R.I.P. cap and trade? Not just yet

August 11, 2010

— Valerie Volcovici is a Washington, DC-based journalist for Point Carbon, a Thomson Reuters company that provides news and intelligence on environmental and energy markets. Any views expressed here are her own. —

The architects of the Western Climate Initiative couldn’t have asked for better timing for the release of the blueprints for their planned cap-and-trade system on July 27.

With national headlines the week before calling Senate Majority Leader Harry Reid’s legislation to set up a federal greenhouse gas emissions trading system “shelved”, “jettisoned” or even “dead”, the release of the highly technical details of the WCI’s cap-and-trade plans drew more attention than would have otherwise been expected.

The WCI’s market design proposal is not completely new – it had been nearly two years in the making.

The blueprint was crafted out of an initial set of recommendations published in 2008 and refined with the input of stakeholders, advisers and experts. Few people other than the usual mix of state air regulators, environmental markets brokers and climate policy geeks would have even bothered marking the date of the blueprint’s release in their calendars.

But with lawmakers and journalists writing obituaries for a national carbon trading system, the signs of life displayed by the partnership of western states and Canadian provinces served as a reminder that cap and trade isn’t dead for the U.S. — at least not yet.

Like the Regional Greenhouse Gas Initiative (RGGI) in the northeastern U.S., the WCI was conceived by a handful of state governors to develop a common greenhouse gas reduction strategy in the absence of comprehensive federal legislation to address climate change. The WCI expanded from five members – Arizona, California, New Mexico, Oregon and Washington in 2007 – to 11, with the addition of Montana and Utah, as well as four Canadian provinces.

By joining the WCI, the states and provinces agreed to collectively reduce their greenhouse gas emissions 15 per cent below 2005 levels by 2020.

The central feature of the WCI is a cap-and-trade system, which would cover 90 per cent of the region’s economic sectors when fully implemented in 2015.

While all states and provinces participated in the market design process, not all are required to participate in emissions trading. So far only California, New Mexico, British Columbia, Ontario and Quebec are expected to start trading in 2012, when the market begins. The market blueprint design allows for states to join in when they get the go-ahead of their state or provincial legislatures.

Back in 2003, when the earliest seeds of the WCI concept were sown, the governors thought by acting first on greenhouse gases, they could compel federal lawmakers to enact national carbon market that would preempt their own program. But Congress still hasn’t called their bluff. Despite a brief glimmer of hope last year for passage of a federal climate bill when Democrats had a filibuster-proof Congress, the regional programs remain the only cap-and-trade systems in the US.

Last month’s release of the WCI market design plans was a reminder of that. With new attention now focused on the regional programs, what could federal lawmakers learn from their collaborate approach?

The WCI and RGGI program designs reflect the inputs of a variety of different states and provinces with different emissions and energy consumption profiles. For example, the WCI’s biggest emitter, California, sees the majority of its greenhouse gas emissions from the transportation sector, while coal-dependent Arizona sees the majority of its emissions from electricity production.

The programs give states some flexibility to decide how they want to participate in the cap –and-trade system. It is up to them, for example, to decide how many emission allowances they want to give to emitters for free and how many they want to sell via auction. Such issues have been difficult to iron out on a federal level and proved to be a tricky issue for senators as they attempted to negotiate every detail of a cap-and-trade bill at the outset.

Back in the eastern states, the nascent RGGI market has been going through some growing pains midway into the second year of its operation.

The market is oversupplied with allowances because emissions limits were set too high when the program was designed over three years ago. The initial allocation of RGGI allowances far exceeded the actual emissions that state regulators had projected. This was partly due to the fact that the economic recession led to lower production, and subsequently lower emissions.

But in RGGI’s next trading phase, state regulators will be able to tighten the cap to more accurately reflect the state’s greenhouse gas output. The RGGI example illustrates the fact that a cap-and-trade program can start out flawed, but improved as time goes on by learning from early mistakes. Just look at the EU ETS.

The chances of getting a cap-and-trade bill passed are extremely challenging at best.

Trying to cram through the complex details of a national cap-and-trade scheme that can appeal to at least 60 senators in an election year requires the political will of more than just two politicians. (Sorry, Senators Kerry and Lieberman).

Now may be a good time to pay attention to the work that is being done from the ground up on the state level.

By the time the political stars align for Congress to pass a climate bill, at least half of the states in the U.S. will be years ahead.

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Read Der Spiegel where this week the EU has admitted their carbon trading scheme has FAILED. Carbon trading is a mechanism for elitists to gain control over property rights, freedoms, and wealth. He who controls carbon, controls life.

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