The States Address Climate Change – Cap and Trade

Command and Control or Market Driven Solution

In a prior post we referred to Renewable Portfolio Standard programs as “point of sale” regulations for reducing greenhouse gases. In this post we describe Cap and Trade programs as “point of production” regulations for reducing greenhouse gases.

The two main point of production regulations to reducing greenhouse gases and “command and control” and “market-driven solutions”. In “command and control” the government mandates the quantity of greenhouse gases that may be each generator may produce. In “market-driven solutions”, the government provides incentives for the industry to determine the most cost effective solutions. Cap and Trade is a form of market-driven solution.

Cap and Trade Operation

In a Cap and Trade program the government sets a maximum quantity of greenhouse gases (in tons of carbon) that the industry may produce in any year. This maximum quantity is the “Cap” component of Cap and Trade. The government then issues a quantity of “allowances” equal to the Cap. It may issue the allowances to generators based upon their historic level of greenhouse gas production. Or it may hold an auction in which generators can purchase the allowances. At the end of the year each generator must hold a quantity of allowances equal to its greenhouse gas emissions. Generators that fail to hold an adequate number of allowances must pay a penalty.

Source: Calwatchdog.org

To ensure reduction in greenhouse gases the government will reduce the Cap and the allowances it issues in each succeeding year. Generators that take steps to reduce their greenhouse gas production will reduce the number of allowances that they need. They may also receive additional revenues by selling excess allowances. Generators that do not take steps to reduce their greenhouse gas production will have to purchase additional allowances to avoid the penalty. This opportunity to purchase and sell allowances is the “Trade” component of Cap and Trade.  

By giving generators the option to either purchase allowances or implement efforts to reduce their greenhouse gas production the Cap and Trade programs encourage the industry to take advantage of the most cost effective greenhouse gas reduction solutions. 

Program Successes

Cap and Trade programs generally work as intended. Acid Rain, caused by power plant emissions of nitrogen oxide (NO) and sulfur dioxide (SO2),  was once very harmful to fish and other wildlife. However, a Cap and Trade program established under the Clean Air Act successfully reduced SOemissions from power plants by 50% and substantially eliminated the harm from acid rain. 

And, in 2005, the European Union adopted a Cap and Trade Program aimed at greenhouse gas reduction. That program has a goal of reducing emissions by 21% below 2005 levels by 2020 and by 43% below 2005 levels by 2030. As of 2018, the European Union’s program was considered to be on target, having reduced emissions by 29% below 2005 levels. 

Federal Government Fails to Adopt a Cap and Trade Program

During the 2008 presidential campaign the editorial board of the San Francisco Chronicle asked Barak Obama to describe his response to climate change. Mr. Obama said that he advocated the use of a Cap and Trade program to reduce greenhouse gases.

However, the opponents of such a program pieced together portions of Mr. Obama’s comments and attributed the following quote to him: “If someone wants to build a coal-fired power plant, they can. It’s just that it will bankrupt them.” The Cap and Trade opponents then went on to attribute the following quote to Mr. Obama: “Under my plan. . . electricity rates would necessarily skyrocket.” 

A Google search of “San Francisco Chronicle Obama electricity rates” results in hundreds, if not thousands, of hits to speeches and articles from representatives of the coal industry, coal miners, and industry in general. They all refer to the above quotes and accuse Mr. Obama of seeking to undermine the United States’ economy in general and the coal industry in particular. 

In 2009, after Mr. Obama was elected President, the House of Representatives passed a comprehensive Cap and Trade bill referred to as the American Clean Energy and Security Act of 2009.  But the opposition to Cap and Trade had its effect. The Senate never acted on the House bill and it was never made into law. 

States Begin to Adopt Their Own Programs

In the absence of Federal legislation, the states have begun to implement their own Cap and Trade programs. California was the first state to implement such a program. As of 2017 that program had reduced greenhouse gas emissions in the state by 13%. And California was using revenues obtained from selling the allowances for various energy efficiency and clean air initiatives.

Multiple states participate in the Regional Greenhouse Gas Initiative (RGGI), implemented in 2008. Currently, the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont participate. And the program is expanding. New Jersey is scheduled to join in 2020. And Virginia is seeking ways to participate.

Under RGGI, each of the participating states is allocated a share of the annual capped CO2 emissions based on historical emissions. The overall cap and each state’s share of the cap is reduced each year. All of the RGGI states (other than New Hampshire) have committed to adjustments in the cap that will reduce their emissions to the goals of the Paris Climate Accord – i.e. to levels 26% to 28% below 2005 levels by 2025.

The RGGI states conduct annual auctions to distribute allowances used for compliance with RGGI requirements. Through 2014, the RGGI states have used the funds obtained from those auctions to finance $1.37 billion in energy efficiency and clean energy projects.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry.