cap and trade

We could find common ground on a carbon tax

I recently replied to a question on the National Journal blog, “Is Washington ready for a carbon tax?”

You can read other responses at the National Journal.

Here is my response: If we’re going to get serious about reducing the greenhouse gas emissions that are causing climate change, the most efficient and effective policy is to put a price on carbon.

Australia's Carbon Pricing Mechanism

Australia's Carbon Pricing Mechanism

December 2011

Download the full brief (PDF)



Australia’s Clean Energy Future plan is a comprehensive set of national policies aimed at reducing greenhouse gas emissions and driving investments in clean energy. At its core is a carbon pricing mechanism starting in July 2012 and covering approximately 60 percent of Australia’s emissions. The pricing mechanism begins with a fixed carbon price for the first three years, then transitions to a cap-and-trade program. Revenue generated by the carbon price will be used to ease costs for households and industry and for investment in renewable power, energy efficiency, and other low-carbon alternatives. This brief summarizes the carbon price mechanism and other key features of the Clean Energy Future plan.



On November 8, 2011, the Australian Senate gave final approval to the government’s Clean Energy Future climate change plan outlining a series of measures to reduce greenhouse gas (GHG) emissions and drive investment in clean energy. A central element of the plan is a carbon pricing mechanism directly covering 50 percent of Australia’s emissions and providing direct financial support for renewable energy, energy efficiency, reducing emissions from land-use and forestry, and other elements. The mechanism starts with a fixed price for the first three years from 2012 to 2015 (AUD 23, rising with inflation to about AUD 25 at the end of the fixed-price period). It then transitions from 2015 to 2018 to a cap-and-trade program, with a price cap and price floor. Regulations to implement the plan are being developed. Other principal elements of the plan include:

  • A long-term target of reducing GHG emissions 80 percent below 2000 levels by 2050;
  • Over 50 percent of revenue generated from the carbon price is returned to households, particularly low-income ones, through tax relief and greater family benefit payments;
  • Revenue generated by the program, along with additional government resources, will be used to ease the impact on trade-exposed industries and workers, and boost investments in renewable power, energy efficiency and other low-carbon alternatives;
  • Implementation of the plan is expected to cost the government AUD 4.3 billion over the first four years, over and above revenue generated;
  • Emissions from sectors not directly covered by the carbon price, such as certain fuels and synthetic gases, are indirectly addressed through changes to existing levies and taxes;
  • Politically sensitive sectors are carved out of the mechanism: agriculture is addressed separately through an incentive-based scheme, and road transport fuels are largely exempt from the carbon price;
  • Three new governance institutions are established to administer, oversee, and advise on all areas of the plan.

Climate Debate in Word Clouds: The Conflicting Discourse of Climate Change

Like it or not, climate change is now part of the “culture wars.” Like abortion, gun control, and health care, climate change divides conversations along political battle lines of left versus right. But if you listen closely to what is being said, you will find that people are talking past each other, engaged in a debate that has little to do with an evaluation of climate science. Instead, it is a clash about values, beliefs, and worldviews. Opinions are based largely on ideological filters that people use to understand complex issues, influenced strongly by the cultural groups of which they are a part and the opinions of thought-leaders and pundits whom they trust. The arguments are constructed around the frames by which people view the science, not the science itself.

Carbon Markets Take Flight (In Europe)

This post originally appeared on Txchnologist

At a time when many are adopting the narrative that carbon markets are faltering, the European Union (EU) is aggressively pursuing the expansion of theirs to include aviation. One of only two mandatory greenhouse gas (GHG) cap-and-trade systems in the world, the EU Emissions Trading Scheme (ETS) plans to fold in a new sector beginning in January 2012. Our research shows reducing GHG emissions from aviation is critical if we are to mitigate the impacts of global climate change. Low-carbon fuel technology and other technologies for airplanes are advancing at a rapid clip, but we need a climate policy – either a price on carbon or something else – to get over the hump.

RGGI’s Benefits, Costs, and Why It Should Stay

Throughout the beginning of 2011, the Regional Greenhouse Gas Initiative (RGGI) —the first mandatory carbon dioxide (CO2) cap-and-trade program in the United States—was successfully defended by state legislators in three states where attempts were made to remove those states from the program. In the second week of May, the states of Delaware and Maine defeated bills proposing withdrawal, while in New Hampshire, Senators did not pass the House’s version of a withdrawal bill. But on May 26, New Jersey Governor Chris Christie announced that his state will leave RGGI by the end of the year.

Participating RGGI states cap CO2 emissions from power plants (those with generation capacities of at least 25 megawatts) and auction most of the emissions allowances. (Each allowance lets a power plant emit one ton of CO2.) RGGI’s CO2 emission allowance auctions raised $789.2 million for the 10 participating Northeast and Mid-Atlantic states from 2008 to the end of 2010. Meanwhile, consumers on average saw their monthly utility bills increase by less than $1. As highlighted in a February RGGI report, this allowance auction revenue has benefited the 10 participating states via investments in clean energy technology and energy bill assistance. These investments are creating clean energy jobs, saving consumers money, and deploying technologies that reduce the environmental impact of power generation.

EPA’s Regulation of Greenhouse Gases: What are the Facts?

With EPA’s recent announcement of timelines for additional regulation of greenhouse gases (utility and refinery sectors) and the arrival in town this week of the new Congress, the shouting about EPA’s regulatory actions has already begun. Many of these claims are clearly political posturing – the facts are that schools, churches, and libraries will NOT be subject to regulations, there will NOT be a moratorium on all new industrial facilities for at least 18 months, and new coal plants will NOT be banned. But it is also true that regulating greenhouse gases (GHGs) has the potential to substantially impact our economy and is critical to reducing the risks and costs associated with climate change. The critical challenge facing EPA is how to properly balance the costs of reducing GHG emissions against the benefits of limiting climate change. How EPA balances these interests demands a serious discussion. In an effort to lower the volume and better inform future discussions about EPA’s use of its regulatory authority, the following are key factors that should be considered.

1. EPA is not overreaching by regulating greenhouse gases (GHGs) under the Clean Air Act but is doing so in direct response to the Supreme Court’s 2007 ruling in Mass. v. EPA.

Some have incorrectly claimed that EPA has overstepped its authority in regulating greenhouse gases and is attempting to regulate GHGs even though Congress failed to pass climate legislation last year. In fact, it is the Supreme Court in 2007 that clarified that EPA had the authority to regulate GHGs under the existing Clean Air Act. EPA had denied a petition by some states and environmental groups calling on it to begin regulating GHGs under the existing Clean Air Act. The Supreme Court rejected EPA’s claim that the Clean Air Act does not apply to GHGs and held that these emissions meet the definition of an “air pollutant” under the Act. The court held that “under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.” Based on its extensive review of the scientific evidence in its endangerment finding, EPA reached the only conclusion that the evidence supported – that GHG emissions cause or contribute to air pollution, which may reasonably be anticipated to endanger public health or welfare and, therefore, are subject to regulation under the Clean Air Act.

2. EPA’s regulations will not require unproven technologies, impose excessive costs at a time when our economy is hurting, or harm small and previously unregulated sources.

There are legitimate concerns that the Clean Air Act was not developed specifically with GHGs in mind and these emissions are different in fundamental ways from traditional hazardous and criteria pollutants covered by the Act. As a result, EPA has gone to great lengths to “tailor” its regulations -- for example, with respect to new source permitting -- in such a way that only the largest sources of GHGs are covered. This tailoring rule has been challenged in courts (along with all other GHG regulations). If it is overturned, Congressional intervention would likely be necessary. But the Clean Air Act includes many provisions that minimize compliance costs, and many of its fundamental requirements apply equally well to regulating GHGs. For example, the Act requires that technological feasibility and costs be considered in setting emission performance standards and allows for different requirements for new and existing sources. In its guidance to states on what constitutes “best available control technology,” EPA has focused on energy efficiency technologies as a means to achieve both reductions in GHG emissions and cost savings to firms. The agency has also made it clear that the use of coal as a fuel can be continued under its guidelines. While EPA regulations will impose some costs on firms, based on guidance to date, those costs are likely to be modest and will result in far greater benefits than costs to society.     

3. Delaying any EPA regulatory actions would be bad for business and bad for the climate.

Delaying regulations by EPA will allow some firms to avoid compliance costs in the near term but will increase overall costs over the longer term. For firms in states already facing GHG requirements (e.g., utilities in 10 northeast and mid-Atlantic states, large emitters in California), any delay in EPA regulations are not likely to alter the requirements they face. For firms in other locations that are planning facilities with long lifetimes, some are likely to install the same technology that would be required by EPA in an effort to avoid more expensive retrofits in the near future. These firms would prefer the certainty of knowing what regulatory requirements they must meet prior to making large capital investments. Finally, delay in reducing GHG emissions will result in greater economic harm throughout our society as families and communities face the costs associated with increases in extreme weather (droughts and floods), impacts from sea level rise, limits on the availability of water resources, and other climate impacts.

4. EPA’s regulatory actions are not a form of backdoor cap and trade or an energy tax.

Congress rejected a comprehensive cap-and-trade approach to regulating GHG in its last session. EPA’s approach does not rely on a cap-and-trade regime and is far from comprehensive. EPA’s regulations focused first on the transportation sector with the issuance of widely supported standards for light-duty vehicles and proposed standards for medium and heavy-duty vehicles. On the stationary source side, EPA first targeted the largest new sources and major modifications of existing sources and recently announced plans to develop new source performance standards for the electric utility and refinery sectors. Such standards are the traditional approach used under the Clean Air Act and are generally implemented through state programs.The regulations are being developed on a timeframe consistent with Clean Air Act requirements covering other pollutants to allow covered sources the flexibility of developing compliance plans that cost-effectively meet a comprehensive set of requirements.

5. EPA is not attempting to meet the same reduction requirements that were rejected by the last Congress.

The House-passed climate change bill called for reductions in GHG emissions of 17 percent of 2005 levels by 2020, increasing to reductions of over 80 percent by 2050. EPA’s use of the Clean Air Act is not likely to produce emission reductions of the magnitude or in the timeframe set forth in the legislation proposed last year.

6. Important questions do need to be addressed in moving forward.

EPA’s initial set of regulations represent an important beginning in addressing the risks associated with climate change but also raise important issues. In moving forward, several questions will need to be addressed:

* How will EPA’s regulation be implemented in a manner consistent with current and future state actions?

* Given market forces driving utilities toward increased use of natural gas, the regulatory uncertainty that currently exists, and the age and fuel mix of the current utility fleet, what is the likely future role of coal in this sector?

* As EPA moves forward in regulating stationary sources through the use of emission performance standards, how might it be able to provide flexibility to regulated sources to achieve cost-effective reductions?  

* How might EPA regulatory actions specific to utilities interact with possible Congressional interest in a clean energy standard?   

Steve Seidel is Vice President for Policy Analysis

In Defense of Markets

This blog post originally appeared on Belfer Center's An Economic View of the Environment

Cap-and-trade has been demonized by conservatives as part of an effective strategy to stop climate legislation from moving forward in the U.S. Congress.  As I wrote in my previous blog post (“Beware of Scorched-Earth Strategies in Climate Debates,” July 27, 2010), this unfortunate tarnishing of market-based instruments for environmental protection will come back to haunt conservatives and liberals alike when it becomes politically difficult to use the power of the marketplace to reduce business costs in the pursuit of a wide variety of environmental objectives.

FutureGen 2.0

The first two weeks of August saw two big news items from the U.S. Department of Energy (DOE) related to carbon capture and storage (or CCS, for an overview of CCS see the our Climate TechBook CCS brief). First, on August 5, DOE announced its plans for FutureGen 2.0. One week later, President Obama’s Interagency Task Force on CCS delivered its final report and recommendations regarding overcoming “the barriers to the widespread, cost-effective deployment of CCS within 10 years, with a goal of bringing five to ten commercial demonstration projects online by 2016” (see the separate post regarding the task force’s report).

Why is this FutureGen announcement from DOE important? CCS is anticipated to be a key technology for achieving large reductions in U.S. and global greenhouse gas (GHG) emissions (for example, see the recent projection from the International Energy Agency that CCS could provide nearly one fifth of all global GHG emission reductions by mid-century). Initial commercial-scale CCS demonstration projects are a critical step in advancing CCS technology; these projects provide valuable experience and confidence in “scaling-up” CCS technologies and technology improvements and cost reductions from “learning by doing.” The aforementioned report from the Interagency Task Force on CCS notes that FutureGen is one of ten planned CCS demonstration projects supported by DOE (see Table V-2 of the task force’s report for the list of seven power-sector and three industrial CCS projects).

The FutureGen project has had a somewhat tumultuous history. In 2003, DOE announced its plan to work with an industry consortium on the FutureGen plant to demonstrate commercial-scale integrated gasification combined cycle (IGCC) technology coupled with (pre-combustion) CCS at a single new coal-fueled power plant (with DOE covering most of the project’s costs). In 2007, the industrial consortium selected a site in Mattoon, IL, for the FutureGen power plant. In 2008, though, DOE abandoned the idea citing the escalating cost estimates for the FutureGen project and decided instead to pursue cost-sharing agreements with project developers to support multiple CCS demonstration projects (this time with DOE covering a smaller fraction of project costs). DOE received only a small number of applications for this restructured FutureGen approach, and this change of plans came in for some criticism from the Government Accountability Office (the GAO report also provides a helpful overview and history of what might now be referred to as “FutureGen 1.0”).

In 2009, the Obama Administration revived plans for a single FutureGen plant and restarted work with the industrial consortium on preliminary design and other activities, promising a decision in 2010 on whether to move forward with the project. That decision came on August 5 and included another shift in DOE’s plans for the FutureGen project (now dubbed “FutureGen 2.0”). Energy Secretary Chu announced the awarding of $1 billion in Recovery Act funding for the repowering of an existing power plant in Meredosia, IL, as a coal-fueled power plant using oxy-combustion and CCS. With “FutureGen 2.0,” DOE decided to change from building a new plant to repowering an existing one and chose a different technology (oxy-combustion with CCS rather than IGCC with CCS).

When subsidizing initial CCS demonstration projects, policymakers should support a variety of relevant technologies and configurations. With respect to applying CCS technology to coal-fueled electricity generation, there are factors that are expected to make certain variants of CCS technology more appropriate for certain circumstances. These factors include the application of CCS with: new plants vs. retrofitting/repowering existing plants; different coal types; and various geologic formations for CO2 storage. Importantly, there are three types of CO2 capture technology—pre-combustion, post-combustion, and oxy-combustion—with the latter two appropriate for use at existing coal-fueled power plants (see our Climate TechBook CCS brief for details). 

With its new approach for “FutureGen 2.0” DOE has focused on large-scale demonstration of oxy-combustion. Of the ten CCS demonstration projects supported by DOE, FutureGen will be the only one to use the oxy-combustion technology. Of the 34 large-scale power plant CCS projects worldwide tracked by MIT, only four (counting FutureGen) use or plan to use oxy-combustion, and FutureGen will be the only such oxy-combustion project in the United States. Given the greater focus so far given to the two other alternative CCS approaches, oxy-combustion is likely the CCS technology that can most benefit from the FutureGen large-scale demonstration project.

With its new approach for “FutureGen 2.0,” DOE is taking an important step in demonstrating a portfolio of different CCS technologies. Such demonstrations, along with other supportive government RD&D policies, provide a critical “push” for low-carbon technologies. Long-term policy certainty (such as from a GHG cap-and-trade program) for the private sector regarding future GHG emission reduction requirements can provide the necessary technology “pull” to guide private investments in widespread deployment of CCS and other low-carbon technologies.

Steve Caldwell is a Technology and Policy Fellow

CCS Recommendations Hit President’s Desk

Last week, the Obama Administration’s Interagency Task Force on Carbon Capture and Storage (CCS) released its final report and recommendations. President Obama created the task force, co-chaired by the Department of Energy (DOE) and the Environmental Protection Agency (EPA) and involving 14 executive departments and federal agencies, in February. The President’s directive charged the task force with delivering “a proposed plan to overcome the barriers to the widespread, cost-effective deployment of CCS within 10 years, with a goal of bringing 5 to 10 commercial demonstration projects online by 2016.”

Go West, Emissions Cap

Less than a week after Senate Democrats decided that including cap and trade in an energy bill was too ambitious for this year, the Western Climate Initiative (WCI) forged ahead with a blueprint for its own such program. Seven U.S. states and four Canadian provinces, which together represent 13 percent of U.S. and 50 percent of Canadian greenhouse gas emissions, have compiled a detailed plan for implementing a market-based system to reduce greenhouse gas emissions in their region to 15 percent below 2005 levels by 2020. The plan is an elaboration on the design recommendations released by the same states and provinces in 2008. 

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