By and large, the 2014 midterms did not go well for climate hawks. Republicans’ new majority in the Senate will allow them to at least slow down various climate policies, and maybe even scuttle a few completely. The election also solidified the GOP’s grip on various state governments, making state-level green policy less likely, and threatening the rollback of existing laws.
But there was one big exception.
In Pennsylvania, Democrat Tom Wolf ousted Republican Governor Tom Corbett by a handy margin of 54.9 percent to 45.1 percent. Wolf’s victory ended the lockdown the GOP had held over the state’s executive branch and both houses of its legislature. But even more significantly, it served as an implicit endorsement by Pennsylvania voters of a prominent commitment Wolf made during the campaign: if elected, he’d work to move the state into the Regional Greenhouse Gas Initiative (RGGI).
Formed in 2008 and updated in 2013, RGGI is a cooperative effort by nine states in the Northeast to cut their collective carbon emissions using a single, shared cap-and-trade system. To bring the state into RGGI, Wolf will have to go through the Republicans that still control its legislature. But if he’s successful, the move would double the size of RGGI’s market and massively boost the system’s political legitimacy.
Most importantly, it could mark a turning point for climate efforts in the United States as a whole. For the moment, there’s effectively no hope of national climate policy coming out of Congress, and the new Environmental Protection Agency (EPA) rules to cut power plant emissions will likely be mired in legal battles for years. So it may well fall to the states — acting outside the aegis of the federal government — to combat climate change on their own.
As goes Pennsylvania, so may go much of the nation.
Bigger Carbon Markets Are Better
The purpose of any cap-and-trade system is simple enough. First, put a hard ceiling on how much greenhouse gas (GHG) can be emitted in a given year by every firm subject to the system. That’s the “cap.” Then take the total amount of GHGs the cap allows for that year, and divide it up into permits, each one allowing whoever holds it to emit one ton of emissions. Then all the firms can buy and sell the permits among one another. That’s the “trade.”
The system ensures everyone has a profit motive to reduce their emissions: the more they cut, the fewer permits they need to buy, and the more excess permits they can sell to others. Some firms may cut a little, and some firms may cut a lot, just as long as the total reduction matches the cap. And without specific regulatory rules, everyone in the system can also pick and choose the least-costly reductions that work for them. In effect, a cap-and-trade system turns all the firms in it into a giant cooperative laboratory looking for the most efficient combination of ways to meet that one cumulative reduction.
That’s where a multi-state cap-and-trade setup like RGGI comes in. The more firms and emitters that are covered by the system — in the case of RGGI, which just covers the electricity sector, that would be power generators — the more possibilities there are to buy and sell permits, to innovate, and to find emission reductions. “By enlarging the scope of the market, it enlarges the pool of sources with which one can trade,” explained Robert Stavins, the director of the Environmental Economics Program at Harvard University. “That can have the effect of lowering costs even more.”
While Governor-elect Wolf’s office did not respond to repeated requests for comment, it’s clear the dynamic Stavins described would apply in spades if Pennsylvania were to join RGGI. The state has the sixth-largest economy in the country and is the third-largest carbon emitter. Pennsylvania gets 40 percent of its electricity from coal and only four percent from renewables, and its emissions are higher than the nine other RGGI states combined.
“Pennsylvania has substantial sources and also has a substantial possibility of benefiting from a system like RGGI,” added David Littell, a member of RGGI’s Board of Directors. “If they entered, it would expand significantly the amount of allowances in our system.”
Some analysts and observers even believe Pennsylvania’s entrance could act as a kind of demonstration project for multi-state cap-and-trade systems, creating “a domino effect and influence other large states with a diverse fuel mix to consider the cap-and-trade option,” according to E&E; News.
It could happen elsewhere, too: California started up a statewide cap-and-trade program in 2012, and has already linked up its system with a cap-and-trade program that covers the Canadian province of Québec. They had their first successful joint auction for emission permits in late November, and every last allowance sold out at a price of $12.10.
Pennsylvania has substantial sources and also has a substantial possibility of benefiting from … RGGI.
Where cap-and-trade sets a cap on emissions and then lets the market figure out the price, carbon taxes set a price on emissions to incentivize the market to reach a particular reduction target. All other things being equal, economists tend to prefer carbon taxes; they’re simpler, and don’t require the creation of whole new financial instruments or trading markets. And it’s a little easier to link cap-and-trade systems to each other than to link them to a carbon tax. But the effect of a carbon tax or cap-and-trade system is “essentially symmetric,” as Stavins put it. “There’s very little difference between the two. The advantage at this point of cap-and-trade is mainly that some important states like California plus the Northeast have already gone forward with it.”
Oregon and Washington State have also been part of discussions between California and British Columbia, and Washington’s Governor Jay Inslee announced this month that a carbon tax would be included in a new proposed transportation package. Oregon is ostensibly leaning toward a carbon tax as well, but hasn’t come to a final conclusion yet.
But with its economic size and the scale of its GHG emissions, no possible move in this direction would carry the same weight and influence as Pennsylvania’s.
Could EPA Incentivize The Red States?
Now, plenty of states are not keen to get in on the action. As mentioned, Republicans hold an impressive number of state governments, and large swaths of the party remain hellbent against policies of any sort to curb carbon emissions.
But even deep red states may find joining a regional system preferable to alternative options. That’s because, judicial challenges or no, the roll-out of EPA’s regulations to cut power plant emissions continues. The rule gives each state an emission reduction target to hit, and then provides them a menu of options for how to go about doing so. EPA will finalize the rule in June 2015, and each state has until the following year to submit a proposal for which of those options it intends to use and how it wants to put them together to meet its target.
If states wish to comply in a way that causes as little pain as possible for their citizens … a cap-and-trade mechanism is a way of doing it at minimum cost.
Buried in that menu of options is the phrase “market-based instruments.”
“’Cap-and-trade’ and ‘cap-and-tax’ have been demonized by conservatives, so it’s sort of a toxic phrase that EPA didn’t want to use,” Stavins explained. “But clearly EPA is thinking about cap-and-trade mechanisms.”
As much flexibility as EPA tried to give states, the rule’s normal route will still involve the states and the EPA going over a number of moving parts — from plant scheduling changes to new renewable construction to new efficiency policies and more — and calculating out whether they’ll be enough. Going with a cap-and-trade system would, in a sense, bypass that by handing the EPA a goal, while handing the nitty-gritty of how to meet that goal over to the market cooperation embedded in how a cap-and-trade system functions.
“If states wish to comply in a way that causes as little pain as possible for their citizens, then they’re going to want to do it in the least costly possible way,” Stavins continued. “And a cap-and-trade mechanism is a way of doing it at minimum cost.”
South Dakota is thoroughly controlled by Republicans. According to Brian Gustafson, the administrator of South Dakota’s Air Quality Program, they have been talking to other states about a regional proposal, and EPA’s rule was the impetus for that discussion. Gustafson mentioned discussions South Dakota has had with other states via the Center for a New Energy Economy — which is run out of Denver — and via the Western States Air Resources Council — an organization of 15 states that includes California, Oregon, Washington, and Colorado, and which coordinates between their various air agencies.
“What we’ve done so far is we’ve participated in meetings and conference calls with other organizations and states to determine our options, or to have our options open for states banding together to comply,” Gustafson said. What that banding together would look like, and whether it would involve cap-and-trade, remains up in the air, as everyone waits to see what EPA says when it finalizes the regulation next year.
Who’s Going To Get In The Game?
It also turns out that states can submit their proposal to EPA as a group and, according to the rule’s language, multi-state proposals don’t have to come in until June 2018. So states that decided to meet EPA’s requirements by banding together in a cap-and-trade system would have an extra two years to submit their proposal, which is another incentive to pick that route.
RGGI itself is almost tailor-made for meeting this purpose — like EPA’s targets, RGGI’s cap-and-trade system only covers the power sector — and its member states may well lean on their participation in the system or on collective tweaks to it as their plan to meet EPA’s goals. California’s cap-and-trade system is broader — or, at least, it will be next year, when it expands to cover transportation fuels as well as its power sector — but it could do the same. So the question then becomes, who else might get in the game?
“We haven’t had formal inquiries or high-level inquiries” by states looking to join RGGI, Littell admitted. “No formal requests from governor’s offices, etc.”
“But we’ve had a lot of low-level informational inquiries and informal discussions. And what I mean by that is inquiries on details of this or that, to which we obviously respond and get back to staff or groups in others states,” Littell continued. “I think for right now people are still trying to figure out what their options are, what they look like, and gathering the best information they have on various compliance options.”
Exactly how states could join RGGI or another regional cap-and-trade system varies from state to state. It’s possible that some governors could cite their obligation to comply with EPA’s rule as adequate authority to join a system with or without the approval of their state’s legislature. But for the most part it will depend on what powers the legislature has and has not invested their state executive branch with already. “Some states may have adequate authority on the books,” Littell said. “Other states may need legislation.”
For his part, Stavins thinks we’ll see California, Oregon and Washington submitting a joint proposal of some sort to EPA, or submitting individual proposals relying on a cap-and-trade system or a carbon tax and then linking up with the California-Québec system. “Likewise, we’ll certainly see, at a minimum, the RGGI states submit a multi-state plan” to comply with EPA’s new targets using RGGI as the mechanism, Stavins continued. “And I think it’s likely that Pennsylvania will join with them.”
“There will be multi-state proposals, without a doubt.”