From the Union of Concerned Scientists, Center for Science and Democracy
1. European Union's Trading Scheme
2. The Northeast Regional Greenhouse Gas Initiative
3. The Western Climate Initiative
4. Midwestern Regional Greenhouse Gas Reduction Accord
Existing cap-and-trade programs provide important lessons about the
need for robust design features. A brief review of real-world experience
will illustrate two of these lessons. First, a cap must be tight enough
to achieve significant cuts in emissions. Second, the method regulators
select for distributing emission allowances to firms is critical, and
auctioning is gaining favor as the preferred approach.
Cap and Trade in Practice. The
European Union’s Emission Trading Scheme (EU ETS) is the first
cap-and-trade program for reducing heat-trapping emissions, and is
designed to help European nations meet their commitments to the Kyoto
Protocol. This program includes 27 countries and all large industrial
facilities, including those that generate electricity, refine petroleum,
and produce iron, steel, cement, glass, and paper.
The first phase of the EU ETS—from 2005 to 2007—drew criticism for
not achieving substantial cuts in emissions, and for giving firms
windfall profits by distributing carbon allowances for free. These
criticisms are valid. However, the EU viewed Phase 1 as a trial learning
period. The extent to which Phase 2—which runs from 2008 to 2012—helps
Europe fulfill its Kyoto commitments will be a better test of the
program.
Phase 1 allowed countries to auction up to only 5 percent of
allowances—and only Denmark chose to auction that amount. The result was
billions of dollars in windfall profits for electricity producers.
Phase 2 allows slightly more auctioning, which is expected to occur.
The rules for Phase 3—which extends from 2012 to 2020—were published
in December 2008, and unfortunately they are not as ambitious as
expected, given the EU’s stated commitment to tackling global warming.
This phase targets a 20 percent reduction in emissions from 1990 levels
by 2020; climate experts had hoped for 30 percent. Even this target is
considerably watered down because of the large amount of offsets allowed
from outside the capped region. Auctioning of allowances is still not
likely to play a major role. This experience reinforces the fact that
the United States would be much more likely to win stronger commitments
from the EU and elsewhere if it fulfilled its responsibility to lead on
climate policy.
The Regional Greenhouse Gas Initiative (RGGI)
is a cap-and-trade program that covers a single sector—electricity
generation—in 10 northeastern and mid-Atlantic states. The program aims
to achieve a 10 percent reduction in emissions from power plants by
2018.
The program’s most notable aspect is that states unanimously chose
auctioning to distribute the vast majority of emission allowances. Six
of the ten states will auction nearly 100 percent of their allowances.
The auctions of the other four states include fairly small portions of
fixed-price sales or direct allocations.
The program's initial
three-year compliance period begins in 2009, but the first multistate
auctions occurred on September 25 and December 17, 2008. The first
auction, which included allowances from only six states, raised $38.5
million, while the second raised $106.5 million. States and electric
utilities will invest the vast majority of those funds in energy
efficiency and renewable technologies, with an emphasis on reducing
demand for fossil fuel–based electricity and saving consumers money.
The RGGI auction includes a reserve price, to ensure that CO2
emissions will always carry a minimum cost, and that the auctions will
yield a minimum amount of revenue for these important programs. Some
analysts fear that the states may have set the cap too high, because
emissions have not grown at the rate expected when the cap was set in
2005. However, there is a possibility that the states could revisit the
cap.
Cap and Trade on the Horizon
The Western Climate Initiative (WCI)—which
includes seven western states and four Canadian provinces—has
established a regional target for reducing heat-trapping emissions of 15
percent below 2005 levels by 2020. WCI’s main focus is developing a
regional cap-and-trade program. The WCI also requires participants to
implement California’s Clean Car Standard, and recommends other policies
and best practices that states and provinces can adopt to achieve
regional goals for cutting emissions.
The first phase of WCI development culminated on September 23, 2008,
with the release of its Design Recommendations. These sketch out a very
broad cap-and-trade program that would cover 85–90 percent of all
heat-trapping emissions from participating states and provinces. The
only parts of the economy that would remain uncapped are agriculture,
forestry, and waste management. However, some sectors, such as
transportation fuels, would be brought in at the start of the second
compliance period, in 2015.
California is the largest single entity in the WCI, and it has the
most detailed action plan of any state in the nation. In 2006 the
legislature passed, and Governor Schwarzenegger signed, a law to reduce
emissions economy-wide. The California Air Resources Board has created a
blueprint for achieving the required reductions. The plan includes a
strong set of sector-specific policies forecast to provide about 80
percent of the needed reductions, as well as a broad cap-and-trade
program linking to the WCI. The California and WCI cap-and-trade
programs are scheduled to go into effect in 2012.
Another nascent regional effort is occurring in the
Midwest.
On November 15, 2007, the governors of Illinois, Iowa, Kansas,
Michigan, Minnesota, and Wisconsin, as well as the premier of the
Canadian province of Manitoba, signed the Midwestern Regional Greenhouse
Gas Reduction Accord. Participants agreed to establish regional targets
for reducing global warming emissions, including a long-term target of
60–80 percent below today’s levels, and to develop a multisector
cap-and-trade system to help meet the targets.
Participants will also establish a system for tracking global warming
emissions, and implement other policies to help reduce them. The
governors of Indiana, Ohio, and South Dakota joined the agreement as
observers. The regional accord for reducing such emissions is the first
in the Midwest.
The governors and premier assembled an Advisory Group of more than 40
stakeholders to advise them, and their final recommendations are due in
May 2009. As now conceived, the cap would take effect January 1, 2012.