Politics May Sour Cap-And-Trade Sweeteners in Obama Plan

Photographer: George Frey/Bloomberg

A Utah Railway train moves 103 cars of coal, each with over a 100 tons, up Price Canyon from the Wildcat Coal Load-Out Terminal, outside Price, Utah, on March 5, 2014. Wildcat Coal Load-Out Terminal receives coal via trucks from the local mines and transfers it to railcars for transport to power generation facilities. Close

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Photographer: George Frey/Bloomberg

A Utah Railway train moves 103 cars of coal, each with over a 100 tons, up Price Canyon from the Wildcat Coal Load-Out Terminal, outside Price, Utah, on March 5, 2014. Wildcat Coal Load-Out Terminal receives coal via trucks from the local mines and transfers it to railcars for transport to power generation facilities.

Obama administration officials gave new life to cap-and-trade yesterday. Just don’t expect them to say so.

Republicans championed the approach decades ago then rejected it when President Barack Obama pushed it in 2009. States may now view the politically toxic concept as a way to comply with limits on carbon emissions from power plants Obama proposed yesterday.

“I suspect it’s an option that many states will seriously look at,” said Jason Bordoff, director for Center on Global Energy Policy at Columbia University in New York.

Bordoff, who was a senior director for Energy and Climate Change on the staff of the National Security Council under Obama, said in an interview before the plan was announced that cap-and-trade has become “a little bit tarnished” since it failed in Congress, though the approach can be an effective way to drive emissions cuts.

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Obama has included an incentive for states to develop regional carbon-trading systems. They can get an additional year to comply over states that chose to act alone, pushing their deadline to come up with an emission-reduction plan to 2018.

Ultimately, the decision may fall along familiar fault lines of politics: states now participating in carbon-trading systems, such as California and those in the Northeast, tend to vote Democratic.

Republican Opposition

Opposition to the idea is already becoming a theme in criticism by Republicans, who are reviving complaints that Obama’s plan is a “cap and tax” approach that would send electricity bills higher and hurt the economy.

Gina McCarthy, the administrator of the Environmental Protection Agency, said in announcing the draft rules yesterday that there are several options to reduce carbon emissions. She didn’t use the term cap-and-trade, instead describing the idea as “multi-state market-based programs.”

How Carbon Markets Work

States can meet the goals through energy efficiency gains, using more renewable energy and by switching from coal to cleaner-burning natural gas without joining trading networks.

States ‘Marry’

Asked about cap-and-trade programs at a meeting with Bloomberg News reporters and editors today in Washington, she said “It would not surprise me if states took a close look at whether or not they could marry with others, whether it’s a cap-and-trade program or other mechanism.”

“We did analysis that looked at states doing it alone and states doing it with others states,” McCarthy said. “Clearly it’s much more cost-effective with other states.”

Kelly Speakes-Backman, who serves a chairman of the northeastern market, called the Regional Greenhouse Gas Initiative, or RGGI, said counterparts from other states have asked her at conferences how the market is working.

“States view our success as a benchmark,” said Speakes-Backman, who’s also the Maryland public service commissioner. It’s a sensitive topic, though: “I prefer to call it, ‘the program that shall not be named.’ I don’t care what we call it, as long as it’s working.”

Even before Obama’s plan was unveiled, Washington Governor Jay Inslee signed an executive order April 29 ordering the creation of a cap-and-trade program in his state.

‘Fairly Quickly’

“It will lead to something of a national market fairly quickly,” said Andy Weissman, a counsel at Haynes & Boone LLP who has advised energy companies operating within trading networks. States will probably link up to share the burden of making the cuts, he said.

Obama’s proposal would cut U.S. carbon emissions, which most scientists say contribute to global warming, by 30 percent from 2005 levels in the next decade and a half. The EPA is seeking comments for 120 days and says it will release a final version a year from now.

Joining regional networks will be the easiest way to comply because utilities often operate across state lines, Weissman said. “The impression may be that states will develop plans within their borders,” Weissman said. “That just doesn’t work anymore.”

Lacking Expertise

Tom Hewson, a principal at Energy Ventures Analysis, an energy and environmental consulting firm in Arlington, Virginia, said regional trading networks may be attractive because some states lack the expertise to go it alone. It may also be cheaper.

“If you expand the base, that could result in efficiencies,” he said in an interview.

The spread of carbon trading systems could be limited by politics. New Jersey Governor Chris Christie, a Republican, withdrew from the Northeast trading group known as the Regional Greenhouse Gas Initiative in May 2011, calling it a costly failure.

Jan Brewer, Arizona’s Republican governor, cited concerns about costs when she decided to take the state out of the western trading system that California is now implementing.

“It’s difficult for any state with a Republican governor or legislature to support cap-and-trade,” said Michael Gerrard, director of the Center for Climate Change Law at Columbia University in New York.

Democrats Targeted

Republicans made the proposal an issue against Democratic candidates in this year’s midterm congressional elections.

The House Republicans’ campaign arm targeted more than 30 vulnerable Democrats in an e-mail blast shortly after the administration released its proposal.

“Now, Annie Kuster will have to decide between saving the economy and jobs or supporting the President’s liberal cap-and-trade scheme for political gain,” read one missive targeting the first-term House Democrat from New Hampshire.

It wasn’t always so. Cap-and-trade once had support in both political parties. The system was established to cut sulfur dioxide that causes acid rain, in amendments to the Clean Air Act signed by President George H.W. Bush. It was designed to be a market-based, business-friendly approach to regulation.

In the programs, utilities buy and sell emissions credits to meet targets for cutting emissions. The pool of permits shrinks over time, forcing reductions in what’s being released.

Regional Initiative

A majority of governors who set up the Regional Greenhouse Gas Initiative, or RGGI, in the U.S. Northeast were Republicans, Victoria Arroyo, executive director of the Georgetown Climate Center at Georgetown University in Washington, said in an interview.

Supporters say the efforts show the approach is an effective way to reduce emissions and that other states are likely to join.

Arroyo said other states probably would set up some type of market-trading system to help them comply, though its likely to be one of a variety of approaches states choose.

Analysts said it is too soon to judge how well the trading programs are working. Emissions have dropped in general in the U.S., in part because energy use fell in the economic slowdown and cleaner-burning natural gas has displaced some coal as an electricity source.

Prices for the carbon credits have traded near the low price set up by administrators, an indication that the overall caps have been set too high to change behavior.

Generate Revenue

“Most cap-and-trade programs have such low pricing that they’re aren’t all that effective right now,” Gerrard said. “The main benefit is generating revenue for energy efficiency and renewables.”

The Northeast trading system has raised $1.6 billion to help pay for energy conservation and clean energy programs, he said.

California, the second-biggest carbon emitter after Texas, has raised almost $2 billion in seven credit auctions.

David Cash, commissioner of the Massachusetts Department of Environmental Protection, said the experience in the northeast shows that trading systems can help governments trim emissions without raising costs.

Estimates predicted the carbon caps could lead to a modest increase in electricity prices, he said. Instead bills have fallen by 8 percent, he said.

Market-based systems lead to “emissions reductions at the lowest cost,” Cash said.

To contact the reporters on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net; Christopher Martin in New York at cmartin11@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net Steve Geimann

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