Environmental Law

Western Climate Consortium Unveils Cap-and-Trade Design

By Dennis Pfaff and Kevin Livingston, Editors

The Western Climate Initiative, a partnership of American states and Canadian provinces representing a significant chunk of each country's economies, Tuesday unveiled its design for a market-based system to reduce greenhouse gas emissions.  

Key elements of the program include requiring each of the states and provinces to initially auction at least 10 percent of the emissions credits or "allowances" that companies will need to emit carbon dioxide and other heat-trapping gases. It also placed a limit on the use of "offsets" -- essentially paying other entities to cut emissions -- to the equivalent of no more than 49 percent of the reductions. Officials released a press statement, a question-and-answer sheet and a summary of the program. 

Overall, the goal is to reduce the emissions of pollutants believed to cause global warming to 15 percent below 2005 levels by 2020. That's comparable to the California standard set out in the state's groundbreaking AB 32, which calls for the state to match 1990 emissions levels by 2020, Eileen Tutt, deputy secretary of the California Environmental Protection Agency, told Climate Law Update Tuesday.

The so-called cap-and-trade system would get underway in 2012, according to the document. Release of the design comes just a couple of days before the Regional Greenhouse Gas Initiative, a similar compact of Eastern states and provinces, launches the country's first-ever auction of carbon dioxide allowances, covering emissions from power plants, scheduled for Sept. 25. 

Under such a program, limits are set on pollutants and companies must obtain permits or credits -- which can be bought and sold -- equal to their emissions. That puts a value on the emissions and, its supporters believe, helps produce cost-effective reductions.

Among the more controversial elements of designing such programs has involved what proportion of the allowances to initially sell or auction, versus give away for free. Under the design for the western program released Tuesday, the proportion would climb from 10 percent to 25 percent by 2020. Governments could elect to go higher, something California is considering, as underscored by a recent set of recommendations put forward by state energy regulators recently. At least some of the money from the auctions would go toward energy efficiency and developing low-carbon technologies, according to the information released by the initiative. 

The design set a goal of eventually auctioning all of the credits.

Members of the western consortium include seven states and four provinces that together account for one-fifth of the United States economy and fully 70 percent of Canada's. The economic sectors covered by the program would also be much broader than its East Coast counterparts, eventually covering an estimated 90 percent of the region's emissions. Under a phased start-up, the first three years of the western system will cover emissions from electricity generation and large industries, and in later years transportation fuels and other residential, commercial and industrial fuels will be added.

While some governments may have to pass new legislation to implement the plan, others, such as California with its AB 32, already have the necessary legal authority, she said.   

Tutt said that by working with the other states and provinces, emissions reductions equal to more than double California could have achieved on its own. Officials also are clearly hoping that the plan sparks a broader effort. Said Tutt:

"We feel like we have provided a model and a basis for a future federal program and we are frankly quite proud of that."

Regarding the use of offsets, Tutt said there was agreement among the states and provinces that most of the reductions should come from the economic sectors actually being included in the program. However, she said there are "tremendous benefits" both economically and environmentally from the use of offsets.

The plan immediately received a mostly positive review from a major environmental group, the Natural Resources Defense Council. The organization released a statement from one of its climate change advocates, Ned Farquhar, saying the initiative "promises to reduce our reliance on dirty fossil fuels." However, he urged the states and provinces to increase increase the percentage of allowances that are auctioned:

"The adoption of smart design features, such as auctioning allowances and investing the money in energy efficiency and renewable energy, will ensure that the program transforms the West’s energy economy at an affordable cost, saving money in the long run."

--Dennis Pfaff of Thelen LLP

Photo: Niagara Mohawk coal-fired and biomass-fired power plant, New York; Courtesy, U.S. Department of Energy-National Renewable Energy Laboratory; Credit: David Parsons  

Full post as published by Climate Law Update on September 23, 2008 (boomark / email).