The Future of Cap and Trade in the U.S. and Europe

The EPA has announced its rule on carbon dioxide emissions from new power plants. The new rule requires new fossil-fuel-fired power plants to put out less than 1,000 pounds of CO2 per megawatt-hour. Coal plants emit an average of 1,768 pounds of CO2 per megawatt hour. The average natural gas plant emits 800 to 850 pounds of CO2 per megawatt hour. The rule has an exception for coal plants with permits that will begin construction within a year.

The proposed rule is under the Clean Air Act (CAA) section 111(b), which deals with new sources of air pollutants. However, existing sources will also need to be regulated under CAA section 111(d). The EPA made a settlement agreement with several states and environmental groups to act on regulating greenhouse gases after the U.S. Supreme Court, in Massachusetts v. EPA, ruled that greenhouse gases meet the definition of “air pollutant” in the CAA.

The rule also comes after several failed attempts to institute a national cap and trade system. Although the U.S. House of Representatives narrowly passed H.R. 2454, a bill that included a cap-and-trade component, the bill, S. 1733 (titled the Clean Energy Jobs and American Power Act), never made it out of the Senate. Without national legislation voluntary trading programs like the Chicago Climate Exchange closed.

In November 2011, six U.S. states withdrew from the Western Climate Initiative – an emissions trading group previously made up of several U.S. states and Canadian provinces. The initiative is left with British Columbia, California, Manitoba, Ontario, and Quebec. The continued viability could be further eroded by Canada’s withdrawal from the Kyoto protocol in December 2011. But the Regional Greenhouse Gas Initiative (RGGI), which is composed of northeast and mid-Atlantic states, has not yet suffered the same loss of participation although New Jersey withdrew and New Hampshire recently voted to quit the RGGI. Earlier this year, several states in RGGI announced they were permanently eliminating over two thirds of the unsold carbon allowances. Later announcements brought the total unsold permits retired to 93 percent. These eliminations have led to speculation that the cap on emissions will be lowered.

Removing allowances from previous periods is expected to increase the price of emissions in the future. This incentivizes shifting to forms of energy production that have lower emissions. Emissions in these states have already dropped over 30 percent below the cap, well below the goal of reducing emissions by 10 percent by 2018.

Allowances went unsold mainly because emissions were lower than expected. Lower than expected economic activity was one important factor. Another was the shift from natural gas to coal.

The European Union now faces a similar choice to the RGGI. The price for allowances, or permits, has fallen in recent months. The European Parliament seemed to take steps similar to those by the RGGI to prop up the price of allowances. A March resolution from the European Parliament allows for the possibility of removing allowances to support the price of carbon in the EU’s system. The euro-area economy is projected to decline this year. Like the RGGI region, which faced reduced economic growth, the decreased demand for energy and the corresponding reduction in emissions has led to an oversupply of allowances.

Coal also plays a key role in the discussions of EU regulations. Poland has been the most outspoken member against EU efforts to increase the required cuts in emissions. Moves to prop up the price of carbon or lower the cap on emissions in the future will likely hit Poland especially hard because coal provides about 90 percent of Poland’s power.

Written by Brendan Chestnut, GIELR staff

One response to “The Future of Cap and Trade in the U.S. and Europe

  1. With natural gas priced at records low levels for the foreseeable future; breaking our dependence on fossil fuels will require a different economic matrix than the current model most industries use.

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