Regional alliances enlist cap-and-trade approach for carbon

NEW YORK -- In what are likely to be blueprints for a national effort to fight climate change, clusters of states on the East and West coasts and in the Midwest are setting up marketplaces for electric utilities and other companies to buy and sel...

NEW YORK -- In what are likely to be blueprints for a national effort to fight climate change, clusters of states on the East and West coasts and in the Midwest are setting up marketplaces for electric utilities and other companies to buy and sell credits to emit carbon dioxide and other gases responsible for global warming.

Building on a voluntary market system pioneered in Chicago, 10 Northeastern states recently launched what they are billing as the biggest, most coordinated effort yet in the U.S. to take on climate change by mandating that electric utilities take part in an emissions-allowance trading program.

But an alliance of seven Western states and four Canadian provinces could surpass their efforts with a more ambitious trading system they unveiled in September. It encompasses industry as well as utilities, with a goal of cutting greenhouse gas emissions by 15 percent in 12 years.

And a consortium of six Midwestern states -- Minnesota, Wisconsin, Illinois, Iowa, Michigan and Kansas -- and one Canadian province -- Manitoba -- are establishing their own carbon-trading market, aiming to have it running in 2010. Observers of the accord are Indiana, Ohio and South Dakota as well as the province of Ontario.

These programs embrace the "cap-and-trade" approach that has the support of both the Democratic and GOP presidential nominees. Proponents say it offers an effective way to cut the emissions blamed for warming the climate, and to do so cheaply and more efficiently than a regulatory program.


Eventual impact

The results for consumers are unclear. Although cutting carbon dioxide emissions is predicted to raise electric rates, cap-and-trade may mean the cost will be less than conventional regulations, and in many states, some of the proceeds from the sales of emissions allowances will be spent on promoting energy efficiency and conservation, saving households money on their electric bills.

Whatever the eventual impact on household budgets, the first auction of emissions allowances at the New York Mercantile Exchange in September represented the opening of a new chapter in America's response to the threat of climate change caused by the accumulation of carbon dioxide and other gases in the atmosphere.

"The start of the Regional Greenhouse Gas Initiative auction of emission allowances demonstrates both how far we've come and how far we need to go to effectively address climate change," says Eileen Claussen of the Pew Center on Global Climate Change, referring to the effort by the Northeastern states.

"These states are paving the path to a comprehensive national program that offers the most cost-effective solution to significantly reduce U.S. greenhouse gas emissions," she says.

Emissions trading started in the 1990s with efforts to reduce sulfur dioxide, the cause of acid rain. When that proved successful at cutting emissions quickly for much less than the cost of a conventional regulatory program, the cap-and-trade approach came to be seen as a way to tackle the bigger problem of global warming.

Indeed, with presidential candidates Sen. John McCain, R-Ariz., and Sen. Barack Obama, D-Ill., favoring a cap-and-trade system, it's likely that a national trading program will be set up, after years of little action on the federal level, to combat global warming.

"There are differences between the two candidates on climate," says Harvard University's Robert Stavins, a specialist in environmental economics. "However, what's most striking is that if the difference between the two candidates is 1 foot, then both of them have a distance of about one mile from the current administration."


Potential pitfalls

The cap-and-trade approach can have pitfalls. When European countries set up carbon trading in 2005, they not only issued the credits for free, they gave away too many. That led to huge profits for some companies.

The Northeastern states have been criticized for setting too generous a cap -- 188 million tons annually -- for the first several years of their program. Emissions have fallen below that level in recent years because of rising fuel prices and a slowing economy.

But Jonathan Schrag, executive director of the regional initiative, notes that during the first auction, the allowances fetched $3.07 each, well above the $1.86 floor price the states had set. And although only 12.6 million allowances were sold -- covering an equal number of tons of carbon dioxide emissions -- the states received bids for four times that many allowances, a sign that utilities recognize the value of the trading process.

"I think we have set the bar very high for a model that could easily be adapted for a national program," says Pete Grannis, commissioner of the New York State Department of Environmental Conservation.

But Stavins notes that the Northeastern states require only power plants to take part in the cap-and-trade program. The Western Climate Initiative, which includes California, will take in a much broader array of sources, including industry and transportation.

Although still in the planning stage, the Midwestern Greenhouse Gas Reduction Accord, of which Illinois is a member, will include a variety of sources, says accord chief Jesse Heier.

How it works


The concept is that some power plants and businesses can reduce emissions more easily than others for a host of reasons, such as having newer facilities, different fuel supplies or more flexible generating or manufacturing processes.

By issuing a set number of credits, states give those utilities and manufacturers an incentive to reduce their emissions quickly so they will have leftover allowances to sell to companies that cannot adjust as cheaply or quickly. But because the overall number of credits gradually declines, total emissions fall.

The Regional Greenhouse Gas Initiative has set a limit of 188 million tons of carbon dioxide emissions a year for the 233 power plants in the 10 Northeastern states it covers. The group has begun auctioning emission allowances.

Utilities must have allowances to cover their emissions, either by buying them through the auction, buying them from someone else (such as another utility or a broker) or by reducing their emissions. And they can sell any allowances they don't need.

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