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