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By Geoffrey Styles on Jun 12, 2014 with 10 responses

Does EPA’s CO2 Rule Open A Back Door to Cap & Trade?

EPA’s Proposed “Clean Power Plan” Would Require 50 State Plans

Last week the US Environmental Protection Agency released for comment its proposal for regulating the CO2 emissions from existing power plants. It follows EPA’s emissions rule for new power plants published late last year but takes a different, more expansive approach.  If implemented, the “Clean Power Plan” would reduce US emissions in the utility sector by around 25% by 2020 and 30% by 2030.

One of its most surprising features is that instead of setting emissions standards for each type of power plant or mandating a single, across-the-board emissions-reduction percentage, it imposes distinct emissions targets on each state. Based on analysis by Bloomberg New Energy Finance, some states could actually increase emissions, while others are required to make deep cuts. The resulting disparities have apparently triggered new interest in state and regional emissions trading as a means of managing the rule’s cost.

Trading Emissions Is Hardly A New Idea

Although emissions trading has become more controversial in recent years, it proved its worth in holding down the cost of implementing previous environmental regulations, such as the effort to reduce sulfur pollution associated with acid rain. It works by enabling facilities or companies with lower-than-average abatement costs to profit from maximizing their reductions and then selling their excess reductions to others with higher costs. The desired overall reductions are thus achieved at a lower cost to the economy than if each company or facility were required to reduce its emissions by the same amount.

Although the Clean Power Plan doesn’t require that states establish such emissions trading markets, its lengthy preamble includes a discussion of existing state greenhouse gas “cap-and-trade” markets in California and the Northeast. It also points out that measures to comply with the new rule may generate benefits in the markets for conventional pollutants, including those for the recent cross-state pollution rule. Administrator McCarthy also mentioned the benefits of multi-state markets in her speech announcing the new rule.

A patchwork of cap and trade markets across the US, including the addition of new states to mechanisms like the Regional Greenhouse Gas Initiative (RGGI), might help mitigate some of the cost of complying with 50 different CO2 targets. However, it would still be a far cry from the kind of economy-wide, comprehensive CO2 cap and trade system once contemplated by the US Congress.

A Short History of CO2 Cap & Trade

Cap and trade was an idea that had gained significant momentum and even begun to appear inevitable, prior to the onset of the financial crisis in 2008. To supporters, it looked like a better way to limit and eventually cut greenhouse gas emissions while taking advantage of market efficiencies. The price it would establish for emissions would thus be based on the cost of achieving a desired level of reductions, rather than being set arbitrarily,  as a carbon tax would be, without any guarantee of actual emissions reductions. Opponents viewed it as an unnecessary or unnecessarily complicated drag on the economy and a tax by another name, coining the pejorative term “cap-and-tax”.

Although early US cap-and-trade bills were bipartisan, including one co-sponsored by Senator McCain, the 2008 Republican Presidential nominee, the debate over cap and trade took on an increasingly partisan tone, in a period of widening polarization on most major issues. The Waxman-Markey climate bill, with cap and trade as a major provision, was narrowly passed when Democrats controlled the House of Representatives in 2009, but various Senate versions failed to attract sufficient support, even when Democrats held a filibuster-proof supermajority in that body. The chances of enacting cap and trade legislation effectively died when a Republican won the vacant Massachusetts seat in  January 2010.

However, viewing this as a purely partisan divide is simplistic, at best. Aside from opposition by key Senate Democrats, including one whose campaign included a vivid demonstration of his stand against Waxman-Markey, the versions of “cap and trade” debated in 2009 and 2010 bore little resemblance to the original idea. Waxman-Markey was a 1400-page monstrosity, laden with extraneous provisions and pork. Its embedded allocation of free allowances strongly favored the same power sector now being targeted by EPA’s Clean Power Plan, at the expense of transportation energy, for which low-carbon options remain fewer and more costly. This would have created a de facto gasoline tax, while yielding fewer net emissions reductions than a system with a level playing field. Subsequent bills, such as the Kerry-Lieberman bill in 2010, took this a step farther, removing transportation fuels from cap and trade and effectively taxing them at a rate based on the price of emissions credits.

Along the way, national CO2 cap-and-trade legislation evolved from a fairly straightforward way to harness market forces to deliver the cheapest emissions cuts available, to a mechanism for raising and redistributing large sums of money outside the tax code. In some cases this would have been done directly, such as in the gratifyingly brief Cantwell-Collins “cap-and-dividend” bill, or as indirectly and inefficiently as in Waxman-Markey. It’s no wonder the whole idea became toxic at the federal level.

Cap and Trade Emerges in States and Regions

Although emissions trading for greenhouse gas reduction came up short in the US Congress, it took hold elsewhere. The EU’s Emissions Trading System (ETS) is an outgrowth of the Kyoto Protocol’s emissions trading mechanism, which was included largely at the urging of the US delegation to the Kyoto climate conference in 1997. The ETS is focused on the industrial and power sectors and covers 43% of EU emissions. It has experienced significant ups and downs over the sale and allocation of emissions credits.

Cap and trade also emerged as a preferred approach for some US states seeking to reduce their emissions. California’s emissions market was established by a provision of the 2006 Climate Solutions Act (A.B. 32), and RGGI currently facilitates trading among 9 mostly northeastern states. The relatively low prices of emissions allowances in these systems–particularly in RGGI, which has traded in the range of $3-$5/ton of CO2–suggests that they may still be capturing low-hanging fruit in the early phases of steadily declining emissions caps. Their effectiveness at facilitating low-cost emissions cuts is hard to gauge, because they also don’t occur in a vacuum.

Except for Vermont, all of the states involved have renewable electricity mandates that by their nature deliver more prescriptive emissions cuts. These markets have also been implemented in a generally weak US economy, which has constrained energy demand, and against the backdrop of the shale revolution, which has yielded significant non-mandated emissions reductions. Nor have these state and regional approaches to cap and trade entirely avoided the debates over how to spend their substantial proceeds that plagued federal cap-and-trade legislation.

Cap and Trade Shouldn’t Be a Deciding Factor in Evaluating the Clean Power Plan

For many years my view of cap and trade was that if we needed to put a price on GHG emissions, it was a better, more efficient option than an arbitrary carbon tax, or other top-down method. My experience analyzing more recent “cap-and-trade” legislation left me with serious doubts about our ability to implement a fair and effective national cap-and-trade market for CO2 and other greenhouse gases within the current political environment. Whether on a unified basis or in aggregate across many smaller systems, the vast sums it could eventually generate are simply too tempting to expect our legislators and executives to administer even-handedly.

Whatever its potential benefits and pitfalls, I can’t help seeing cap and trade as a distraction in the context of the EPA’s proposed Clean Power Plan. Even at its most efficient, cap and trade couldn’t render painless the disparities of a plan that would require Arizona to cut emissions per megawatt-hour by more than half, and states like Texas and Oklahoma to cut by 36-38%, while Kansas, Kentucky, Missouri, Montana and even California cut by less than a quarter–and under some scenarios might even increase their overall emissions. Cap and trade would merely be a footnote on the scale of transformation the EPA’s plan envisions for the US electricity sector.

  1. By alpha2actual on June 13, 2014 at 9:27 pm

    Probably, due to the fact that Cap and Trade has been exposed as incompetence tempered with ideological Central Planning. Any cogent human being after reviewing the debacle which is the Emissions Trading System in the EU will discover that Cap and Trade is nothing more than a capital transfer from Red States to Blue States. Check out California’s feeble attempt under Moonbeam brown and the more recent North
    Eastern RIGGI pathetic attempts. You voted for these scum, drive on.

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  2. By Tom G. on June 14, 2014 at 12:49 am

    Here is my short take on what Cap and Trade is.

    “Cap and Trade is not a product – you can’t eat it, the public can’t spend or save it, you can’t drive it or plant it in the ground and watch it grow”.

    Pretty simple expression of how I feel about Cap and Trade. Of course if you want a longer version with many more items for consideration I have that as well.

    Instead of trading smoke why don’t we try to do something positive for a change. Why don’t we encourage and empower our people to look for ways to improve the quality of the air we breathe and the water we drink. Let’s stop talking about 400 ppm of CO2 on a mountaintop in HI and start talking about what each of us can do every day to improve our environment, our homes, our schools and businesses.

    There is so much low hanging fruit it isn’t even funny. Clothes dryers that use the air from within our homes to dry our clothes making it one of the most inefficient appliances in our homes. Air Conditioners that are 14-16 SEER when we know how to build 23 SEER units. Heat pumps which turn one unit of electrical energy into 3 units of heat energy. Combined Cycle natural gas power plants that are 60% efficient instead of 35% efficient. Old nuclear reactors that overheat without a constant flow of water instead of safe shutdown gas cooled or molten salt reactors that produce electricity AND desalinate water or some other secondary product to make them competitive with the every decreasing cost of renewable energy systems. And for heavens sakes, solar on every home and parking lot in America. And that will be a no brainer starting in about 2015 but we might just as well get started now. And our utilities; they need to start thinking ahead to how they are going to power our cars, trucks, and railroads. All this stupid bickering is just that – stupid.

    It seems to me that almost every Democrat, Republican, Independent, Tea Party, Liberal and Conservative would probably support things that would lead to clean air to breathe and water to drink for everyone on this planet. Let’s quit all of the nonsense and get on with fixing America first – then we can help the rest of the planet.

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  3. By Forrest on June 14, 2014 at 7:55 am

    EPA has a clever and devious approach to the eventual goal of gaining power over our state public utility commissions. Using the Clean Air Act for something it never was constructed for, they now claim authority per Supreme Court ruling to dictate to power plants to reduce CO2 emissions. They currently provide flexibility in meeting the goals, in attempt to dispel to public an image of targeting coal fuel. The states have a menu of options that lead to only one economic reality of shutting down coal power plants. This play nice atmosphere of EPA is just an exercise for them to demonstrate their burgeoning power over all energy sectors. They fear voters may become upset with skyrocketing utility bills and push lawmakers to put the EPA actions to democratic vote. Environmentalist appear to be appeased with this modest CO2 reduction. Strange as the cherished ’09 Waxman-Markey cap and trade bill demanded an 80% target, per critical need. So, one can determine 30% is insufficient to make a difference. Algore said it was just a symbolic gesture. Price tag estimates of the gesture $50 billion per year. Maybe, this is why EPA is touting health benefits? Let’s push them back to the original intent of regulation and demand credible global warming benefits i.e. how many degrees of global warming are we accomplishing with such huge expenses? Answer, probably nothing. Running the best case scenario through the mystical computer program .02 degree C. in 100 years. Not much reward for shooting ourselves in the foot. How many of our 500 coal power plants will survive the EPA dictates? Meanwhile 1,000 coal plants are under construction in developing economies.

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  4. By Forrest on June 14, 2014 at 7:59 am

    Cap, trade, and tax could be of value if restricted within the coal power sector. Not good to open Pandora’s Box of gimmickry upon all power production sectors. State by state differences within energy resources makeup will not lead to fair trade. I don’t want to send Michigan wealth to North Dakota for their natural gas production neither to Arizona for their sunshine production, nor to Iowa for ethanol production, or to Kansas for their wind production, and what to do with Michigan’s zero CO2 emission of nuclear production.

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    • By Forrest on June 14, 2014 at 8:18 am

      Oh, western states have a wealth of hydro power and geothermal as well as natural gas resources. Why do they need Michigan’s money for exploiting natural resource?

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    • By Geoffrey Styles on June 16, 2014 at 9:15 am

      Forrest,

      In general, the narrower the set of emissions sources included in cap & trade, the less benefit produced. The economics behind cap & trade rely on big differences in compliance costs, creating big cost savings to share between sources. If we only regulated coal plants under cap & trade, with the targets that EPA has just set for them, it’s not clear the benefits would even cover the administrative costs, because they all face the same limitations and obstacles.

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      • By forrest on June 16, 2014 at 3:51 pm

        Coal has attributes that make it valuable, even when compared to solar or wind. It may be a mistake to penalize coal at the benefit of wind, as to my thinking we need coal within the mix. Not good to empower wind, push that energy to maximize usefulness and drop coal to stand still status. The clean coal technology appears to me to be one such technology to greatly improve coal efficiency i.e. steam turbine 35% efficient to combined cycle 60%. That alone is a huge improvement within coal CO2 footprint. Also, the technology removes 95% of harmful sulfur and heavy metals. By restricting to coal sector, would, investment dollars flow to clean coal? Also, the clean coal gasification process produces CO2 more of a by product per its purity and concentration. R&D efforts are targeting to utilize such a pure waste stream of CO2 for process development of useful products. Just a few weeks ago encouraging news of CO2 process enabled with copper catalyst to form ethanol. The process is estimated to be economically competitive, albeit with years of commercial process development to automate.

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  5. By Forrest on June 15, 2014 at 6:47 am

    It would be dangerous to allow federal government to get their hands on a regulatory device to raise a considerable amount of revenue. Government has an insatiable appetite for ever more per desires of expansion of workforce, power, wealth, and ability to purchase popularity, ie temporary war tax known as income tax. Also it would be dangerous to implement another venue of trade to the banking and investment financial institutions whom have incredible corporate structure to stymie attempts to shine daylight upon their shenanigans. Case in point the recent hording and manipulation of Chase bank per RFS credits. BTW, if the Waxman-Markey was a defacto gas tax then cap and tax terminology must not be a pejorative.

    The reason EPA is ganging up on power sector? Answer, the organization is wholly supported and continues to achieve power per political desires of Left. Also, the most Left leaning states have already launched upon costly green energy decisions. So, a no brainer for them to “regulate” power generation. Meaning hurt Red states award Blue states. They know a good path to increase their legislative autonomous authority to rule without representation. A tyrant is acceptable to majority if it wields power stealthily and gradually to not awaken the sleeping. This is also, why the agency avoids transportation sector of which pollutes more. To avoid head to head with voting public anger as this group could pull the rug from EPA control. No, easier for them to attack businesses as they make profits and can’t vote.

    The easiest lowest cost path to achieve lower emissions of power sector. Put as much energy as possible to natural gas point of use and doing so avoid the side step pollution of power plants altogether. Put, bio-mass energy in the mix as well for space heating needs. Award power sector for decreased pollution for this change over. Also, it might be helpful to have a closed loop cap and tax system within power sector that share the same interconnects. This would provide incentive to expand power grid to capture more green energy. They caveat being, their must be a premium placed on power that is reliable and can be called to duty when needed. It sure would be nice to capture the West hydro power that has been estimated to meet 40% of country needs.

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    • By Forrest on June 15, 2014 at 8:37 am

      Geoffrey describes a one time good tool to decrease compliance cost to industry, but now he is aware of political corrosion that makes the device useless. This is caulked up to politics. That’s a very broad brush to paint with and one that avoids the problem. Truth is the Right is tired and fully suspicious of any government regulations that chip away at our freedoms per yet more federal regulations such as EPA and environmental actions. We have witnessed many birthing of such sensible, targeted, and limited voter approved legal action turn to behemoths that grow and grow per Supreme Court actions to beyond original intent. Reference how the Supreme court ruled to make themselves Black Robbed Oligarchs per unlimited power of the simple language of “regulating interstate commerce”. The Clean Air, Clean Water, and probably Affordable Health Care all started earnestly with easy to define benefits. Problem has always been the voting public thinks they are voting for guppy and as the politics of corrupt Judges and activist slowly find multiple paths to inflate the guppy to whale size.

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  6. By Forrest on June 16, 2014 at 4:24 pm

    I did a quick EIA 2013 graph look up on nuclear energy. Michigan has three nuclear plants that annually produce 300 trillion BTUs. That’s about national solar production. Also, national nuclear power plants produce approximately 10 quadrillion BTUs and that about six times the wind production of nation. So, per my thinking nuclear is a heavy hitter league champion CO2 reduction plant. Michigan should get a ton of trade credits since they have equivalent of nations solar power sitting within its borders.

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