Slightly more than one-third of its electricity is generated by nuclear power plants.

Rumors have circulated that RGGI may join with other regional programs and lead to a de facto national cap-and-trade program, with or without congressional leadership. Schrag was mum on such discussions, saying only, “We share best practices with other regions to show how RGGI works.”

Altogether the regional plans include 23 states and four Canadian provinces. In the U.S., the three regional programs include one-half of the population and one-half of the U.S. gross domestic product, and account for one-third of greenhouse gas emissions. In Canada, they include three-quarters of the population and GDP and one-half of CO2 emissions.

The regional compacts include the Western Climate Initiative, a coalition of states—Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington—as well as British Columbia, Manitoba, Ontario, and Quebec. Its goal is to reduce greenhouse gas emissions by 15% below 2005 levels by 2020. The reductions would begin in 2012, and the program is economy-wide and includes manufacturers and transportation. The region represents 20% of the U.S. economy and 70% of that of Canada.

The Midwestern Greenhouse Gas Reduction Accord covers Illinois, Iowa, Kansas, Michigan, Minnesota, Wisconsin, and Manitoba. It is set to begin in 2012. It too would be economy-wide and plans to reduce CO2 emissions by 20% below 2005 levels by 2020. That target could decrease to 18% if prices of allowances become too high. Over the long term, it proposes to cut emissions 80% by 2050.

In California, Assembly Bill 32, which became law in 2006, requires state regulators to develop a program to cut greenhouse gas emissions to 1990 levels by 2020, which is likely to exceed RGGI’s cuts. The state is now developing that program and has proposed the outline of an economy-wide greenhouse gas cap-and-trade reduction program, which would start in 2012.

However, A.B. 32 is under attack, primarily by three oil companies—Valero and Tesoro, with headquarters in Texas but with refineries operating in California, and the owners of Koch Industries, a Kansas-based oil conglomerate. The Koch family also funds Americans for Prosperity.

These oil companies have raised about $7 million to fund Proposition 23, a state proposition to repeal A.B. 32 that will come up for a vote in the November elections. Proposition 23 would block the state regulation of CO2 limits until state unemployment drops below 5.5% for four consecutive quarters—a feat that has not occurred in more than 30 years.

California Republican Gov. Arnold Schwarzenegger has vehemently criticized the proposition and the oil industry support, accusing the oil industry of “self-serving greed” in a recent speech to the Santa Clara County Commonwealth Club. He warns that the proposition will kill the state’s clean technology industry, the fastest-growing sector of the state’s economy.

At the September RGGI auction, for the first time, a group protested the organization. The protest was organized by “No NJ Cap & Trade,” which according to its website is a creation of Americans for Prosperity.

“With this exception,” Shattuck says, “there has not been a backlash against RGGI. The lack of resistance is a reflection of the fact that there hasn’t been much negative impact.” No NJ Cap & Trade, he adds, “isn’t a grassroots organization but is an industry-funded group from outside the region, which has shifted its focus since the national cap-and-trade bill has stalled.”


He argues that energy costs have not increased much as a result of the program, and cap and trade has been shown not to have had much of a negative impact on the regional economy. In fact, Environment Northeast studies show the funds have created jobs through energy efficiency and have helped increase funds to the states in a time of diminishing resources.

The small economic impact of RGGI mirrors the conclusions of several studies that have predicted a proposed national CO2 emissions reduction would have little impact on economic growth. For example, a recent Energy Information Administration study looked at emissions limits far stricter than those expected from RGGI and predicted a 0.2% annual decline in U.S. economic growth going out to 2035.

Such regional programs are “useful laboratories,” says Nicholas Bianco, an energy analyst with World Resources Institute. But studies by WRI have found regional programs are unlikely to tip the scales enough to halt the damage of climate change.

“They can make an important chunk of the reductions as well as teach federal policymakers quite a bit about program design and implementation. But ultimately if we are going to make the level of greenhouse gas reductions that scientists tell us are necessary, we are going to need a national carbon emissions reduction program.”


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