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Eight Is Not Enough

David Biello

The northeastern states Regional Greenhouse Gas Initiative, affectionately known as RGGI, picked up Maryland as its eighth member in April. In the second article of a series about climate change policy in the United States, the Ecosystem Marketplace checks in on action in the Northeast.

The northeastern states Regional Greenhouse Gas Initiative, affectionately known as RGGI, picked up Maryland as its eighth member in April. In the second article of a series about climate change policy in the United States, the Ecosystem Marketplace checks in on action in the Northeast. And then there were eight. After the high-profile defection of Massachusetts and Rhode Island in December, the northeastern states Regional Greenhouse Gas Initiative, or RGGI, gained another member when Maryland's governor dropped his opposition under legislative pressure and signed the Healthy Air Act. The new law requires Maryland to become a "full participant" in the regional effort to cap emissions of carbon dioxide (CO2) by June of 2007. If successful, the Chesapeake State would be the first primarily coal-powered jurisdiction to tackle climate change pollution. The RGGI region in the Northeast derives only 15% of its power from carbon-heavy coal. By contrast, utilities in the state suggest Maryland gets roughly 60% of its power from coal. As a result, Maryland more than compensates for the loss of Massachusetts and Rhode Island. "Their emissions are somewhere between 30 and 33 million tons a year," says Franz Litz, climate change policy coordinator for the New York State Department of Environmental Conservation and chair of the region's staff working group to implement the program. "That compares to Massachusetts' budget of 26.6 million tons a year and Rhode Island's 2.6 million tons a year." Now that Maryland is in the game, it may change the whole dynamic. "If Maryland can do it, then Pennsylvania could also do it," Litz says. And if Pennsylvania does it, there is no reason that the effort could not continue to expand across the country, perhaps linking with efforts under way from states on the West Coast. After all, the RGGI memorandum of understanding highlights an interest in expanding "the geographic reach of the Program." Similarly, the California commission charged with developing its greenhouse gas program has called for links with RGGI. If programs on the east and west coasts link up, it could lead to the ultimate goal: a national program. "Would we be happy if this was the example for federal action?" Litz asks before answering his own question, "Of course we would be happy. That would be a really fine result."

First Steps

Before any of that can happen, the various states involved in RGGI will have to adopt it. At the end of March, the working group that Litz heads released the draft model rule. This rule covers electric generating units capable of producing 25 megawatts or more of power, committing participating states to cap their emissions at 1990 levels after 2009 and then drop them by 10% by 2018. The power plants will have three-year compliance periods—intended to level the effects of weather and other vagaries—and will be required to submit one CO2 allowance for every ton of CO2 emitted. "With CO2, you don't have the short-term concerns that you have with mercury, sulfur dioxide or nitrogen oxides, which tend to have short-term impacts," Litz says. "With a three-year compliance period, you are able to spread out and smooth over those [weather and other] fluctuations." The rule also makes provisions for offsets—reductions that occur away from the power plant itself. In a normal period, 3.3% of emissions may be covered by such offsets, which include capturing landfill methane, planting trees and energy efficiency programs. If allowance prices rise beyond expected levels, then more offsets will be allowed. For example, if CO2 allowance prices are higher than $10 for more than two years, then 5% of the first period's emissions, and 20% of the second period's emissions, can be covered by offsets. "The way the program is designed is to have a step-wise opening of the doors," Litz explains. "If the price impacts of the program turn out to be greater than we expect, then it opens them wider to address those cost concerns." The rule covers how states will allocate allowances as well. In previous programs, such as the U.S. Environmental Protection Agency's Acid Rain Program or the northeastern states' nitrogen oxide trading program administered by the Ozone Transport Commission, affected sources simply received an allowance based on their historical emissions rates. But the RGGI model rule steps away from that precedent by ordering at least 25% of allowances to be set aside for the benefit of consumers or for "strategic energy" purposes (i.e. diversity of generating supply). Since generators will need to buy these allowances, the proceeds from those sales or auctions can be used to keep prices down or invest in new wind farms. But all of this is only a model rule; one that is subject to comment and change before a final version is released sometime this summer. "We do expect that the states will all adopt a substantially similar program," Litz says.

Stumbling Blocks

It may not prove so easy. While designing RGGI has been a prolonged and inclusive effort, the legislative and rulemaking process may yet transform the rule. "Each state is going to have to engage the model rule and turn it into a state rule," says Daniel Cunningham, environmental policy manager for New Jersey-based electricity generator PSEG. "That's really where the rubber hits the road as far as challenges and opportunities." For example, agency heads or legislators in each state might decide to handle allocation differently. After all, the 25% for public use is just a minimum; some states might decide to auction all of the allowances or hand them over to load-serving entities instead. "It ought to be much larger amount than 25%," argues Richard Cowart, a technical advisor to RGGI and director of the non-profit Regulatory Assistance Project. "Given the way that power markets work throughout the RGGI region, allocating to generators creates a significant windfall at the expense of consumers." Since the northeastern region is a deregulated energy market, simply giving allowances to generators will not keep electricity prices down. Power prices in the region are set by the highest price paid to the last generator to contribute electricity in that hour. Every generator in the market in that hour gets that price for their power, regardless of cost, Cowart explains. So in an hour where a coal-fired power plant sets that price, that price will already cover the cost of a CO2 allowance, since the generator will need to factor that into the price it bids. "If we decided that we wanted generators to have no net economic impact from this program, awarding 20% of the allowances would be adequate to achieve that goal and 80% should be given to consumers," Cowart says. "That's if you decide you want consumers to pay 100% of the costs of the program and generators to pay nothing." Others disagree, of course. And allocation is just one of the controversial issues. Offsets have also provoked concern, with environmentalists calling for stringent provisions and industry arguing for more lenience. "There's some myth that we're going to go into power plants and get efficiency savings," argues John Quinn, lead engineer at Maryland-based Constellation Energy. "You're not going to get leaps and bounds more." Cowart cites the same reason when calling for allocating in favor of consumers. He argues that in a deregulated energy market with generators competing to sell power, each has an economic incentive to run as efficiently as possible since they cannot just recapture costs from a captive set of consumers. And there is no readily available technology that can simply be attached to a smokestack to capture CO2, Quinn and others note. That means cuts in CO2 emissions from generation are either going to have to come from consumers cutting back on power consumption—something generators have little incentive to promote since they make money from selling power—or offsets. "For carbon, the ton emitted from a Maryland power plant is the same as a ton emitted from Scandinavia or China," Quinn notes. "Anything that contributes to carbon stabilization should be considered and part of the program." As it stands, the RGGI model rule specifically defines acceptable projects and rigorously controls their use through the step-wise injection of offsets into the program depending on price. "It's much too complicated and it might be crushed under the weight of regulation," says Brian Jones, a policy analyst at Boston-based consultancy M.J. Bradley & Associates. "The combination of those provisions might send conflicting signals to the market and create problems rather than solutions. It's pretty stringent on the offsets."

Basic Disagreements

Offsets aside, there is an even more fundamental argument at the heart of RGGI: what will its impact be on electricity generation in the area? According to the computer simulations run by ICF Consulting at the behest of the makers of RGGI, the answer is: not much. Litz and his fellow regulators relied on information from the U.S. Energy Information Administration to run simulations at a gas price of $5, $7 and – after the price spike in the wake of Hurricane Katrina – $11. Judging a $5 natural gas price the most likely, the ICF model predicted a minimal price impact. "Putting a RGGI policy in place led to very minimal price impacts and the reason for that is that it led to pretty low CO2 allowance prices, ranging from just under $1 to $3 [a ton]," says Steve Fine, director with the energy and resources practice at ICF. "A $2 a ton CO2 price can be absorbed pretty readily by a coal plant and it can still be competitive." Industry is more skeptical. "We'd like to believe the models," says Bob Teetz, director of environmental licensing and compliance at New York-based generator Keyspan. "The models that indicate that RGGI will have a marginal impact on rates do rely on significant amounts of renewables coming online. We are not yet seeing those significant amounts happening because of licensing issues. There are many more proposed than have actually progressed." In fact, the RGGI modeling relied on every state meeting its renewable portfolio standard (RPS), which mandates that a set percentage of power come from renewables such as wind or solar. Given high profile popular opposition to some such proposals—witness the brouhaha surrounding the wind power project off Cape Cod in Massachusetts—it remains unclear whether such programs will achieve their targets. And the modeling thus far, while including dropouts Massachusetts and Rhode Island, has not included Maryland, now the second largest emitting state in the program. Even if a state RPS is met, it may do little to solve the underlying problem of electricity demand and climate change. "Wind blows the most in the fall and spring and in the morning and the evening. That's kind of the opposite of the [electricity use] profile," Constellation's Quinn notes. "Anyway, studies have shown a maximum of 400 megawatts in Maryland. We have 10,000 megawatts of coal in place. You're just denting the problem, you're not able to solve it that way." A potentially bigger problem—and one that RGGI is already working to address through a special working group—is so-called leakage, or an increase in imports of power from generators outside the RGGI region, whether from Canada or surrounding states. "We already import 30% of our power," Quinn says. "The only place to import it from is Pennsylvania, West Virginia or Ohio and there may be a net increase in emissions." That defeats the purpose of RGGI and model runs predicted an increase in imports of anywhere from 20% to 40%, depending on fuel prices and other variables. The models also predict future power plants would be built outside of the region in order to avoid controls. RAP's Cowart and others argue this problem can be solved by requiring load-serving entities to track the CO2 profile of the power they deliver to consumers. "With respect to a megawatt-hour that comes from a RGGI regulated source, the source certifies to the load serving entity that an allowance was retired," Cowart explains. "For a source that's outside the region, the load serving entity would need to make such a certification." "Each state would have to assign carbon responsibility to importers who either increase or decrease emissions with power being brought into the region," he adds. The RGGI group working on the issue expects to issue its findings by the end of next year.

Send in the Lawyers

Despite all the uncertainty, RGGI continues to gain momentum; actual rules may be in effect in the various states as early as fall 2006. And that's when the next hurdle will present itself: legal challenges. Very few clean air programs, if any, have escaped litigation and a program as contentious as RGGI is unlikely to escape the courts. According to a lawyer familiar with the issue, Legal challenges could take a number of forms. Regulated entities might challenge the specific mechanisms a state takes to implement the rule. More broadly, opponents might challenge the program under federal law—a specter already raised by industry group the Edison Electric Institute (EEI). EEI notes that the RGGI program and federal policy conflict and points to the fact that courts have pre-empted state rules in cases relating to foreign policy. EEI and others raise constitutional concerns as well, citing the compact clause, which prohibits compacts between states unless Congressional consent is obtained, and the commerce clause, which prohibits states from regulating interstate commerce. "There is a prohibition on subgroups of states but challenges are pretty rare," notes a lawyer who declined to be identified. "It's been whittled away. States cooperate to do all sorts of things. Compact clause challenges have not been very successful." But a commerce clause challenge might prove more successful, particularly if RGGI treats offsets—or power—generated outside the state differently than that generated inside the states. "At least one commerce clause type challenge is that their offset program kind of treats offsets differently from different states," says the same lawyer. "That kind of bumps up against this prohibition that says you can't treat your own commerce differently from commerce that comes in from different states." "It would be a very serious legal issue if [the program] was to restrict electricity imports to the region based on carbon content," argues Peter Glaser, a partner at Troutman Sanders law firm. Neither lawyers for the various states involved, such as the Attorney General for New York, nor any of the potential plaintiffs had any comment on these legal issues. But if a lawsuit is launched it could end up delaying the program or interfering with its smooth implementation. "Any kind of hold up in New York through legal challenges or regulatory problems really could screw everything up, in much the same way that the European Union's Emissions Trading Scheme was screwed up by national allocation plans," notes Kyle Danish, an attorney at Van Ness Feldman law firm. "When the German NAP got held up, it screwed up the trading market. This is really vulnerable to a bump in state implementation in New York."

National Ambitions

RGGI continues to move forward and many expect it will gain even more momentum when Massachusetts and Rhode Island rejoin the program. Several candidates for governor in Massachusetts already have declared their intention of rejoining the regional effort, and members of the state legislature have begun to work towards implementing a legislative mandate to override the current governor's opposition, much as Maryland's legislature has done. "There's actually language that defines what our apportionment would be," says Bill Lamkin, an environmental engineer at the Massachusetts Department of Environmental Protection and a designated observer of the RGGI process. "All the work associated with that is already done for both Massachusetts and Rhode Island, unlike Maryland." When all is said and done, the RGGI region is just the tip of the iceberg when it comes to U.S. efforts to combat climate change. Many states have enacted renewable portfolio standards to displace more polluting energy generation. New Mexico and Arizona recently formed an alliance to fight global warming. And California, Oregon and Washington are all working on their own efforts to control greenhouse gas emissions. "The California Public Utility Commission said they would be looking toward setting up a trading system," RGGI's Litz notes. "They want to make it so they can link to RGGI." And that creates momentum for a national solution—as evidenced by recent hearings in the Senate on how best to tackle the problem and legislative efforts in recent years (see U.S. Senate Debates GHG Regulation). After all, industry wants to avoid a slew of conflicting regulations and spread the impact as widely as possible. "Power is just 35% of emissions," Constellation's Quinn says. "These things work most efficiently when all sectors of the economy are involved." A panoply of industrial leaders at that Senate hearing agreed, including GE, Wal-Mart, Duke and others. Perhaps a cap-and-trade program to combat climate change is an idea whose time has come. "A national program is the most important thing in the greenhouse gas debate," PSEG's Cunningham notes. "We need to have a national program and we need to have it as quickly as possible. If RGGI is a stimulator to get that national program going, that's a good thing." David Biello is a regular contributor to the Ecosystem Marketplace. He may be reached at d_biello@yahoo.com. First published: May 2, 2006 Please see our Reprint Guidelines for details on republishing our articles.

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