Put a Price On It: Carbon cap-and-trade gains traction

U.S. utilities’ carbon dioxide (CO2) Emissions—or, rather, the lack, thereof—are becoming an increasingly valuable commodity along the East Coast. A regional cap-and-trade program covering 10 New England and Mid-Atlantic states requiring power plant owners to pay for the right to emit greenhouse gases has grown in the past year. The group’s efforts also illustrate one option for the kind of national carbon-pricing plan being called for by a group of the nation’s most influential corporate leaders.

The Regional Greenhouse Gas Initiative (RGGI) began in 2009 and covers power plants in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. (New Jersey pulled out in 2011 but rejoined in 2020.) Power plants in these states are granted a set number of emissions allowances every year and must purchase additional allowances through an auction process to meet their actual output. Generators that don’t need their full allotment can sell their allowances, and the total number on the market decreases with each year.

In July, Virginia also signed onto this agreement. While a political fight is still underway, it is likely Pennsylvania will join the initiative by 2022. Much of the opposition in the Keystone State has come from powerful natural gas interests—the state is second only to Texas in natural gas production, thanks to extensive fracking operations.

Proceeds from the quarterly auction of allowances are divided among participating states to support energy-efficiency and renewable-energy development, along with some direct assistance for utility bill payers. Generators have been bidding up allowance prices over the last year, with states earning a total of more than $295 million in just the first three auctions of 2020. Total proceeds since the first auction in 2009 exceed $3.6 billion.

Now the Business Roundtable, a Washington, D.C.-based association of the chief executive officers from 200 top U.S. corporations, has gone on the record recommending a possible similar approach that could be taken on a nationwide basis. In a September report, the group urged the U.S. government to adopt a market-based strategy, including a price on CO2 emissions, to reduce net greenhouse gas emissions by at least 80% by 2050, compared to 2005 levels. While the organization doesn’t argue in favor of any particular strategy for carbon pricing—such as a carbon tax versus a cap-and-trade system like RGGI’s—it does support reinvesting resulting profits in a way similar to RGGI. This runs in contrast to previous carbon tax proposals, which have suggested rebating such revenues back to consumers and businesses in the form of tax credits or refunds.

The Business Roundtable also suggests such an approach be economy-wide, and not just focused on power generation. This takes into account that any effort to reach their 80% reduction target by 2050 must address all sources of greenhouse gas emissions, including residential and commercial buildings, transportation, industrial processes and agriculture.

This new public stance illustrates how businesses now see climate change as an economic threat that human action must address. Roundtable members represent companies across the U.S. corporate landscape, including retail, finance, manufacturing and even oil and gas companies.

Developing carbon pricing across the entire economy raises questions, though, regarding where to apply it in a larger supply chain. For example, in its regional program, RGGI determined power generators were a logical target—in part, because those companies already fell under the control of state-level regulatory agencies. But where to start with a broad sector such as transportation? East Coast efforts could be a model for such a carbon-pricing program.

Because East Coast states have switched so strongly toward natural gas and renewable energy sources, transportation is a much more significant greenhouse gas contributor there than in the rest of the country, making up 40% of the area’s emissions, versus 28% nationally. RGGI states, including Pennsylvania and Virginia, plus the District of Columbia, have formed a second coalition to address transportation-related emissions called the Transportation and Climate Initiative (TCI). In this case, efforts are limited to reducing emissions from on-road diesel and finished gasoline—in other words, passenger cars, trucks and transit buses.

Per TCI plans, which are still under development, allowances would be purchased by gasoline and diesel wholesalers to offset the carbon content of their fuel. As with the RGGI, proceeds from those sales would be funneled back to participating states for investment in cleaner, more efficient transportation solutions. Such investments could include electric vehicle incentives and charging network development, low- or no-emission transit vehicles and freight efficiency improvements. A memorandum of understanding outlining broad principles and responsibilities for participating jurisdictions is expected to be released by the end of this year.

About the Author

Chuck Ross

Freelance Writer

Chuck Ross has covered building and energy technologies and electric-utility business issues for a range of industry publications and websites for more than 25 years. Contact him at chuck@chuck-ross.com.

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