Regional Cap-and-Trade Programs
In the U.S. Beginning to Take Action
In the absence of federal leadership in establishing mandatory greenhouse gas mitigation programs in the U.S., three regional programs have developed – one in the Northeast, one in the Midwest, and one in the West. These regional cap-and-trade programs are all somewhat different.
Northeast and Mid-Atlantic:
“Regional Greenhouse Gas Initiative”
The Regional Greenhouse Gas Initiative (RGGI) is a coalition of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. Greenhouse gas emission caps have been established on power plants within these states. RGGI has blazed the path for other regional coalitions, and possibly for future action on the federal level.
RGGI is the first mandatory cap-and-trade program for carbon dioxide (CO2) to be established on any level in the U.S. Its reach is somewhat limited, since it only places mandatory emissions caps on the power sector within its 10-state region. RGGI will cap emissions on power plants at 2009 levels. Power plants will then have to stay within that emissions cap through 2014. After that, they will be required to reduce emissions. Each year from 2015 through 2018, power plants in the 10-state area will have to reduce emissions below their cap by 2.5 percent per year, for a total reduction of 10 percent.
To reduce emissions of greenhouse gases, the RGGI cap-and-trade program:
* Requires electric power generators to hold allowances covering their allowed emissions of CO2.
* Provides an emissions allowance auction and trading system so that electric power generators and others can buy, sell, and trade CO2 emissions allowances.
The auction for emissions allowances will be bringing in a considerable amount of money. RGGI states will use these funds for energy efficiency programs, to mitigate price impacts of the program on consumers, to stimulate investment in the renewable energy sector, and to cover the administrative costs of the program.
RGGI held its first auction for CO2 emission allowances on Sept. 25, 2008. Six of the 10 states in RGGI offered emissions allowances at this auction. This points out a unique aspect of RGGI. Each state has its own individual trading program and set of state regulations on that program, all based on a uniform RGGI Model Rule. The CO2 allowances issued to power plants within RGGI are reciprocal between states. Taken together, the 10 individual state programs function as a single regional compliance market for carbon emissions.
At the RGGI auction, all 12.6 million allowances were sold. Each allowance allows the emission of one short ton of CO2 emissions. There were 59 bidders, including representatives from the energy, financial, and environmental sectors. The average price was $3.09 per ton of CO2. The next auction is scheduled for Dec. 17, 2008. RGGI allowances are also currently being traded on the Climate Climate Futures Exchange.
Offsets are an important aspect of the RGGI program. Power plants are allowed to purchase offset allowances from approved projects that will reduce or sequester emissions of greenhouse gases. These CO2 offset allowances may be used to satisfy only a limited portion of a source’s compliance obligation — initially a maximum of 3.3 percent of a power plant’s total compliance obligation. This may be expanded to 5 percent and 10 percent later.
RGGI has set standards to ensure that offsets are real, additional, verifiable, enforceable, and permanent. At this time, five project categories for CO2 offset allowances are eligible under the participating states’ regulations.
a. Landfill methane capture and destruction
b. Reduction in emissions of sulfur hexafluoride (SF6) in the electric power sector
c. Sequestration of carbon through afforestation;
d. Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector
e. Avoided methane emissions from agricultural manure management operations
RGGI also allows for emissions credit retirements from a mandatory program outside the United States (e.g., Clean Development Mechanism CERs) to be used as an offset under limited circumstances.
For more information on RGGI, see: www.rggi.org
Western and Northern U.S. and Canada:
“Western Climate Initiative”
The Western Climate Initiative (WCI) is a coalition of seven U.S. states and four Canadian provinces: Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington; British Columbia, Manitoba, Ontario, and Quebec.
Like RGGI, the WCI is establishing a mandatory cap-and-trade system, with limited offsets. The WCI is not as far along in its development as RGGI, but it is more comprehensive in the number of sectors it will include in its mandatory greenhouse gas emissions caps. Also, the WCI is more comprehensive in the scope of greenhouse gases it includes. RGGI only caps carbon dioxide; the WCI sets caps on carbon dioxide, methane, nitrous oxide, hydroflourocarbons, perflourocarbons, and sulfur hexafluoride.
The WCI has a goal of reducing GHG emissions to 15 percent below 2005 levels by 2020. The WCI cap-and-trade program will be implemented in two phases. Beginning January 1, 2012, emissions from electricity generation and large industrial and commercial sources will be covered under the program. In the second phase, beginning January 1, 2015, the program will expand to cover emissions from transportation and residential, commercial, and industrial fuel use not otherwise covered.
On Sept. 23, 2008, the WCI released its Design Recommendations. This is just one step in the process, and much work remains to be done before final regulations are in place. The next meeting of WCI partners to discuss its market design is scheduled for Oct. 21-22 in Quebec.
Some aspects of WCI have been established, however. A regional cap on greenhouse gas emissions will be set, and emissions allowances (each allowance equals one metric ton of CO2 equivalent) will be issued to entities in the various sectors involved. Unlike the RGGI system in which all allowances are sold to emitters through an auction, the WCI current design recommendations state only that a minimum of 10 percent of the allowances be sold through auction, at least at first. The remaining allowances can be issued at no cost.
Offsets are included in the program, at this point. Emissions credits from GHG emissions offset projects will be limited to 49% of the total emissions reductions from 2012 through 2020. Projects must be real, surplus/additional, verifiable, and permanent.
The WCI has identified three project types for offset projects:
1. Agriculture (soil sequestration and manure management);
2. Forestry activities (afforestation/reforestation, forest management, forest preservation/conservation, forest products); and
3. Waste management (landfill gas and wastewater management).
The Design Recommendations encourage offsets to come from WCI states, but does not require it. Further changes to these recommendations are possible.
For more information on the WCI, see: http://www.westernclimateinitiative.org
“Midwestern Regional GHG Reduction Accord”
This is the newest of the regional accords, and the one furthest from implementation at this time. The Midwestern Regional GHG Reduction Accord, established on Nov. 15, 2007, is a coalition of six states: Kansas, Iowa, Minnesota, Wisconsin, Michigan, and Illinois; and one Canadian province, Manitoba. Indiana, Ohio, and South Dakota joined the agreement as observers to participate in the development of the cap-and-trade system.
Under the Accord, members agree to establish regional greenhouse gas reduction targets, including a long-term target of 60 to 80 percent below current emissions levels, and develop a multi-sector cap-and-trade system to help meet the targets. Participants will also establish a greenhouse gas emissions reductions tracking system and implement other policies, such as low-carbon fuel standards, to aid in reducing emissions.
The Accord is supposed to be fully implemented within 30 months.
For more information, see: http://www.wisgov.state.wi.us/docview.asp?docid=12497
Other State Actions
At least 36 states, including Kansas, have taken individual actions to formulate some type of “Climate Action Plan” on their own. These plans take various forms, but all are designed to find ways to reduce greenhouse gas emissions.
-- Steve Watson, CASMGS Communications
Conference information, presentations, and papers are available at http://www.oznet.ksu.edu/ctec/Fall_Forum.htm
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