States Form Cap and Trade Markets While Senate Bill Flounders

Posted by Charlotte LoBuono on January 8, 2010 at 4:02 pm

The RGGI, a regional cap and trade market in the Northeast, could soon be joined by carbon markets in the West and Midwest. (image: dec.ny.gov)

Greenhouse gas reduction initiatives on the regional and local levels are a growing trend in the U.S. As Bloomberg reported on Thursday, state governments are taking the lead in establishing cap and trade markets in 2010, even as climate legislation continues to languish in the Senate.

According to Bill Becker, executive director of the National Association of Clean Air Agencies, regional-level carbon trading is “where the action is going to be” this year. Becker told Bloomberg that “the states are juiced to expand their programs. They don’t like the slow pace that we’re seeing in the federal government, and they’re not confident that anything meaningful is going to necessarily pass.”

In a cap and trade market, the government issues a limited number of permits, each carrying the right to emit a set amount (typically one ton) of carbon dioxide. Companies can then buy and sell these permits.

Legislation to establish a national market has been delayed in the Senate until sometime this year, because of criticism of the plan from Republicans and some Democrats. In the meantime, a group of 10 states in the Northeast have already put into place a regional cap and trade market called the Regional Greenhouse Gas Initiative, and similar regional programs in the Midwest and West are soon to follow.

The two nascent regional markets, the Midwestern Greenhouse Gas Reduction Accord and the Western Climate Initiative, are currently in development, and are not slated to begin until 2012. The Midwestern Greenhouse Gas Reduction Accord comprises the states of Iowa, Illinois, Kansas, Michigan, Minnesota, and Wisconsin, and the Canadian province of Manitoba. The states of Indiana, Ohio, and South Dakota, and the Canadian province of Ontario are observers.

Members of the Western Climate Initiative are Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington, and the Canadian provinces of British Columbia, Manitoba, Ontario, and Quebec. Observers are Alaska, Colorado, Idaho, Kansas, Nevada, and Wyoming; the Canadian provinces of Saskatchewan and Nova Scotia; and the Mexican states of Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora, and Tamaulipas.

Peter Shattuck, a research analyst at Environmental Northeast, said that the states comprising the regional markets must make “detailed decisions” this year about which companies to regulate, how many permits to sell at auction, and how many permits to give away in order to get the programs underway by 2012.

However, such regional carbon trading programs could face legal challenges from industry and states without comparable greenhouse gas regulations. On December 7, Upstate New York power company Indeck filed a lawsuit against the RGGI, claiming that it unlawfully interfered with the federal government’s authority to regulate interstate commerce.

In addition, North Dakota Attorney General Wayne Stenehjem is contemplating legal action against authorities in Minnesota, a member of the Midwestern Greenhouse Gas Reduction Accord, over plans to include carbon price estimates in future electricity purchasing decisions. Coal-rich North Dakota has power plants that sell electricity to its eastern neighbor, and these facilities would be hurt by the proposal.

Stenehjem told Bloomberg that, “If anything is going to be done to regulate carbon, and if that needs to be done, it’s only going to work if it’s done on a national basis.”

The US Chamber of Commerce will continue to oppose “a patchwork of state and regional regulations” on greenhouse gases, Robin Conrad, the organization’s chief lawyer, wrote in an e-mail to Bloomberg.

While the debate on the federal cap and trade program has unleashed an array of competing estimates about the costs of cap and trade for consumers, it seems clear that such programs will at least temporarily add to the costs of energy companies, and those costs will make their way to individual consumers. The impact of cap and trade on individuals could be small, or gradual, but residents in states that are establishing carbon markets could see the effects of the new policy in their heating bills.