POLICY:

Regional carbon cap gets second look as 'template' for national plan

The climate debate in Congress is prompting a closer look at a mandatory program that has been chugging along for almost two years in the eastern United States with relatively little notice.

The Regional Greenhouse Gas Initiative, or RGGI, operating in 10 states from Maine to Maryland, restricts emissions just from the utility sector, like one of the leading ideas to address climate change now percolating on Capitol Hill. The impetus began to grow last month after a meeting at the White House before the congressional recess. Sen. Olympia Snowe (R-Maine) called the regional program a "template" for national climate legislation.

"I believe that one possibility is to more narrowly target a carbon pricing program through a uniform nationwide system solely on the power sector," Snowe said.

Since then, others have begun to flesh out the utility-only idea. Senate Energy and Natural Resources Chairman Jeff Bingaman (D-N.M.) is working on a bill that would cap emissions of the power sector. Snowe also is involved in these discussions, according to sources.

But are the regional system and its utility-only cap working as intended? And do they offer lessons on how congressional lawmakers should put together a cap-and-trade system at the national level?

For supporters of RGGI, Snowe drew attention to a program that has been implemented without any major blips and has reduced greenhouse gases as planned while boosting local economies.

"Cap and trade has been vilified, and the fact that's it working well shows a system can be designed that will implement serious carbon reductions in a low-cost manner," said David Littell, commissioner of the Maine Department of Environmental Protection and chairman of RGGI's board of directors.

Critics, on the other hand, say that the regional regime raises some red flags about cap-and-trade systems generally and has done little to change behavior for the 209 power plants covered by the plan.

Is this a Goldilocks solution?

"I just don't see it as a national model, since it's a weak cap," said Jeff Tittel of the New Jersey Sierra Club.

The regional program caps emissions on all fossil fuel-fired power plants larger than 25 megawatts in 10 states, including all of New England, Delaware and Maryland. Together, they constitute about a fifth of the U.S. economy.

Participating states agreed to slash carbon dioxide emissions from power plants 10 percent below 2009 levels by 2018. Reductions kick in at 2.5 percent yearly in 2015 after an initial six-year "stabilization" phase where utilities must maintain 2009 emission levels.

They make emissions cuts by buying and selling emission allowances representing 1 ton of C02 in the "trade" part of cap and trade. The idea is to make fewer allowances available over time as the cap decreases so utilities gradually slash their carbon footprint. The first trading auction occurred in September 2008.

Criticism from observers like Tittel ensued when emissions fell dramatically before the program started because of the recession and declining natural gas prices. That spurred the charge that the program has done little on its own to curb C02.

For example, emissions dropped 9 percent between 2008 and 2009, the base year for which later emission cuts are measured under RGGI. That placed carbon dioxide ouput in the RGGI region 34 percent below the cap level in 2009, according to a June report from Environment Northeast. Much of the drop was attributed to slumping energy demand from the lagging economy, rather than the trading program.

Many utilities in the region supportive of the Northeastern program say that so far, it has changed little in terms of operations, considering that the easy-to-meet cap led to very low allowance prices hovering near $2 per short ton of carbon.

"In the short term, the impacts of RGGI have not affected our day-to-day business decisions," said Don McCloskey, director of environmental policy for Public Service Enterprise Group, a New Jersey-based utility. "It is a national program that will affect our decisions."

Utilities don't mind cap; states like the money

Littell said "we're doing a program review" to examine the cap issue. The emission targets were set in 2005, when analysts were still expecting energy demand to rise, he said.

At the same time, RGGI is generating significant greenhouse gas reductions outside the cap, since participating states are using some 70 percent of auction-generated revenue for renewable energy and energy efficiency programs, he said. The buying and selling since 2008 have led to more than $676 million flowing into state government coffers since the program's genesis.

Those investments are changing the power sector's emissions, despite the cap, and illustrate the importance of any federal bill emphasizing efficiency, according to one environmentalist.

"Clearly, how we are using the proceeds will have permanent reductions in greenhouse gases," Littell said. Half of Maine's capital investments are going for energy infrastructure, he said, with a chunk of those investments flowing from RGGI revenue.

For example, the governor of Maine, John Baldacci (D), said earlier this year that RGGI spurred the creation of as many as 1,000 jobs in his state. A June report from the New Hampshire Energy and Climate Collaborative found RGGI auctions generated $24 million for the state between September 2008 and June 2010 to help train 709 people in the energy efficiency sector.

The efficiency investments provide financial help to consumers -- who often get subsidies to buy things such as energy-efficient appliances -- while curbing emissions cheaply at the same time, said Derek Murrow, energy and climate policy director at Environment Northeast. The initiative has saved electricity consumers more than $800 million through programs such as the weatherization of homes, he said, citing his group's estimates.

Yet RGGI skeptics point to two main reasons why the program reveals little about how a similar system would operate nationally.

A tougher sell in coal country

First, New England has a distinctive fuel mix, particularly when it comes to coal, the most carbon-intensive fossil fuel. New York, New Jersey, Connecticut, Maine and New Hampshire, for example, rely on coal for less than 17 percent of their electricity, according to the American Coalition for Clean Coal Electricity.

Massachusetts uses the fossil fuel for 25 percent of its power, while Rhode Island and Vermont burn no coal at all. Nationally, coal fires more than 45 percent of electricity.

Delaware and Maryland rely on coal for more of their fuel supply than the rest of the RGGI region -- closer to 60 percent -- but still burn a much lower percentage than states such as West Virginia and Ohio. That means that some utilities in the Midwest would face a different challenge from Northeastern states in trying to reduce emissions dramatically from almost all their power plant fleets, rather than just a portion of them.

"If you start to operate the [RGGI] model in Indiana, it is a lot more challenging politically to sell that," said Leigh Raymond, an associate professor at Purdue University and a RGGI supporter.

Many of the likely swing votes on national climate legislation if it ever reaches the Senate floor, such as Sens. Jay Rockefeller (D-W.Va.) and Sherrod Brown (D-Ohio), hail from states where coal fires more than 85 percent of electricity.

The second issue of contention is cash flow.

New York and New Jersey recently shifted RGGI-raised revenue from energy efficiency programs to general state treasuries in a process that Tittel termed "RGGI-cide." The money shuffle bodes badly for how revenue might be diverted in a cap-and-trade program at the federal level, said one representative for Midwestern utilities.

The idea of lost cash is a concern for the coal industry, in particular, since it is counting on any national climate program to raise money for researching and deploying yet-to-be-proven technology capturing and storing C02 from coal plants. It also is pushing for hefty sums to flow back to energy consumers in coal-dependent states to buffer the possibility of electricity price spikes.

A climate bill that passed the House in 2009, for example, provided billions of dollars for advanced coal research, with a chunk of the money flowing through allowances that were given away freely, rather than auctioned. The regional program auctions some 87 percent of allowances.

Supporters tout stable market, low costs

Money also could be lost under a utility-only approach like RGGI's, said Eugene Trisko, an attorney who has testified in Congress for the United Mine Workers but spoke independently for this article, since there will be fewer capped emitters to funnel cash into a money pot. An economywide approach spreads the cost out among more industries, he said.

Supporters of the program defend it as a national model, in that it demonstrates that the worst warnings about cap and trade are untrue. The program always was intended to kick in gradually and give utilities and the public time to adjust.

In the meantime, it has shown that carbon trading is a sound concept that helps the economy rather than hurts it, they say. In their view, a few tweaks here and there to RGGI's utility-only model nationally, such as distributing some allowances to coal utilities, would eliminate any problems.

"A lot of the concerns about a national program echo the same concerns that we heard initially during the development of RGGI and have gone away," said McCloskey of Public Service Enterprise Group, who is a RGGI supporter.

Among those were arguments that cap and trade inevitably leads to market manipulation and erratic electricity prices, said McCloskey. That has not happened, and lawmakers in Washington, D.C., need to be aware of that, he said.

In 2009, RGGI added less than 1 percent to electricity prices in New England, according to Environment Northeast's report.

For utilities that burn a significant amount of coal, the costs also have been modest. Baltimore-based Constellation Energy relies on coal for about a third of its electricity, and consumers are paying about $1.25 more a month than they would otherwise, said John Quinn, director of environmental affairs at the company.

An independent market monitor, Potomac Economics, has certified that the auctions and the secondary market have been free of collusion, the group said. Pace University Law School's Energy Project said in a paper last year that among other things, RGGI's transparent record-keeping has made it more difficult for players to game the system.

"All the auctions have been flawless," said Quinn.

Reporter Evan Lehmann contributed.

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