The Unlikely Comeback of Cap and Trade

With New Jersey's announcement that it will rejoin a multistate compact to limit carbon emissions, 2018 could be a banner year for cap and trade in the states -- even if the idea is dead in Washington.
by | February 2018
(AP)

Fifteen years ago, New York Gov. George Pataki sent letters to nine fellow governors in the Northeast and Mid-Atlantic, inviting them to join a bipartisan alliance aimed at fighting global climate change. Pataki was promoting a cap-and-trade system, a regulated market that would limit the amount of carbon dioxide power plants could emit and provide financial incentives for cutting emissions over time.

Cap and trade has had its ups and downs since then, and it’s all but dead right now at the federal level. But it has more life than ever in the states. Nine of the 10 states that signed up with the Regional Greenhouse Gas Initiative (RGGI) -- the eventual result of Pataki’s pitch -- in 2007 continue to follow it today. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont are all active participants. Carbon dioxide emissions from power plants in these member states fell 51 percent between 2005 and 2016. At the same time, the states generated more than $2.6 billion in revenue from quarterly auctions of so-called allowances that power plants must buy to offset their emissions.

A few years ago, RGGI (pronounced “reggie”) served as a blueprint for the creation of aggressive federal carbon reduction targets. Under the Obama administration, the Environmental Protection Agency put forward the Clean Power Plan, a regulatory framework that aimed to cut emissions from the national electricity sector 32 percent by 2030. One of the likeliest ways states could have met that goal was through a cap-and-trade program. But Donald Trump’s election essentially eliminated federal pressure to reduce the nation’s reliance on fossil fuels. In June, Trump announced his intention to withdraw from the international Paris Agreement. His EPA administrator, Scott Pruitt, is in the process of repealing the Clean Power Plan and weakening federal fuel standards that would have encouraged the purchase of electric vehicles. Even the words “climate change” have been systematically removed from EPA web pages and documents.

 

In 2007, then- Massachusetts Gov. Deval Patrick signed legislation joining RGGI. (AP)

 

And yet 2018 is shaping up to be a banner year for cap and trade. The new governor in Virginia wants to join RGGI, and his counterpart in New Jersey, which dropped out in 2012, announced on Monday that his state would be rejoining the group. Oregon will consider legislation this month -- also supported by the governor -- to create its own program, which would link to other existing carbon markets in California and Canada. Meanwhile, many of the states that created RGGI are looking to enact more aggressive reduction targets for 2030 and want to establish a second regional market for vehicle emissions.

“With the federal government’s U-turn on climate change, there’s a real sense of urgency to the problem,” says Ashley Lawson, a senior fellow at the Center for Climate and Energy Solutions. With building political pressure to do something, “it’s fallen to states, almost by default.”

When the initial 10 states started discussions about creating a regional cap-and-trade program, seven of the governors were Republican. In fact, cap and trade was originally a Republican policy idea. An attorney in the Reagan administration proposed a version of the strategy to reduce the amount of sulfur dioxide and nitrogen oxides emitted by power plants, which contribute to acid rain. A Republican president, George H.W. Bush, signed a 1990 law creating a federally regulated market for those gases, resulting in dramatic cuts over time.

Republican governors weren’t the only ones interested in copying the Bush administration’s market-oriented Acid Rain Program. In the early 2000s, Arizona Sen. John McCain repeatedly introduced legislation to create a national cap-and-trade system and went on to endorse it during his 2008 presidential campaign. But when Democrats managed to pass cap-and-trade legislation in the U.S. House, McCain joined Republican senators -- along with coal state and farm state Democrats -- in opposing the bill and preventing a floor vote.

Public polling at the time suggested McCain’s shift reflected the will of his supporters. By December 2009, a majority of Republicans nationally were opposing cap and trade, especially if it meant an increase in household energy costs. During the 2010 midterm campaigns, Republicans turned the issue into a referendum on incumbent Democratic lawmakers by arguing that the legislation would raise electricity costs for businesses and spike homeowners’ utility bills. What was once a Republican idea with bipartisan backing had become toxic to many on the political right.

That helps to explain why then-New Jersey Gov. Chris Christie, a Republican who took office in 2010 and had ambitions to run for president, quickly announced his intention of leaving RGGI. He called the cooperative a failure that “does nothing more than tax electricity, tax our citizens, tax our businesses, with no discernible or measurable impact upon our environment.” New Jersey’s departure was seen as a blow to RGGI, but also to the general notion of regional bipartisan cap-and-trade programs, which states in the Midwest and on the West Coast had also been considering.

But RGGI survived Christie’s withdrawal. The remaining states renewed their commitment in 2013 and again last December. Both times, the states set steeper reduction targets and introduced new features to minimize fluctuations in the pricing of emission allowances. In the latest update, the cap for 2030 will be about 45 percent below what the states emitted in 2005 -- a more ambitious reduction goal than the one sought in the Clean Power Plan.

Although there are more Democratic governors in the Northeast today than in 2003, five of RGGI’s nine member states are still helmed by a Republican. Last year, two of the Republican governors, Paul LePage of Maine and Chris Sununu of New Hampshire, expressed skepticism about lowering the carbon cap for 2030 and openly discussed leaving the initiative. At the same time, the governors of Connecticut, Massachusetts, New York and Rhode Island wanted the opposite -- much steeper cuts. They arrived at a compromise that is likely to generate more revenue from power plants even as emissions steadily drop.

What has helped save RGGI during political transitions is the freedom it gives each state to meet the regional emissions cap, says Ben Grumbles, secretary of the environment under Maryland Gov. Larry Hogan, a Republican. “The magic ingredients,” he says, “are flexibility and autonomy.” Each state has its own plan for shifting away from carbon and each state has broad discretion in how it invests the revenue collected from the program. Some states give greater priority to lowering residents’ electricity bills, for example, while others focus on expanding the use of renewable energy. While the latest program review did run the risk of breaking down along party lines, “the states were all committed to finding common ground,” Grumbles says. “Given all the debate over climate change, bipartisan environmental leadership is more important than ever before.”

 

Carbon dioxide emissions from power plants in RGGI states fell 51 percent between 2005 and 2016. (AP)

 

The big question for RGGI states now is how they might expand the scope of their work in the future. The steady drop in power plant emissions has actually prompted a criticism that RGGI is too narrowly focused on electricity. Electric power generators produce a shrinking piece of the total emissions pie. Last year, for the first time, emissions from cars, trucks and airplanes exceeded emissions from power plants. In the RGGI states, power plants contribute only 20 percent of total carbon emissions. “Transportation is the largest sector of emissions now,” says Vicki Arroyo, executive director of the Georgetown Climate Center. “You can’t achieve economy-wide reductions without tackling transportation.”

To date, California is the only state with a cap-and-trade program that includes gasoline and diesel distributors. That could soon change. Last fall, Maryland and six Northeastern states launched a listening tour to gather ideas about how to drive down emissions in the transportation sector. Those states are part of a broader working group called the Transportation and Climate Initiative, which includes the RGGI states, plus New Jersey, Pennsylvania and the District of Columbia. Transportation officials in some of the states say they are interested in a RGGI-like arrangement that puts a price on vehicle fuel emissions and invests the proceeds in cleaner transportation options, such as public transit, bike lanes, pedestrian walkways and electric vehicles. Two years ago, the Georgetown Climate Center estimated that pricing policies could reduce transportation emissions by as much as 40 percent by 2030.

 

When Trump announced last year that the United States would leave the Paris Agreement, a group of 15 governors responded by pledging to meet the goals of that international agreement regardless of what Washington chose to do. This past November, representatives from 11 states that included both Democratic and Republican administrations flew to Bonn, Germany, to engage in climate change talks hosted by the United Nations. “Donald Trump cannot stop us from doing anything that we’re bound to do to defeat climate change,” said Washington Gov. Jay Inslee, citing electric vehicle incentives in California, offshore wind farms in Virginia and his own state’s efforts to limit carbon pollution through new regulations. Inslee and other governors at the gathering announced they would be joining the North American Climate Leadership Dialogue with the federal governments of Canada and Mexico, in which the focus will be on how to phase out coal-fired power, enact carbon pricing and stoke demand for vehicles that do not emit carbon at all. 

Although several “accords” and “compacts” have sprung up in the last 12 months, none of them have the teeth to compel change the way the Obama administration’s Clean Power Plan would have. This year will be the first test of whether governors who volunteered to stick with the Paris Agreement can implement new policies to make good on those promises.

In New Jersey, the move to rejoin RGGI was a foregone conclusion with the election of the state's new Democratic governor, Phil Murphy. (Christie had vetoed legislation to reinstate the cap-and-trade program three times, but it became clear last year that he was only delaying the inevitable. His own lieutenant governor, Kim Guadagno, said as a candidate in the 2017 Republican gubernatorial primary that she would restore New Jersey’s membership in RGGI.)

Murphy, who defeated Guadagno, pledged to make it one of his first actions in office, and on Jan. 29 he signed an executive order directing the Department of Environmental Protection and the Board of Public Utilities to begin negotiating the state's reentry into the compact. “New Jersey has not been a partner to our neighbor states in advancing the goal of reducing greenhouse gas emissions since pulling out of RGGI,” Murphy said in signing the order. “Pulling out of RGGI slowed down progress on lowering emissions and has cost New Jerseyans millions of dollars that could have been used to increase energy efficiency and improve air quality in our communities.”

 

New Jersey Gov. Phil Murphy pledged to rejoin RGGI during his campaign. (AP)

 

While most supporters of RGGI had anticipated that New Jersey would ultimately elect new leadership in favor of rejoining the group, the likely addition of a new neighbor from the South has been a much bigger surprise: The November election results in Virginia, which handed Democrats a slate of victories, all but guaranteed that the state will set up a carbon trading program as well. Democrat Ralph Northam, who won the governorship by a comfortable margin, has pledged to push forward with carbon regulations proposed by his Democratic predecessor, Terry McAuliffe, possibly by executive order. So far, only one state (New York) has created a cap-and-trade program through executive order, but Virginia Attorney General Mark Herring, a Democrat who won reelection in November, says current law permits the governor to enact the regulations.

RGGI has signaled a willingness to bring in new members, which would be the first time that has happened since its founding. The group is already in talks with Virginia about its proposed rule. “It’s hard to beat the RGGI model,” says Katie Dykes, who chairs the Connecticut Public Utilities Regulatory Authority. “We recognize that by participating in a multistate program, we’re able to achieve more cost-effective, flexible reductions in carbon emissions than if we tried to accomplish the same within our state borders alone.”

This month, Oregon state Rep. Ken Helm plans to reintroduce a cap-and-trade bill that has the backing of Democratic Gov. Kate Brown and her party’s legislative leaders, who control the state House and Senate. Helm’s legislation would go beyond the electricity sector and also regulate emissions from gasoline and diesel. If enacted, the law would allow Oregon to join the Western Climate Initiative, an international partnership that includes not only California, but also Ontario and Quebec, the two Canadian provinces that already have carbon markets.

Helm is careful not to give Trump too much credit for the recent cap-and-trade activity in states. He notes that Oregon already had a 2020 target for reducing its greenhouse gas emissions and that the legislature has debated a carbon pricing program for several years. Still, the new president did add a renewed sense of urgency to state efforts, Helm says. “While the change in administration wasn’t a catalyst for what we’ve done, it did give us a little oomph just to get back to our own business.”

A version of this story appears in the February issue of Governing.