Think tanks suggest less formal multi-state carbon-trading to meet EPA goals

By Emily Holden | 03/17/2015 08:20 AM EDT

Visceral politics and administrative hurdles could keep many states from using regional cap-and-trade programs to cut carbon emissions under U.S. EPA’s Clean Power Plan, but there might be a less controversial alternative.

Visceral politics and administrative hurdles could keep many states from using regional cap-and-trade programs to cut carbon emissions under U.S. EPA’s Clean Power Plan, but there might be a less controversial alternative.

A policy brief released today by Duke University’s Nicholas Institute for Environmental Policy Solutions suggests that states adopt "common elements" that would allow them to participate in cross-state carbon trading systems to reduce power-sector emissions of the planet-warming gas.

A state could develop an individual plan to meet its own emissions target — rather than a multi-state plan to reach a joint target — and allow electric generators to trade compliance credits with generators in other states, the paper explains. States wouldn’t need to enter formal groups as long as they shared common plan elements, like definitions of carbon-reducing measures.


"States wouldn’t necessarily have to mandate market-based approaches or even endorse the approaches," said Jonas Monast, lead author of the brief and director of the climate and energy program at the Nicholas Institute. "What it would require is the states using a common definition of what a compliance instrument is and ensuring that somehow the credits are verified and tracked."

States could tailor the programs to their own political needs. They could cap emissions and freely distribute credits or auction them off to power producers to fund government programs, for example.

The proposal offers more specifics on a concept many states have been contemplating for months: how they could collaborate formally or informally to try to reduce the costs of implementing the Clean Power Plan.

A ‘bottom up’ plan

Regional grid organizations have been pushing multi-state, market-based compliance options as the least-cost strategy to meet Clean Power Plan requirements. The Nicholas Institute says market-based approaches would leave energy planning decisions to "energy experts (e.g., power plant owners and utility commissioners) rather than environmental regulators … allowing power plant operators to determine economic compliance choices over time."

"What this plan is doing is trying to identify ways to leave some of these politically controversial decisions to the power plant operators as opposed to leaving them solely to the state regulators," Monast said.

Robert Stavins, a Harvard University economist and well-known cap-and-trade advocate, called the Nicholas Institute idea "cap-and-trade from the bottom up, rather than the top down."

"Perhaps that means less political attention focused on it," Stavins said.

Republican-controlled states seem unlikely to adopt cap-and-trade systems on their own or with other states, but Stavins said he could see this type of interstate trading happening throughout blue states.

Assuming the draft rule survives legal challenges, Stavins said he anticipates a set of linked cap-and-trade systems along the West Coast (among California, Oregon and Washington), as well as an expanded Regional Greenhouse Gas Initiative in the Northeast. RGGI currently operates in nine states.

Need for a national scoreboard

Beyond politics, there are additional barriers to multi-state programs, the Nicholas Institute points out.

States anticipating lower compliance costs than their neighbors may be reluctant to allow interstate trading out of concern that it would raise electricity prices for their own residents, the paper said. And devising a multi-state program requires administrative resources to design and evaluate the program. Plus, it may be difficult to get electric generators to agree on a regulatory approach.

The paper says the "common elements" approach could help overcome those obstacles. It would allow states to write their own plans, establish whatever kind of state-level cap-and-trade system is politically feasible and avoid drawn-out negotiations with other states.

There would certainly be kinks to work out, however. For one, states would need a tracking platform for credits. The Nicholas Institute says states could request that EPA develop a national platform. Or states could establish their own systems that could electronically interface with other registries — much like those used now for tracking renewable energy credits for state-level renewable portfolio standards.

And it would be simpler for accounting purposes for states to establish "mass-based" caps on emissions. But the approach would still be accessible to states that use a "rate-based" standard, or work reducing the rate at which the power fleet emits carbon, Monast said.

Ways for states to work together

Multiple groups of states, including the Midcontinent States Environmental and Energy Regulators, have said EPA should allow different types of multi-state collaboration.

"EPA should recognize that multistate collaboration can take numerous forms and allow states to file separate state compliance plans that include or contemplate a connection to other states," the organization of 14 states’ air and utility regulators said in comments in November.

EPA plans to give extra time to states working together to submit proposals, but it’s unclear whether states adopting these "common elements" would qualify. Last week, EPA acting air chief Janet McCabe told federal regulators that she had been listening to states that want flexibility on how they can work together, including how they can "move in and out of" multi-state planning efforts (ClimateWire, March 16).

Many states might be interested in ways to account for credits across state lines without entering joint plans, said Gabe Pacyniak, a mitigation program manager at Georgetown Climate Center who has been working on Clean Power Plan compliance pathways with states. The Georgetown Climate Center last year released a document laying out potential types of multi-state coordination and collaboration.

The Nicholas Institute and Georgetown Climate Center are two of at least a handful of nongovernmental organizations that have been talking with states and power companies about these ideas.

And the Bipartisan Policy Center, along with the Great Plains Institute, has a paper under peer review that examines the pros and cons of rate-based and mass-based standards, including in regional coordination.

"The paper is not limited to multi-state options, but includes discussion/consideration of how a state could preserve the option to access emission reductions in other states and how the various policy options could work in a multi-state context," said Jennifer Macedonia, a senior adviser at the Bipartisan Policy Center.