Regional Cap-and-Trade Programs to Cut Global Warming Emissions

In the absence of federal action, Northeastern and Western states have adopted cap-and-trade programs to reduce global warming pollution in their respective regions.

The Northeast Regional Greenhouse Gas Initiative
The Regional Greenhouse Gas Initiative (RGGI) is a market-based cap-and-trade program to reduce carbon dioxide (CO2) emissions from power plants in 10 Northeast states. Participants include the six New England states (Maine, New Hampshire, Vermont, Massachusetts, Connecticut and Rhode Island), New York, New Jersey, Delaware and Maryland. RGGI will be the first mandatory cap-and-trade program in the United States to reduce global warming emissions.

RGGI began in 2003 when then-New York Governor George Pataki invited the governors of Northeastern states from Maine to Maryland to help design a mandatory cap-and-trade program to cover power plants. Representatives from state regulatory agencies met over two years to design a template for state programs, culminating with a formal agreement in 2005 to implement RGGI.

RGGI will go into effect January 1, 2009, capping emissions from all power plants in the 10 states. 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. (For details, go to: www.rggi.org/docs/mou_faqs_12_20_05.pdf.)

RGGI has established an important policy precedent. Every state that has formally issued a proposed regulation or enacted legislation (Maine, Massachusetts, New York, Vermont and Connecticut) has decided to auction nearly 100 percent of the emissions allowances created by the program. They realized that fundamental economics dictates that once a cap is implemented, an emissions allowance is an economic asset. Giving away allowances to electricity generators would amount to granting them a windfall profit.

The policy goal of a cap-and-trade program is to 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 complimentary public policies, will spur energy efficiency and clean, renewable energy sources to supplant carbon-intensive, fossil-fuel-based electricity. Raising the price of fossil-fuel-based electricity may cause consternation in the Midwest, but there is abundant evidence that the alternatives—energy efficiency and renewable energy generation—have economic and social benefits that can more than offset the price. (For more information on the benefits of renewable energy, go to: http://www.ucsusa.org/clean_energy/clean_energy_policies/cashing-in.html.)

All 10 states are in various stages of implementing the program. Maine and Massachusetts have issued proposed rules and are expected to issue final rules early in 2008. New York and Vermont have recently proposed rules and are currently taking public comment. New Jersey lawmakers are expected to consider legislation before the end of the year allowing an auction and specifying how the revenue will be used. Maryland and Connecticut are expected to issue proposed rules before the end of the year. The New Hampshire and Delaware legislatures will take up bills in early 2008 to implement the program. And Rhode Island likely will issue its proposed rule in spring of 2008.

Officials from the participating states will meet in early December to discuss the auction’s design details and policy implications. The states have established a nonprofit, nongovernmental organization, RGGI, Inc., to handle the program’s administrative and technical functions. They want to hold the first allowance auction in June 2008. As the first mandatory cap-and-trade program for CO2 emissions in the United States, RGGI can provide a wealth of information that should inform the design of other regional, as well as federal, cap-and-trade programs.

The Western Climate Initiative
The Western Climate Initiative (WCI) is an emerging regional coalition that includes six western states (Arizona, California, New Mexico, Oregon, Utah and Washington) and two Canadian provinces (British Columbia and Manitoba).

The WCI originated as a memorandum of understanding signed by the governors of five of the six states last February. In the months that followed, the original signatories were joined by British Columbia, in April; Utah, in May; and Manitoba, in June.

The founding document outlined three tasks for the coalition members:

• Participate in a multistate greenhouse gas registry;
• Set a regional limit on global warming pollution; and
• Develop a blueprint by August 2008 for a regional, multi-sector market program, such as cap and trade, to help achieve the regional emissions cap.

The coalition already has accomplished two of the three tasks. All the participating states and provinces have joined the newly formed greenhouse gas registry. (For the registry, go to: www.theclimateregistry.org.) In August, the WCI partners announced a regional goal of reducing emissions 15 percent below 2005 levels, which is similar to California’s Global Warming Solutions Act, which requires that emissions be returned to 1990 levels. That law is predicted to cut emissions in California by about 29 percent below what would have been expected without the law in place. With the WCI agreement, the other participating states and provinces will reduce their emissions by at least that much. British Columbia, for example, must cut emissions about 46 percent and Arizona about 45 percent over their forecasted emissions growth in the absence of the WCI initiative.

The WCI’s next major objective is to establish a regional cap-and-trade program to help meet the group’s emissions limit. The coalition has published a work plan, which is available at www.westernclimateinitiative.org. State officials plan to meet to discuss how to design the program, and there will be opportunities for businesses, environmental groups and other interested parties to participate. The WCI partners plan to issue a draft blueprint for a regional market program next July and approve it in August.