Faced with a political stalemate at best on climate change legislation at the federal level and not much optimism for an international deal on reducing greenhouse gas emissions, some US states are leading the way in showing how greenhouse gas emissions can be reduced through affordable mechanisms. Long in the making, California has launched a Cap and Trade program to help limit its CO2 and other greenhouse gas emissions. While the 10 northeastern state Regional Greenhouse Gas Initiative (RGGI) program has been successfully operating since 2008 in limiting emissions from electricity generating plants, the California program is much more comprehensive in covering more of the economy. Also, the California effort will be the first program in the US to look toward international forest conservation programs, such as Reducing Emissions from Deforestation and forest Degradation (REDD), which will be the center of much attention at upcoming international climate negotiations in Durban, South Africa, in December 2011.
The RGGI program began in 2008, has held 13 emission allowance or carbon credit auctions, and has raised a total of $912 million for the 10 states of the northeastern US (unfortunately, New Jersey’s Governor Christie intends to drop out of RGGI). Each state has latitude as to how spend those monies, so some of the money has gone to financing renewable energy projects, some to weatherization projects, and some has been “raided” or appropriated by states to help balance their budgets during the recent economic downturn. RGGI’s goals are to 1) promote energy efficiency and low-carbon energy resources; 2) establish a price for carbon; 3) encourage innovation and accomplish CO2 reductions at a lower cost; 4) establish a model for a national cap & trade program and; 5) provide regulatory certainty for electricity generators.
The emissions cap for RGGI of 188 million tons of CO2 from power plants was set with the goal of reducing emissions by 10% by 2019. But, that goal has already been widely surpassed because of fuel switching (e.g. from dirty coal to cleaner natural gas), because of the recent recession, and due to RGGI-funded efficiency and renewable energy initiatives. Consequently, by 2010 RGGI region CO2 emissions from power plants were 29% below the cap and far ahead of the 2019 goal. One of the lessons learned from RGGI was that the original cap was set much too high – in part due to political compromises – resulting in too many CO2 allowances to be auctioned. In all recent auctions, the price for emission allowances has been close to the mandated floor price of $1.86 per ton. A lower cap and a higher price would probably have reduced emissions further. Nevertheless, RGGI has significantly reduced emissions and stimulated the regional economy by reducing payments for out of state fossil fuels. It has also created jobs so that the $912 million raised and spent has a net present value (NPV) of $1.6 billion added to the region’s economy (see Analysis Group).
California, home to the world’s eighth largest economy and responsible for 13% of the US GDP, (the RGGI region = 19% of US GDP) has the more ambitious goal of returning California by 2020 to its 1990 level of emissions of about 427 million tons of CO2 per year via 32 different strategies. The reduction would equal a greater than 30% lowering from the business as usual scenario for 2020 of 600 million tons of CO2, or a reduction of about 173 million tons. A significant difference from RGGI is that 85% of California’s economy will be covered by 2015, whereas RGGI only includes electrical power generation. In the California plan, cap and trade would only cover about 20% of the reductions needed so other tools would include direct regulation, as in setting tighter automobile emission standards, and economic incentives such as a surcharge on gas guzzling cars.
California emitters will be able to buy carbon offsets tied to emission reduction projects such as urban forests or other forests managed to sequester carbon, or lessen methane emissions from manure, or by controlling ozone-depleting substances. Also, offsets can come from avoiding deforestation domestically and, eventually, internationally. California now has agreements with the Mexican state of Chiapas, the Brazilian state of Acre in the Amazon Basin, and Aceh, Indonesia. These offsets will be allowed to meet up to 8% of the pollution limit and are often the least expensive way to reduce greenhouse gas emissions.
California will begin with a minimum or floor price of $10/ton or 5 times the current RGGI minimum and close to the current European Union price of approximately $10 to $14/ton. Expectations are for the California prices to rise, with some already selling for $19/ton, as there are “not enough California eligible credits” to go around. However, as entrepreneurial initiatives develop to reduce emissions and sequester carbon through a variety of technological and management innovations, these costs may well come down. The bottom line is to avoid climate change in the most cost-effective way possible, as determined by a combination of market-place and regulatory mechanisms.
Carbon markets are also being created in other countries, such as Australia. After July 2012, Australians will be taxing CO2 at A$23/ton (or US $24/ton). The bill proposes to “reduce the carbon tonnage by 160 million tons a year by the end of 2020” and will set up a carbon pricing mechanism. Australia may be particularly sensitive to climate change as it was rocked in 2010-2011 by their worst flooding in history, and which was preceded by the worst drought (with wildfires) in their history. In the neighboring New Zealand carbon market, CO2 is already being traded at about $12/ton.
South Korea is also planning a carbon market that will reduce its GHG emission by 30% by 2020 from major emitters (those that emit more than 15,000 tons of CO2 per year). Even North Korea has expressed interest in joining in hopes of earning hard currency. An urban carbon market has started in Tokyo which has been trading credits since October 2010 and is being contemplated as a national model for Japan. Other countries discussing carbon markets include China, India, Brazil, and Taiwan.
Several investor groups and businesses are also pushing for governments and other large businesses to come to grips with the looming climate crisis. For instance, the International Investors Group on Climate Change (IIGCC) recently issued a compelling statement regarding both domestic and international policy on behalf of 285 investor groups who represent assets of more than $20 trillion. They state that climate change represents a major risk to the global economy and to the assets that they represent, and that well designed climate and clean energy policies present significant opportunities for investors. But, they caution that the private investment needed to correct our path will only come if there are “clear, credible and long-term policy frameworks that incentivize investments in low carbon technologies” and move away from carbon intensive energy sources. The insurance industry in particular is highly concerned. In 2009, the National Association of Insurance Commissioners (NAIC) adopted a “mandatory requirement that insurance companies disclose to regulators the financial risks they face from climate change, as well as actions the companies are taking to respond to those risks.” In addition they state, “The US government should also establish a national strategy to reduce US GHG emissions following the lead of the Regional Greenhouse Gas Initiative (RGGI) and the Western Regional Climate Action Initiative” of which California is the largest member. They note that the job of insurance companies is “to manage climate change-related risks as part of an insurer’s risk-management policy.”
While the word from Washington is discouraging these days, and the news from Durban is not expected to be groundbreaking with respect to an international deal to address the climate change emergency, the dogged efforts of individuals, communities, states, and countries around the world are demonstrating that something can be done. Humanity is in this for the long haul – we have no other option. We at the Woods Hold Research Center are demonstrating through our research the huge impact that climate change is having on ecosystems and humans, and we seek science-based solutions to the challenges of climate change. The variety of local and regional policy efforts that we describe here demonstrate that the roadblocks to progress can be overcome.