States can learn from each other on carbon pricing

As discussed at our C2ES Solutions Forum on Carbon Pricing & Clean Power, both power companies and states see advantages to using carbon pricing, such as a cap-and-trade program, to reduce carbon emissions under the Clean Power Plan.

For companies, rather than being forced into specific measures to cut emissions, a carbon price harnesses market innovation to find the most cost-effective solutions. Meanwhile, states can draw on the experiences of existing cap-and-trade programs in California and the nine-state Regional Greenhouse Gas Initiative (RGGI).

While the advantages of market-based approaches are widely acknowledged, some stakeholders are concerned that the Environmental Protection Agency’s (EPA) timeline would make it challenging to develop a cap-and-trade program. EPA proposes giving states until summer 2016 to submit a plan. States could apply for a one-year extension or, if submitting a plan as part of a multistate collaboration, a two-year extension.

It took more time than that for California and the RGGI states to set up their programs. RGGI, the first cap-and-trade program for carbon dioxide in North America, began as a memorandum of understanding among seven governors at the end of 2005, and went into force in 2009. The origin of California’s program, which extends beyond the power sector, was its Global Warming Solutions Act, passed in 2006, and its first auction was in 2012. These two programs took years to implement in part because they were pioneers.

EPA will submit its final rule this summer. Even if its implementation timeline is unchanged, there are several reasons why setting up a cap-and-trade program or other trading mechanism would take much less time today.

First, a major sticking point for California and RGGI, the size of the cap, will already have been set by EPA. RGGI took years to negotiate the total cap for the region and how allowances would be distributed across member states. Once the Clean Power Plan is finalized, states will know exactly what their 2030 goals are, which power plants are covered, and what interim goals, if any, they must meet. Since each state will have an established cap, research or negotiation on this point will not be necessary in a single-state program. In a multi-state program, states may wish to negotiate the allocation of the overall cap, but this process should be easier than what RGGI went through, since each state would have a defined and transparent starting position. Due to EPA’s existing rules on power plant greenhouse gas reporting, states also now have a better sense of the amount and location of their power sector emissions.

Second, states need not reinvent the wheel. States can emulate either RGGI’s method of allocating allowances via auctions or California’s mix of auctions and free allocation. They can also emulate cost certainty measures (both existing programs have an allowance price floor and measures to limit price spikes), and even the administrative structure of distributing, tracking, and retiring emission allowances.

Third, the California and RGGI programs are more complex than what would be required under the Clean Power Plan. California’s program covers not only in-state electricity generation, but also electricity imports, industrial facilities, heating fuels, and transportation fuels. RGGI focuses on domestic generation, but involves nine states working together on a single program. In contrast, a cap-and-trade program developed to comply with the Clean Power Plan would only have to cover domestic generation from a single state.

Finally, states merely have to submit plans by EPA’s deadlines; they do not have to have programs in place. EPA has proposed the following requirements for state plans:

  • Identification of affected entities
  • Description of plan approach and geographic scope
  • Identification of state emission performance level
  • Demonstration that plan is projected to achieve emission performance level
  • Identification of emission standards
  • Demonstration that each emission standard is quantifiable, non-duplicative, permanent, verifiable, and enforceable
  • Identification of monitoring, reporting, and record-keeping requirements
  • Description of state reporting
  • Identification of milestones
  • Identification of backstop measures
  • Certification of hearing on state plan
  • Supporting material

(79 Fed. Reg. 34838 (June 18, 2014))

It’s clear that a state would need to have the framework of a cap-and-trade program developed before submitting its plan to EPA, including the trajectory of the cap, backstop measures, and reporting requirements. However, the program need not be fully formed at this stage. EPA appears to leave room for additional details, such as the logistics of allowance distribution, to be worked out between the time the plan is submitted and 2020, the first proposed compliance year.

Developing a cap-and-trade program within a few years would not necessarily be an easy task. However, the existence of pre-established targets, lessons available from California and RGGI, and additional time to work out logistical details means states that see the advantages of using cap and trade to implement the Clean Power Plan should not view the plan submittal deadline as a deterrent to pursuing this option.