| What a difference a year can make. In twelve | | | | industry-wide emissions stay below a certain |
| months the center of gravity has strikingly | | | | level. |
| shifted in the debate over U.S. climate | | | | |
| change policy. Eleven states have developed | | | | Based on past successes with similar policies |
| mandatory greenhouse gas limits. More | | | | in controlling SO2 and nitrogen oxide |
| corporations are calling for federal policy. | | | | emissions and early promising results from |
| And numerous studies and media stories, | | | | the European program, there is substantial |
| including the report this month from the | | | | support to create a national CO2 |
| United Nations Intergovernmental Panel on | | | | cap-and-trade program in the United States. |
| Climate Change and Al Gore's movie, are | | | | Almost all of thefederal climate bills |
| tipping the scale of public opinion. | | | | propose this approach for power plants. Some |
| | | | proposals, including one by Senators John |
| But the biggest difference is in Congress. | | | | McCain and Joe Lieberman and one by Senator |
| Since January, Capitol Hill has been | | | | Jeff Bingaman, would expand cap-and-trade |
| inundated with a wave of climate bills. At | | | | beyond power plants and include the |
| this point, a federal climate policy seems | | | | transportation sector. |
| inevitable. That's certainly what many | | | | |
| electric power company senior executives | | | | Regardless of the sectors regulated, the |
| think. More than 80 percent of those polled | | | | question of how allowances are distributed |
| in CERA's most recent executive power survey | | | | under a cap-and-trade program looms large. |
| expect a mandatory carbon policy by 2015. | | | | Current programs have mostly followed the |
| | | | precedent of the U.S. SO2 program by |
| But designing a U.S. climate change policy is | | | | allocating the majority of allowances |
| a big undertaking. It may be difficult to | | | | directly to the regulated companies at no |
| reach a consensus in this Congress; however, | | | | cost. But this could change because the |
| a real debate is underway. At the very least, | | | | stakes are higher with CO2. |
| that debate will be an important prelude to | | | | |
| the 2008 presidential election and a | | | | The government allocation of CO2 allowances |
| signalthat climate policy is moving to the | | | | would be a major wealth transfer with the |
| front and center of U.S. politics. | | | | annual value ranging anywhere from $5 to over |
| | | | $200 billion. This has not been lost on |
| The Bush Administration's existing climate | | | | interest groups and many are already staking |
| change policies emphasize research, | | | | out positions. Certainly regulated companies |
| technology development and public-private | | | | want to hedge future costs through allowance |
| partnerships such as the Asia-Pacific | | | | allocations. Consumer groups would like some |
| Partnership on Clean Development and Climate. | | | | of the allowances as a compensation for the |
| The new policy proposals would move to a | | | | higher prices they expect to be paying. And |
| mandatory approach of regulating carbon | | | | some advocates want to use allowances to |
| dioxide (CO2) emissions. | | | | subsidize investments in new, lower emission |
| | | | technologies. |
| These bills seek to accelerate investments in | | | | |
| lower emitting fuels and technologies by | | | | Some proposals would avoid free allocations |
| setting specific emissions targets. | | | | altogether and instead use auctions and in |
| | | | the process create a major revenue source for |
| The obvious questions for setting these | | | | the federal government. That is how New York |
| emissions targets are, "What level of | | | | plans to distribute the state's CO2 |
| reductions will be required?" and "On what | | | | allowances under the regional program being |
| timetable?" We will hear much discussion | | | | set up in the Northeast. It is likely that a |
| about these in the coming months. Butthere | | | | federal allocationscheme will move away from |
| are other, less obvious questions that will | | | | any single approach to a blend of these |
| really chart the course for U.S. climate | | | | mechanisms and incentives. |
| policy. | | | | |
| | | | Beyond designing how a domestic climate |
| To start, policymakers will need to decide | | | | change policy will function, policymakers |
| any program's scope and framework- what | | | | will also have to define how a U.S. program |
| sectors will be affected and how. The | | | | connects with the policies of other nations. |
| electric power and transportation sectors | | | | Linking a U.S. CO2 emissions market with |
| account for more than 70 percentof U.S. CO2 | | | | other trading systems seems an obvious step. |
| emissions. So it's no surprise that they are | | | | Regulators in the Northeast and California |
| at the top of the list of sectors to control. | | | | are already thinking about how their programs |
| But how should these emissions be effectively | | | | could link with international markets. But |
| limited? Cap-and-trade is the framework | | | | the real question comes down to how the |
| getting most of the attention right now, at | | | | United States should deal with major emitting |
| least for the power sector. | | | | countries that are not capping emissions. |
| | | | |
| First used to control sulfur dioxide (SO2) | | | | The United States accounts for over 20 |
| emissions from U.S. power plants, | | | | percent of global CO2 emissions today, but |
| cap-and-trade has become the favorite of | | | | the global balance is changing. Due to rapid |
| academics, corporations and regulators. In | | | | economic development, emissions in China and |
| January 2005, Europe adopted this approach to | | | | India have grown more than five times faster |
| controlling its CO2 emissions. Now over | | | | than those of the United States since 1990. |
| 11,000 powerplants and industrial facilities | | | | And CERA projects this trend to continue, |
| across Europe are covered under the European | | | | with China and |
| policy. | | | | |
| | | | India contributing about half of the growth |
| And CO2 cap-and-trade programs are now | | | | in global emissions over the next quarter |
| sprouting up in the United States. The | | | | century. |
| Regional Greenhouse Gas Initiative, a | | | | |
| cap-andtrade program for power plants in 10 | | | | The global emissions trends are daunting, and |
| northeastern states, is scheduled to start in | | | | the effectiveness of any policy to curb them |
| 2009. California is also drafting a similar | | | | will depend on the collective actions of the |
| policy for in-state power companies set for | | | | international community. Nonetheless, it is |
| 2012. | | | | very possible that the United States will |
| | | | push forward with a domestic policybefore any |
| How does cap-and-trade work? It starts with a | | | | new international system is established. |
| government setting an emissions cap or | | | | Given this reality, a number of proposals |
| ceiling for a group of sources. For | | | | include measures to ensure that a U.S. |
| example,power plants-and then issuing a set | | | | program does not impose sudden cost increases |
| of "allowances," the currency of the program, | | | | that place its economy at a disadvantage to |
| equal to the overall size of the cap. The | | | | those of its major trade partners. |
| requirements are really very simple: | | | | |
| companies comply by limiting their emissions | | | | Such economically-oriented approaches will |
| to the number of allowances they hold. | | | | likely be balanced by other voices asserting |
| | | | that the U.S. needs to take the first step to |
| The innovation with cap-and-trade is that by | | | | encourage countries like China and India to |
| trading allowances,companies get to choose | | | | adopt their own emissions policies. But |
| where to reduce their emissions. And in | | | | whatever system emerges internationally, |
| circumstances where it's not economic, they | | | | climatechange will be a central issue in U.S. |
| can buy additional allowances in the open | | | | politics going into the 2008 presidential |
| market. Regardless of who buys and | | | | election and beyond. |
| sellsallowances, the overall cap ensures that | | | | |