April 30, 2009

The Emerging National Climate Program

Posted on April 30, 2009 by Robert Wyman

As Congress debates comprehensive climate legislation, the EPA considers its options and responsibilities under the Clean Air Act, and states and regions continue to develop their own programs, it is important to consider the potential risks of dual or overlapping federal and state programs. A federal climate program will be vastly superior to a patchwork of state and regional programs. Congressional action is preferred, but even a federal EPA program would likely be superior to a state or regional approach.

There are several obvious reasons why a federal climate program would be superior to a patchwork of state programs.  Successfully stabilizing the climate will require nothing less than the transformation of our energy and transportation systems. As some detractors of climate proposals have noted, near-term cap and trade programs will reduce emissions, but will not do nearly enough to make the progress needed to stabilize the climate. That will require long-term and broad scale changes to the way all nations generate and use energy. While states are valuable laboratories, there is little question that only the federal government can support the required scale of research and development, invest in the necessary infrastructure (including an adequate national transmission system and transportation fuel supply system) and otherwise establish and support markets of sufficient scale to stimulate needed change. Likewise, federal action is necessary to ensure that our climate policy is integrated with other high priority national goals, such as energy and transportation security, reliability and affordability. There is an emerging consensus as to the appropriateness of near-term comprehensive federal action, tempered by concerns about its economic impact during a severe recession and by debate regarding program design.

If there is a federal program and, if, as expected, it includes a cap and trade program, there should not be overlapping state cap and trade programs. The reasons for this conclusion were nicely illustrated yesterday by the highly-regarded economics consulting firm, National Economic Research Associates (NERA), in the second of its Climate Policy Economic Insights newsletters. As noted in the NERA document, if a state program is more stringent than the federal program, then the allowance price in that state will be higher than the federal allowance price because sources regulated in that state will face a higher cost abatement curve than sources subject only to the federal program. A good illustration of this problem is the emerging California climate program. Early estimates of the marginal cost of a carbon allowance in California at the compliance year 2020 are in excess of $100 per annual ton of carbon dioxide equivalent (CO2e) emissions (see “Analysis of Measures to Meet the Requirements of California’s Assembly Bill 32,” Precourt Institute for Energy Efficiency, Stanford University, Discussion Draft September 27, 2008, at 14-16). By contrast, EPA’s initial estimate of the marginal cost at 2020 of the Waxman-Markey Discussion Draft is expected to be in the range of  $17-22/ton CO2e (see EPA Preliminary Analysis of the Waxman-Markey Discussion Draft, April 20, 2009, at 3, 15). This cost differential is not in the least surprising, as California GHG sources have been subject for many years to ambitious renewable portfolio standards (requiring up to 20% of electricity to be supplied to investor-owned utility customers by 2010) and aggressive energy-efficiency standards, among other strategies. Requiring California sources to reduce their emissions further will simply cost more because the lower-cost options along their cost abatement curve are no longer available. Note that this is very different from requiring all sources to meet a common performance standard, in which case state-by-state costs per ton would be much closer. Indeed a national trading program based on a performance standard (e.g., carbon intensity) would likely reward California sources for their early actions.

The bottom line is that sources in states with more stringent carbon reduction programs will pay more for their next ton of carbon than their competitors elsewhere, potentially more than five times more. This might be warranted if GHG emissions had a local health impact, but it is not warranted given that GHG emissions impacts are global in nature and the location of the reduction generally is not of concern (except for the unusual, and easily segregated, situations in which there are co-benefits of reducing criteria pollutants). Notably, at a recent visit to Washington, DC, by Southern California elected officials and business leaders, one visitor urged Senate EPW Chair Barbara Boxer to consider preempting state programs to avoid disadvantaging California businesses. Senator Boxer answered that no California source would pay more for a ton of carbon than anyone else in the country. This is a reassuring statement, but one that can only be true if federal legislation preempts state climate programs. Fortunately, the Waxman-Markey draft appears to recognize the potential problems of overlapping federal and state programs, as it contains a partial preemption (through 2017) of state cap and trade programs.

Even if federal legislation preempts state cap and trade programs, there is a strong likelihood that so-called “complementary” measures may still be implemented at the state level. Such measures include several programs of strategic importance, such as renewable power and transmission investments, low carbon transportation fuel standards, and, in California’s case, comprehensive motor vehicle regulations. The Waxman-Markey Discussion Draft appears to recognize the value of undertaking these strategic programs instead at a federal level. While state leadership in each of these areas is to be recognized and lauded, once robust federal programs are in place state programs in these critical areas should be transitioned to the federal programs in a manner that minimizes, and even eliminates, the economic inefficiency associated with compliance with multiple programs.

Some states (again, California is a prime example) will develop complementary command and control measures to reduce GHG emissions in other sectors or for other categories for which the state regulation is not strategic. That is to say that the measures’ value will be primarily in reducing emissions, not in advancing a technology or fuel of critical national or regional importance. It may be that some of these measures are warranted at the state level. A good example would be energy efficiency programs to retrofit buildings or local or state initiatives to reduce energy consumption or vehicle miles traveled through smart land use and transportation planning. Except in such situations where states and localities offer unique advantages in structuring such programs, once Congress enacts (or EPA implements) a robust GHG cap and trade program, states should avoid the adoption of additional GHG regulations where the carbon cap already provides an adequate incentive for reducing emissions on a national basis.

Seasoned Congressional observers will recognize that, despite best efforts, Congress may not be able to enact a federal cap and trade program in the near term. If the Senate’s recent budget amendment is any indication of the prospects of legislation this year, 89 Senators voted to oppose climate legislation if it would have the effect of increasing electricity or fuel prices. Of course, raising the price of energy to reflect the environmental impact of carbon emissions is one central purpose of a cap and trade program. So the Senate vote is a danger sign to the prospects for passage. Senator Boxer’s subsequent amendment, which sought support for returning allowance auction revenues to consumers to neutralize the program’s overall price impact, garnered 54 votes, but still 6 shy of what would be required to prevent a filibuster.

Recognizing that Congress may not succeed in passing a federal cap and trade program this year, EPA should develop an appropriate federal framework backstop program. This course would be a natural progression from EPA’s recent proposal to find that GHG emissions endanger public health and welfare. When considering agency regulation of GHGs, EPA’s 2008 Advanced Notice of Proposed Rulemaking (ANPR) showed a deep understanding of the potential risks of regulating GHG emissions under the Clean Air Act on the one hand, and of the possible path forward that could avoid significant economic injury on the other. Following this path, EPA should be prepared to develop a national GHG program under section 111(d) of the Act. As suggested by the Waxman-Markey Discussion Draft, to ensure ultimate consistency with emerging federal legislation and to minimize economic risk, the EPA should not treat GHGs as criteria or hazardous air pollutants, nor should the agency apply the Act’s new source review program to GHG sources. Likewise, using the full scope of administrative discretion likely to be recognized by the courts as appropriate in this extraordinary context, EPA should focus on the largest GHG sources (above 25,000 annual tons) and apply Title V only to those sources already subject to the Title V program for other pollutants. If Congressional action is delayed, then, applying section 111 of the Act, EPA should develop appropriate performance standards or benchmarks for existing and new GHG sources that would form the basis of a national averaging and trading program similar to the program that was used to remove lead from gasoline. This program would initiate investment in carbon reductions and provide a basis for the creation and use of GHG emission reduction credits. It also could easily transition either to a Congressional cap and trade program or, if Congress cannot act promptly, to an EPA-administered national cap and trade program, with full recognition and value to any credits generated under the initial phase of the program. While Congressional action is clearly preferable, an EPA national trading program would be better than a patchwork of state programs for the reasons noted above.

Tags: Air


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