Tight Federal Deadlines May Keep U.S. States Out Of Existing Cap-and-Trade Programs

Several U.S. states are considering joining existing cap-and-trade programs such as the Regional Greenhouse Gas Initiative to comply with pending carbon rules from the federal government. However, a major obstacle in doing so is the tight deadlines that federal officials have set for states to submit compliance plans. 

17 April 2015| Want to join an existing cap-and-trade program in the United States? The nine Northeastern states participating in the Regional Greenhouse Gas Initiative (RGGI) are ready to welcome with open arms any of their counterparts who want to use the carbon trading program to comply with upcoming regulations from the United States Environmental Protection Agency (EPA).

“The waters are warm – dive on in,” Janet Coit, Director of RGGI member Rhode Island’s Department of Environmental Management, said at an event hosted by nonprofit think tank Center for Climate and Energy Solutions (C2ES).

Not so fast.

Literally, time is a major obstacle for states wanting to join existing carbon trading programs such as RGGI or California’s cap-and-trade program as a compliance mechanism, according to state regulators speaking at the C2ES event.

The EPA announced its proposed Clean Power Plan to limit carbon pollution from existing power plants last June, with a final rule scheduled to be released this summer. The rule will mainly affect coal-fired power plants, with the goal of cutting emissions from electricity generation 30% below 2005 levels by 2030. States must submit compliance plans to the EPA in the summer of 2016 – either complete plans or initial plans with requests for 1-year or 2-year extensions. States would be eligible for a two-year extension to June 2018 – with a progress report due in June 2017 – if their compliance plan is part of a multi-state plan.

For the RGGI states, those deadlines are “completely doable because we have already been through that process and we have a system that works,” Coit said. “If people wanted to join RGGI, depending on what the rule says, they might be able to declare their intentions in time. But would we be able to work through how to bring in a state within the timeframe is the question.”

It took the RGGI states five years to develop and launch the program, followed by another few years of public consultations and analysis that underpinned the 2014 revamp of the program. So there might not be enough time for new states to join RGGI as a compliance option if the EPA remains strict about the summer 2016 deadline. Even a June 2018 extended deadline could be tough to meet given RGGI’s rule-making process.

The EPA outlined several potential compliance options for states, including market-based programs to reduce carbon, investments in existing or new energy efficiency programs or expansion of renewable energy initiatives – or a combination of these strategies. Market-based programs would allow regulated entities to trade emissions reductions units to reduce the cost of compliance, as long as the state met an overall cap. The agency explicitly mentioned that the emissions reductions generated by RGGI and California’s cap-and-trade programs would be approved under EPA’s guidelines – a concrete recognition of regional market-based programs.

The emissions of capped sectors in California have dropped 3.8% in the first two years of the compliance program. RGGI states have achieved 40% cuts in emissions in the power sector since 2005.

“EPA has given the states a gift by giving us all this flexibility,” said Martha Rudolph, Director of Environmental Programs for the Colorado Department of Public Health & Environment. “Yet, there’s so much flexibility that trying to figure out what we’re going do in a short timeframe is very difficult.”

The tight deadlines, if left unaltered, could even have the “unintended consequence of discouraging people from exploring regional solutions, and I think that would be a shame,” she said.

The Trail Leads Northeast

There has been a movement in the Virginia state legislature and among NGOs for the state to join RGGI as an “off-the-shelf solution” to complying with the EPA’s regulation. So joining RGGI is one of the options, said David Paylor, Director of the Virginia Department of Environmental Quality.

“But we don’t know what RGGI is going to look like in the context of the Clean Power Plan yet,” he said. “It’s our view that RGGI is going to have to be reformed a little bit and that is something that we would look at, along with all of the other options, to see what makes the most sense. Market-based solutions are likely to make a lot of sense.”

Joining a regional carbon trading program could gain momentum in the state if companies support this compliance approach, Paylor said.

“When it comes to carbon pricing, I would say in Virginia that’s going to have more legs the more the business community gets behind it,” he said. “And we’re finding that much of the business community is still in the ‘we’re not quite sure’ stage.”

Businesses and individuals are reticent about policies such as carbon pricing that could increase energy costs for consumers, particularly in states that currently have low costs, even if implementing a carbon pricing program would be more cost effective in the long term, the regulators observed.

“Even though it’s the least cost, it doesn’t feel that way to them,” Paylor said.

But the Trail Goes Cold out West

Rudolph sees a different hurdle for Colorado in joining a regional cap-and-trade program such as RGGI or California’s program – which is currently linked to the Canadian province of Quebec and could eventually be linked to Ontario – to comply with the pending EPA rules. Her state has a diverse energy mix, more than half of which comes from coal-fired power plants, and gets its energy from two investor-owned utilities, several municipal utilities and rural electric associations, which creates significant challenges in developing a carbon pricing program in the state.

“Frankly, I think it’s going to be difficult for us to pursue that, although if it comes to us we certainly won’t say no,” she said. “The amount of time the rule gives to set up any kind of plan is very short and the type of plans, like RGGI or the California plan, would be frankly in the timeframe nearly impossible for us to set up.”

But there are “smaller, less complex trading programs that caught my eye” such as a state-only plan that allows regulated entities to trade credits with each other, Rudolph said.

“That is a more modest type of trading proposal that I think may have legs in states like Colorado,” she said. “We have not talked about that as an option, but that is something I’d be putting on the table for consideration.”

Paylor suggested a solution could be to start with an intrastate carbon trading program that transitions into an interstate approach. “And we’re having discussions with other states now to try to keep the maximum number of options open as we go forward and see what the rule looks like,” he said.

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