With a new greenhouse gas law now in force, California has put to rest any doubt that the United States – or at least large swathes of it – will impose carbon reductions on the electricity industry. Elisa Wood reports.

The Global Warming Solutions Act is the mostly closely watched environmental bill in the nation for good reason: where California goes, others follow. We’re at a turning point in the fight against global warming’, said Ann Notthoff, California advocacy director for the Natural Resources Defense Council, a non-profit environmental organization.

The 12th largest emitter of carbon dioxide in the world, California has set a goal of capping greenhouse gas emissions 25% by 2020, with a mandatory emissions reporting system to monitor compliance. California’s law is the most stringent emissions cap in the world, and could result in the deepest cuts in carbon emissions yet in an industrialized economy, according to Redefining Progress, an Oakland, California organization that focuses on developing a sustainable economy.

Governor Arnold Schwarzenegger signed the bill (A.B. 32) into law in September, about two months after inking an agreement with British Prime Minister Tony Blair that they would, together, pursue greenhouse gas reductions. Schwarzenegger’s action follows a series of events over the last year signalling that US leaders are more open to the idea of a mandatory cap on carbon emissions.

California Governor Arnold Schwarzenegger signs a bill in September passing a law on carbon restrictions (John Decker, Office of Governor Schwarzenegger)
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The country has been the hibernating giant of climate change policy since it pulled out of Kyoto Protocol in 2001. But it won’t slumber much longer, according to Véronique Bugnion, research director with Point Carbon, an Oslo-based market analysis firm that opened North American headquarters in September and released a report: ‘Carbon Trading in the US: the hibernating giant’.

Upcoming elections are expected to displace some climate change sceptics, and Congress is considering several bills that create mandatory federal carbon reduction programmes. In addition to California, several East Coast states have carbon cap plans under development. Meanwhile, about 200 mayors have signed onto a framework to reduce emissions in their cities in line with Kyoto goals.

The awakening has been gradual, stirred by a drumbeat of warnings from the scientific community. Utilities and corporations added their voices, pushing for definitive action that would bring regulatory certainty. Then came the shocking blow of Hurricane Katrina, which caused US$45 billion in devastation to the south-eastern US in August 2005. While it’s difficult to attribute any single storm to climate change, the disaster heightened public discussion about global warming.

In addition, an unusual voice also entered the debate – Evangelical Christians. Eighty-six church leaders in early 2006 issued a call to action for federal leadership on climate change. Their campaign, which includes lobbying, advertising and education of church members, is significant since they are generally seen as influential with President Bush and conservative lawmakers, a group that largely supports voluntary – not mandatory – carbon reduction efforts.

Devil in the detail

While earth stewardship may be a godly pursuit to faith-based leaders, the devil is in the detail when it comes to the relationship between clean distributed energy technologies and carbon caps.

Attempts to reduce carbon emissions are generally good news for renewable energy. Programme specifics, however, determine the extent of the good news, and those particulars are far from settled in most of the country.

Carbon caps traditionally favour low-value efficiency improvements and traditional approaches to emissions reductions, according to Scott Sklar, president of The Stella Group, a Washington, D.C. clean energy marketing and policy firm. Renewable energy will benefit most if carbon programs have high reduction goals – or even a ‘zero carbon’ standard.

Much depends on whether the carbon cap programme allows ‘double dipping’, the ability of a renewable energy project to take advantage of both renewable energy incentives and carbon offsets. In a state with renewable portfolio standards, will a solar installation, for example, be allowed to accrue renewable energy certificates (RECs) as well as carbon offsets? Rules may require that the project choose one market or the other.

Renewable energy projects in some states may find themselves in the perplexing position of choosing among four possible markets for their product, according to Point Carbon’s Bugnion. The first is the mandatory REC market in states that have portfolio standards. Utilities and retail suppliers buy the certificates from renewable energy projects to meet the state requirement that a percentage of power come from green energy. A second market exists for voluntary RECs. In this case, corporations or organizations buy the certificates as an act of goodwill; no law compels them, but they want to support renewables. Those same entities might decide to voluntarily buy carbon offsets to make themselves carbon-neutral, creating the third market. The fourth market – a mandatory offset market – would develop in states that adopt cap-and-trade mechanisms.

Whatever the case, a carbon cap will add costs to high carbon emitters, better positioning clean energy to compete against them in the market. The US Energy Information Administration found that a cap-and-trade programme (H.R.5049) proposed by Congressmen Tom Udall and Tom Petri would add about 6% to electric costs by 2030. The study attributes the cost adder, in part, to fuel suppliers passing on allowance costs to power generators. The costs of coal, petroleum and gas all rise, with delivered coal taking the hardest hit – a 46% cost jump.

It’s difficult to fully calculate the value of renewable energy in a carbon-based economy because it’s an apples-and-oranges equation, according to Bugnion. Renewable energy is measured in MWh, while carbon offsets are calculated in tonnes of greenhouse gases. The other question that remains unanswered is what will the renewable energy project displace? High-emission coal-fired generation or other less carbon-intensive power plants?

But given that many renewables are carbon-free, the US mood for carbon reduction could spill over into better incentives – outside of carbon offsets – for renewable energy. This could come in the form of a national renewable portfolio standard or at least more states adopting RPS rules and other clean energy incentives. The United States Public Interest Research Group says that increasing non-hydroelectric renewables from the current 2.5%-20% by 2020 would reduce US carbon emissions by 511 million tonnes per year or more than 8% of 2004 emissions levels. The goal would require that the country generate 700 million MWh from renewables.

After awaking, what to do?

While the US appears to be heading toward some sort of mandatory carbon reduction programme, no one national strategy has emerged yet. Even California’s law is low on details.

California’s law provides a broad brushstroke for how its programme will work, but leaves it up to the California Air Resources Board (CARB), an 11-member entity appointed by the governor, to develop the programme’s regulations and market mechanisms. A scoping plan is due from the board no later than 1 January 2009, and regulations no later than 1 January 2011. State officials say the board will attempt to achieve some uniformity with carbon cap plans underway in other states and Europe’s cap-and-trade mechanism.

The state takes a unique approach in that it includes emissions from industrial sources. The programme operates under a load-based cap, set according to energy purchased, not energy produced. California used this approach because it imports 15% of its power. Those imports would be spared the cap if the rule were based on generation produced.

Mandatory caps begin in 2012 for significant sources. The bill also includes a ‘safety valve’ mechanism – the governor can suspend the emissions caps for up to one year in the case of an emergency or significant economic harm.

RGGI has put together a cap-and-trade model that is expected to raise electricity prices and add a price advantage to DG projects such as this rooftop photovoltaic installation at a New Jersey pharmaceuticals plant (PowerLight Corp.)
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Point Carbon’s Bugnion praised the state for establishing a strategy that works in the proper order. First the state will track emissions, then establish a baseline and target, and finally enact the programme.

Eastern states push action

On the opposite side of the country, The Regional Greenhouse Gas Initiative (RGGI, pronounced Reggie) in August issued a model rule for a cap-and-trade programme.

Unlike California, the Northeast states that developed RGGI did not propose a broad-stroke plan for later refinement by regulators, but instead hashed out in detail, over two years, how the carbon trading programme will work. More than 100 organizations filed about 1000 pages of commentary on a draft of the rule before the group made it final. The rule now goes to state regulatory agencies and lawmakers for adoption and is expected to take effect on 1 January 2009.

The rule has the support of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont. Maryland lawmakers have ordered the state to join RGGI by June 2007. Point Carbon expects Massachusetts and Rhode Island to sign on to RGGI, spurred by gubernatorial changes or legislative action. Both states were involved in the plan during the early stages, but later backed out. New York’s Gov. George Pataki initiated the RGGI discussions in 2003.

RGGI calls for reducing power plant carbon emissions by 10% by 2019. The programme attempts to stabilize carbon emissions at 121 million short tons (110 million metric tonnes) between 2009 and 2015, followed by a 10% reduction by 2019. The cap would be 149 million short tons if Massachusetts and Rhode Island rejoin RGGI and about 180 million short tons with Maryland, according to Point Carbon. The states agreed to set aside 25% of their allowances for public purposes, which they may auction off or sell into the market.

The plan details when and how offsets must come from the US and when the international market can come into play. It also spells out how offsets can be created from such sources as methane combustion, sulphur hexafluoride capture and recycling, afforestation and energy efficiency.

‘Unlimited banking of allowances will create price coherence across the RGGI forward curve. The size of the bank will be determined by the growth in electricity demand, improvements in emissions intensity amongst RGGI facilities, co-firing of biofuels alongside coal or oil, relative fuel costs, prevailing weather conditions and the availability of cheap domestic offsets’, said Point Carbon in its recently released report.

Like California, RGGI includes a safety valve to keep allowance costs in check. If the average annual price of an emission allowance rises above $7, sources can use offsets for up to 5% of a power plant’s emissions. If the average price rises above $10, then sources can use offsets for up to 10% of a plant’s emissions, including offsets from international trading programmes.

RGGI does not allow double-dipping; that is, renewable energy projects cannot participate in the carbon market if they also receive incentives through systems benefits charges or renewable portfolio standards.

The model rule does allow creation of offsets from methane landfill gas, as well as for end-users that reduce natural gas, oil or propane through increased efficiency. The efficiency can be achieved through several means including passive solar, energy management, active renewable energy heating systems and fuel switching to less carbon-intensive fuels, such as renewables.

Overall, RGGI expects to raise electricity rates for the average household by $321 per year. However, the economic impact may be reduced if RGGI spurs more clean energy and efficiency to enter the market.

‘RGGI is the first major US carbon market and it will provide significant “pull” for low-carbon technologies. Companies who are well positioned to trade emissions reductions and sell climate-friendly technology will be able to participate profitably in that market,’ said Eileen Claussen, President, Pew Center on Global Climate Change.

Other states, too, are looking at climate protection programmes. Oregon, and possibly Washington and other western states, are expected to sign on to the California plan. The Western Governors Association in June passed a resolution calling on states and cities in the region to take action to reduce greenhouse gases and supporting regional and national efforts.

Arizona Gov. Janet Napolitano in September established a goal to reduce greenhouse gases to 2000 levels by 2020. The state’s Department of Environmental Quality will devise an emissions reporting mechanism, with the goal of establishing a registry with other western states. Meanwhile, North Carolina has set up a Climate Action Plan Advisory Group (CAPAG) to help develop a state-level carbon strategy.

‘It takes some time for these initiatives to come through. But having news from both the east coast and west coast has built a lot of dynamism. It makes other states look like they are lagging behind’, said Point Carbon’s Bugnion.

Heavy hitters press for national cap

On the federal level, a significant flash point occurred in early 2006 when Senators Jeff Bingaman and Pete Domenici issued a white paper: ‘Design Elements of a Mandatory Market-Based Greenhouse Gas Regulatory System’. About 130 companies and organizations responded to the paper’s request for guidance on developing a US carbon reduction mechanism.

‘The White Paper, the broad responses and the discussions following in its wake, clearly show the interest in developing a federal approach to GHG emissions trading’, said Point Carbon in its report.

One carbon reduction proposal being carefully watched is the ‘Climate Stewardship and Innovation Act’, proposed by Senate heavy-hitters John McCain and Joseph Liberman. This bill was initially proposed as part of the Energy Policy Act of 2005, but later rejected. It creates a national cap-and-trade programme that covers the power sector, transportation, industry and commercial facilities that exceed a 10,000-tonne per year limit on greenhouse gas emissions. This bill is of particular interest because McCain, as of fall 2006, was considered a strong contender for the Republican presidential nomination. He has vowed to press forward with the proposal.

Table 1. Congressional proposals – characteristics of congressional climate change cap-and-trade programmes
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‘The timing of a US greenhouse gas emissions trading scheme will largely be determined by the next two federal elections. Potential candidates’ positions and their poll numbers would suggest that there is a high likelihood of seeing a federal greenhouse gas trading system emerge in 2009’, said Point Carbon.

All of this activity has made not only utilities and power producers sit up and take notice, but also the insurance industry, which is weighing the financial consequences of climate change. A Ceres study: ‘Availability and Affordability of Insurance Under Climate Change: A Growing Challenge for the US’, said that after Katrina the industry realized climate change is a true threat.

‘The challenge now is taking concrete action. Despite US catastrophic losses growing 10 times faster than premiums since 1971, insurers and regulators have done little so far to address the growing risks from weather-related losses and climate change’, said Mindy Lubber, president of CERES, a Boston, Massachusetts-based coalition of investors and environmental groups.

Wild cards

While there is clearly strong push from many directions for a mandatory carbon cap, several wild cards exist. One is a pending US Supreme Court decision on whether greenhouse gases should be regulated by the US Environmental Protection Agency under the Clean Air Act. Whichever way the high court rules could spell trouble for a US cap-and-trade programme, according to Bugnion.

Since the Clean Air Act has no rules for carbon reduction, the EPA might find itself forced to apply Title IV rules meant for lead, carbon monoxide or particulate matter. ‘Title IV sets ambient air quality standards. How would the US enforce a standard such as a concentration of 550 ppm CO2 in the atmosphere, the level thought by the Intergovernmental Panel on Climate Change (IPCC) to prevent “dangerous interference with the climate”, when three quarters of emissions are originating outside of the United States?’, said Point Carbon. At the same time, if the court rejects EPA control, climate change sceptics may consider the decision fodder for inaction.

The country’s strong concern with security issues also could prove to be an obstruction to mandatory carbon caps. Bush has said he wants the country to be less dependent on hostile foreign governments for oil, a goal broadly supported by voters. To some this means bringing more renewables and on-site energy into the mix; to others greater reliance on the country’s abundant coal supply.

Individual US states and cities have come ahead of the federal government in adopting measures to limit emissions
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‘The most logical means of improving energy security is to promote coal usage. This does not, however, have positive consequences for the climate. Clean coal and carbon capture and sequestration are promising technologies, but they are not immediately viable alternatives to conventional coal-firing’, said Point Carbon.

And finally, while the US electorate says in polls it believes climate change is real, it also says it wants lower electricity prices. Dramatic price electricity hikes, some as high as 100% over the last year, have created voter discontent that has spilled over into regulatory and legislative action. In some cases, public utility regulators were fired; in others cases, states initiated debate to revoke liberalization. Given that mandatory carbon caps are likely to increase costs, lawmakers will find themselves in the unenviable position of choosing between environmental and economic impact.

Having woken up to the need for action on climate change, the US faces a host of complicated decisions. Yet, with state plans already underway, and pressure for federal action, the country has set down the path toward mandatory carbon restrictions and seems unlikely to turn back.

Elisa Wood is a US-based writer on energy issues.
e-mail: cospp@jxj.com