Cap-and-trade to get fresh look with EPA power plant rule

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An upcoming Environmental Protection Agency rule cutting greenhouse gas emissions from existing power plants could spawn more regional cap-and-trade programs and greater electricity collaboration, according to industry experts.

The EPA rule, which is expected to be announced June 2 and is the cornerstone of President Obama's climate change strategy, likely will preserve ways for states to band together to reach emissions cuts sought by the agency, insiders have said about the closely guarded proposal. Interest in joint measures could be high because of the broad scope the EPA is leaning toward for implementing the rule.

"There's early conversations among states that regional pooling of their resources would be desirable because of the interconnectedness of their grids," Tim Profeta, director of the Nicholas Institute for Environmental Policy Solutions at Duke University, said on a conference call with reporters.

That's because the EPA is looking at using an "outside the fenceline" tactic for imposing the rule. That means it would regulate the power sector across the entire spread of the electric grid -- from the coal-fired generators to the transmission lines to the distribution utilities that send electricity to customers -- rather than at individual smokestacks.

States likely would be able to use regional programs, with state renewable electricity mandates, energy-efficiency upgrades and "smart" grid investments, as credits for meeting the rule. Interest is already mounting.

How cap and trade would work

Tom Wolf, the Democratic gubernatorial candidate in Pennsylvania, has said he would push the state to join the Regional Greenhouse Gas Initiative. Known as "RGGI," it's a cap-and-trade system of nine Mid-Atlantic and Northeast states that began in 2008 and has earned plaudits from EPA Administrator Gina McCarthy -- herself a former official in member states Massachusetts and Connecticut.

Officials in Washington state are working with counterparts in Oregon, British Columbia in Canada, and California -- which already has a statewide cap-and-trade program -- to reduce emissions, with a cap-and-trade system one of several avenues being examined.

RGGI is likely to remain intact under the EPA rule and would provide a model for multi-state initiatives that could spring from the new regulation, experts said.

The program establishes carbon "allowances" based on a capped quantity of emissions that could be traded on a market. States that produce fewer emissions than the cap could sell their allowances to states that exceed the cap, and then use those revenues to invest in energy efficiency and clean energy measures.

Over time, the cap drops to tighten the screws on emissions and the number of allowances — and, therefore, the value of them. Power-sector emissions have fallen 40 percent below 2005 levels due to a combination of the program, a drop in natural gas prices and reduced electricity demand.

Supporters of regionally based plans say the EPA rule would be easier to achieve with more integration because electric utility assets are rarely confined to state borders. They say that cap-and-trade and similar schemes could limit the costs states and utilities face for implementing the rule, which could aim to reduce power sector carbon emissions by 25 percent.

Some electric utilities might even prefer that approach, despite the perception among some conservatives that cap-and-trade programs would raise electricity prices. Many in the electric utility industry have said that they would have preferred a cap-and-trade system to the persistent regulations they now face, so some are asking the EPA to provide them that option.

"Most importantly," the rule should allow states to use "flexible market-based mechanisms" to meet reduction targets, said Melissa McHenry, a spokeswoman with American Electric Power, a coal-reliant utility that serves more than 5 million customers across 11 states.

RGGI states have seen their electricity prices drop 8 percent on average between 2008 and 2013, while the GDP grew 2.5 times and emissions fell 2.7 times faster than the rest of the country, according to a report released Tuesday by Boston-based Environment Northeast. That hurts a theory among conservative critics that cap-and-trade systems and other emissions-reducing schemes impede economic growth, said Peter Shattuck, the group's director of market initiatives and lead report author.

"You could see a similar weakening of the link between emissions and economic growth" elsewhere in the country, he told the Examiner.

Shattuck said the rule might also forge greater collaboration with regional electric grid regulators by encouraging more coordinated planning for adding low- or zero-carbon energy sources, such as wind and solar.

Northwest opportunities?

Some utilities in energy-producing states seem willing to push their regulators — which, by and large, would be charged with approving such schemes — to enter into such collaborations.

“States must have the flexibility to develop regional programs taking into account that generating sources may be located in states remote from the load they serve,” Dale Niezwaag, senior legislative representative for Bismarck, N.D.-based electric cooperative Basin Electric, said at an event that drew government and utility officials from 21 states, according to the Bismarck Tribune.

K.C. Golden, policy director with Climate Solutions and a member of a climate task force formed by Democratic Washington Gov. Jay Inslee, said that energy-producing states and their utilities might stand to benefit from regional programs.

Golden pointed to the Northwest as an example. Oregon and Washington will shutter their coal-fired generation by 2025, but their residents will continue to draw power from coal-fired units based in inland states such as Montana. A cap-and-trade scheme would produce considerably more allowances in Oregon and Washington that could be sold to power producers in Montana to meet whatever benchmarks are set.

"If this is going to work right and at scale and in more than a few states, I think we really have to think about what are the market opportunities — thinking about some states that have a lot of carbon power and relatively fewer people," he told the Washington Examiner.

The hurdles to cap and trade

Some, however, are less bullish.

Establishing more cap-and-trade and similar mechanisms faces hurdles, not the least of which is that cap-and-trade is still a no-go politically -- especially among conservatives -- in the wake of legislation that passed the House but collapsed in the Senate in 2010.

The rule's stringency, which depends somewhat on the year the EPA uses as a baseline for benchmarking emissions cuts, also will play a role by affecting which improvements states could use to meet the rule. Choosing 2005 as opposed to, say, 2010, would be less restrictive but also would result in fewer emissions cuts in the future.

How stringent the rule is also will have some bearing on whether states, which must get their plans approved by the EPA but are loath to give up their autonomy, feel the need to collaborate. If the rule allows considerable wiggle room for compliance, the urge to buddy up with neighbors will be restrained in certain states, Shattuck said.

Many of the more reluctant states would be found in the Midwest, where the economy is more manufacturing-based, and energy-producing states — especially those that get a considerable amount of electricity from coal-fired power.

"It would hard to be see how a state like Kentucky or Missouri would join a regional program," said Rob Thormeyer, a spokesman with the National Association of Regulatory Utility Commissioners.

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