REGULATION

Midwest plan musters coal states to cut emissions

Six coal-reliant states in the Midwest and a Canadian province are poised to adopt a plan to limit global warming pollution from sources that stretch from family cars to power plant smokestacks.

The Midwestern Greenhouse Gas Reduction Accord accelerated last week when an advisory group of 42 companies, experts and environmentalists sent a list of recommendations to the states' governors and the premier of Manitoba for final approval. The plan includes tentative targets for reducing carbon dioxide emissions 18 to 20 percent by 2020, as compared to 2005 levels.

The move is meant to send a strong message to Washington: The Midwest's huge appetite for coal is no obstacle to a national plan that would hit the brakes on air pollution believed to warm the world's atmosphere.

The timing is critical. Participants believe the regional approach, in an area filled with industry and manufacturing, could persuade Midwestern Congress members to support the national climate change bill being designed in the House Energy and Commerce Committee this week. They also hope to alter the final outcome of the national plan, in order to spare heartland states some of the financial misery that new carbon regulations could bring to companies and consumers.

Contributors hope their regional plan is never implemented. It's seen as an emergency backup, in case Congress fails to put a lid on polluters. The Midwestern plan has its share of holes. While it includes big industry states like Michigan, it has not convinced Ohio and Indiana, the fourth- and seventh-largest emitters in the country, respectively, to join on. Both states are observing the process.

"Ohio is being careful. We're still working through a lot of these issues," said Drew Bergman, a deputy director with the Ohio Environmental Protection Agency and a member of the Midwest accord's advisory group.

"We're not saying that nothing should be done," he added. "We are supporting a federal program. But we want it to be designed in a way where it's not a devastating economic impact on the Midwest."

No free allowances in the heartland

Similar concerns are urgently driving the governors from states participating in the regional compact to send their recommendations to Capitol Hill. Participants believe they have discovered an unmapped solution that could end the sharpening fight in Congress over whether to give pollution permits to industry for free or auction them off.

The states plan to charge a small fee for every permit received by power plants and other polluters. The recommendations are being reviewed by the governors of Illinois, Iowa, Kansas, Michigan, Minnesota and Wisconsin and the premier of Manitoba. The advisory group did not specify how much each permit, or allowance, should cost. But previous suggestions ranged from $2 to $4 for every ton of carbon dioxide emitted.

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"It does a nice job in getting by what, in my view, has been a disturbing polarization between those advocating free allocation and those advocating full auctioning," said Brad Crabtree of the Great Plains Institute, who helped draft the recommendations. "We have to make sure that this issue about how the allowances get distributed doesn't take the whole thing off the rails."

The topic is contentious. President Obama campaigned for an all-auction program, but has since indicated that the idea won't win politically. The national climate bill being debated in the House Energy and Commerce Committee this week was amended to allow industry to receive 85 percent of all allowances for free, in the beginning.

But opponents say that gives the biggest polluters a "windfall" of allowances, which they can trade on secondary carbon markets for a profit or use to pollute for free. Auctions, meanwhile, can vex companies as they try to cope with rising operational costs, many of which will be passed along to consumers.

The Midwestern plan strikes a balance, supporters say. Businesses would be able to determine their costs beforehand, while still providing revenue for energy efficiency and renewable energy projects through the purchase of allowances.

"It's like a hybrid idea," said Tia Nelson, co-chairwoman of the Wisconsin task force on climate change, where the fee idea first surfaced. "People talk about this being an either-or proposition. We simply rejected both ideas."

Can the Midwest avoid 'staggering' costs?

Eventually, all of the allowances would be auctioned away in the Midwestern program. The plan is slated to begin in January 2012. All sectors would be regulated, including transportation, power plants, natural gas combustion and industries, such as paper mills. Transportation would be the only sector where all the allowances are auctioned.

That profile is similar to the Western Climate Initiative, a group of eight states and three Canadian provinces that expects to begin regulating carbon dioxide in 2012. Currently, the country has only one operating cap-and-trade program, the Regional Greenhouse Gas Initiative, located in 10 Eastern states stretching from Maine to Maryland. It only regulates emissions from 233 power plants, not from other sectors.

Like the Midwestern program, the experiment along the East Coast saw its biggest polluter opt out. Pennsylvania did not join RGGI, raising concerns that power being sent to regulated states would not be capped for emissions.

Now there are signs that Pennsylvania and other states could oppose a federal carbon plan. Three commissioners from the Pennsylvania Public Utility Commission urged the state's congressional delegation to oppose current cap-and-trade legislation last week. They said in a letter that 66,000 jobs could be lost by 2020, and that residents would see the average price of electricity spike $400 per year by 2013 if the bill offered by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) is adopted.

"The cost estimates are staggering," the commissioners said. "Residents of Pennsylvania and other coal-reliant states will be severely and disproportionately harmed by carbon legislation."

They were also referring to Midwestern states, which consume more coal than any other region. Yet there was consensus when the Midwestern advisory group advanced the recommendations to the governors last week, according to participants.

Companies involved in the process, like Alcoa Inc., Dow Chemical Co., Midwest Generation LLC, and others whose emissions could be regulated, did not oppose sending the recommendations to the states for final approval. However, they were not asked to vote.

"That was probably a smart thing," said Keith Reopelle, executive director of Clean Wisconsin and a member of the advisory group.

But it's clear that some participants are only supportive of the regional plan insofar as it can be used to leverage a federal climate bill.

"There was by no means consensus that it should be a regional program," said Matthew Most, director of environmental policy at Midwest Generation LLC, an affiliate of Con Edison Co. "We adamantly feel that state and regional action is not appropriate for cap and trade."

He believes that competitors outside of the six states could flourish if they were unregulated.

Subtext in regional plan: It's not needed if Congress acts

The Midwest's timing is also aimed at enhancing its ability to provide offsets under a national climate plan. It hopes to give its farmers "a head start" by allowing low-carbon tilling practices and other agricultural techniques to be counted as carbon-reducing efforts, Reopelle said. Forestry offsets are also a central component of the Midwestern recommendations.

Details of the plan are being withheld until the governors formally approve them. But interviews with participants and press releases from environmental groups attending the two-day meeting in Minneapolis last week provide the broad strokes.

  • Emissions would be reduced up to 20 percent by 2020, as compared to 2005 levels, and 80 percent by 2050.
  • Up to 20 percent of regulated emissions could be met with offsets provided within the six states participating in the Midwestern accord and Manitoba.
  • About half of the allowances would be auctioned, including all of those associated with the transportation sector. The rest would be sold for a small fee. Between 2021 and 2030, all of the allowances would be sold.
  • All of the revenue would be used for energy efficiency programs, renewable energy projects and mitigating the cost of climate regulation on businesses and consumers.

But it's clear that the Midwest's emphasis is on shaping national legislation. It could also help a handful of lawmakers who are undecided about how to vote on the Waxman-Markey bill make a decision, participants said.

"This Midwest cap-and-trade design effort is crucial right now," said Crabtree of the Great Plains Institute.

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