Carbon Constraints are Here!

October 14, 2008

The evolution toward a carbon-constrained society is well underway. The latest push is coming from the northeastern states that have officially started auctioning carbon credits.


The goal is to replicate the success that the region had when in 1984 it set out to curb acid rain levels. The auction, which officially opened in late September and will sell such credits every three months, is a $1.1 billion pilot program that is meant to be small but effective. Organizers want to get it right. If they can do so, the effort may eventually become a standard by which any federal laws can be modeled.


"The start of the Regional Greenhouse Gas Initiative (RGGI) auction of emission allowances demonstrates both how far we've come and how far we need to go to effectively address climate change," says Eileen Claussen, president of the Pew Center on Global Climate Change. "These states are paving the path to a comprehensive national program that offers the most cost-effective solution to significantly reduce U.S. greenhouse gas emissions."


RGGI caps the level of carbon emissions from the 10-state region at its current level of 188 million tons. By 2018, those emissions must be cut by 10 percent. To get there, the states will sell credits -- and not give any away -- to companies. Such businesses can buy or sell credits amongst themselves. Those that are able to achieve the desired results would sell their credits to those that cannot do so.

As the requirements get tougher and as the system issues 2.5 percent fewer credits each year, the price of those chits should rise and give companies more incentive to cut their emissions rather than buy them. They could achieve this in multiple ways and specifically by investing more in renewable energy fuels. The states, meanwhile, will use the money earned from selling credits to invest in energy-saving technologies.


The regional initiatives kick start what will turn into a national discussion. While this auction is underway, several Midwestern and Western states are engaged in a similar set of discussions. The latter coalition has released its plans that would cut greenhouse gas emissions by 15 percent from 2005 levels by 2020. And in the coming weeks, the nation will elect a new president -- either of which has said that restricting carbon emissions should become a national priority.

RGGI will start the bidding at $1.86 a ton, but that is expected to rise quickly to $5-$7 a ton. In the early stages, it is anticipated by the Adirondack Council to have a nominal effect on consumers and cause their electricity prices to rise just 78 cents a month. "In the long run, RGGI will save consumers money and reduce the pollution that is changing our climate," adds Jackson Morris with Environmental Advocates of New York. "Statements by opponents of the regional climate plan about high cost are speculative and not based on sound analysis or research."


Associated Costs


To be sure, carbon caps are opposed by many and notably business groups that say it will cause the price of all goods and services to rise. Logic would suggest that if the government imposes more regulations on businesses, they will pass the associated costs on to consumers. And it's a particularly risky strategy now, given the high price of gasoline and other energy forms.


They also say that the issue needs to be addressed at the federal level so as to avoid a messy patchwork of state laws. The argument here is that regional plans may backfire as businesses would just seek to buy less expensive coal power from those states without such restrictions. That type of circumvention would then be a double whammy as both energy prices and pollution levels in the region would go up.

"By levying an effective tax on carbon, a regional cap-and-trade program would dramatically increase costs to consumers in the West of virtually everything we buy, from energy to food to housing to clothing," says Britt Weygandt, executive director of he Western Business Roundtable. "It remains to be seen whether consumers will agree to these higher costs."

Despite the legitimate concerns, the trend is toward a carbon-constrained world. In congressional testimony, the chief executive of New Jersey's Public Service Enterprise Group, Ralph Izzo, said that global climate change is a real threat and that a national platform whereby carbon emissions can be traded is necessary.


He says that a plan in which a quarter of the credits would be initially auctioned -- and all of them over a 10-year time frame -- would be optimal. Critics contend such a system allows big polluters to do business as usual. Another idea, most prominently espoused by New York Mayor Michael Bloomberg and even FPL Group, is carbon taxes. Under such a regime, utilities would be penalized for excessive emissions.


Under any set of circumstances, advocates of tighter controls say that actual carbon reductions are not wishful thinking and that many options are now commercially available and more will emerge with regulatory certainty. The current options that PSEG's Izzo points to are energy efficiency, renewable technologies and nuclear power.

"PSEG believes that global climate change represents a real environmental threat and significant business challenge, as well as opportunity," says Izzo. "We support mandatory greenhouse reductions on a national level and a cap-and-trade mechanism to achieve those reductions."

Change is coming. It won't be sudden. But it will, in time, affect all businesses and consumers. RGGI is one of the first such carbon-controlling mechanisms and a program that the nation may eventually try to emulate.

Garry Harris

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