STATE-BY-STATE OR REGIONAL SOLUTIONS?
| Jurisdiction | United States |
(Jan 2015)
STATE-BY-STATE OR REGIONAL SOLUTIONS?
Cascadia Law Group PLLC
Co-Chair, Carbon Emissions Reduction Taskforce for Washington State
Seattle, Washington
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RODNEY L. BROWN, JR. is a partner with Cascadia Law Group PLLC in Seattle, Washington. He works on many environmental issues, ranging from pollution control regulations to natural resource management. Rod was the principal author of Washington's Superfund law, and has served on a series of governmental commissions, including those that led to the creation of the state's Growth Management Act and the Regulatory Reform Act. He also served on the state's Climate Action Team and the Blue Ribbon Commission on Transportation. Rod currently co-chairs the Governor's Carbon Emissions Reduction Taskforce.
Science continues to underscore not just how real climate change is, but also how grave.1 Though other nations have begun adopting policies to combat climate change, political gridlock in the United States means that nothing is being done here.
Nothing, that is, in Congress. But in the states, much is being done. This paper describes what is happening around the world and in the states, and discusses whether, in the absence of global or national action, state-by-state actions might have a chance to link up into regional solutions.
I. What is being done in other parts of the world, and how is it working?
The Kyoto Protocol to limit carbon emissions2 adopted in 1997 finally entered into force in 2005.3 Nearly 200 countries ratified the treaty, but not the United States. The treaty created several mechanisms to respond to climate change, including international emissions trading and the purchase of carbon "offsets" under its Clean Development Mechanism. The parties have been negotiating ever since the first "commitment period" expired at the end of 2012, including at a 2015 Conference Of Parties (COP) in Paris.
By 2014, some forty countries and two dozen states, provinces, and cities had adopted some form of carbon pricing. Most frequently this pricing has come in the form of a "cap-and-trade" system, and sometimes as a carbon tax. Both of
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these are more economically flexible alternatives to achieving goals that otherwise would have to be mandated through traditional command-and-control regulation.
A carbon tax is easy to understand. It charges emitters of carbon a price for each ton they emit. To keep tax administration relatively simple, it usually is levied on "upstream" sources of carbon, such as refineries and power plants. This has the effect of making carbon-intensive products and services more expensive, which puts pressure on the emitters to keep their prices low by emitting less. One benefit of a carbon tax is that the price is set, and will not go up or down based on market conditions. One drawback is that it cannot guarantee the quantity of carbon reductions that will occur for the price set.
A cap-and-trade system starts with a cap on the total amount of carbon that can be emitted by the regulated sectors of the economy. The cap lowers over time. This guarantees that a certain quantity of emission reductions will occur. However, the price that emitters face will vary up and down, because they must buy "allowances" for each ton of carbon they emit. They can buy these allowances from the government in periodic auctions or from the marketplace where emitters may purchase, sell, or trade allowances.
For a short, amusing, and surprisingly clear summary of these two mechanisms, see the attached excerpts from "The Cartoon Introduction to Climate Change," written by Dr. Yoram Bauman, the world's first and only stand-up economist.
A. Carbon markets around the world
Cap-and-trade markets are the most common form of carbon pricing. These markets currently trade nearly $50 billion worth of carbon emission allowances.4
1. Europe
a. Market launch and early problems
Ten years ago the European Union adopted the first sizeable cap-and-trade mechanism -- the Emissions Trading System, or ETS,5 which remains the largest cap-and-trade system in the world. It operates in 31 European countries, covering more than 11,000 emitters in the power generation and manufacturing sectors.
In its three-year pilot phase, the ETS suffered what became a well-understood (and easy-to-avoid) problem with trading systems. The European
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authorities issued too many allowances, and the price of an allowance for a ton of carbon dropped to zero. It turns out that, just as with any other market, an oversupply of carbon allowances lowers prices. This effect, combined with a booming economy, caused carbon emissions to decrease only slightly in the ETS's first three years.
Other trading systems are learning this lesson -- that the initial establishment of the cap must be based on better data than what Europe used. (Europe did not have data on actual emissions, so it asked emitters to estimate their own emissions.)
b. Stabilization - and then recession
In its second three-year phase, among other reforms Europe reduced the supply of allowances. This led to more normal and higher allowance prices at first. However, the Great Recession collapsed the European economy along with the rest of the world. So just as with any other market, the collapse in carbon allowance demand dropped the price from $30 a ton to less than $10 a ton. Still, the second phase, and the recession, did cause carbon emissions to drop faster.
c. Future plans
Europe is now in the early part of its third phase, when it aims to achieve compliance with 2020 targets. They have undertaken further reforms to militate against their initial oversupply of allowances. For example, they "backloaded" the allocation of allowances, setting aside more for the later years of this phase while issuing fewer in the early years. This is just a temporary measure, and they are considering other more permanent reforms. For example, they are considering creating a "market stability reserve" that could adjust the number of allowances in the market. They are also considering decreasing the cap at a faster rate than expected.6 The largest economies in Europe -- Germany and the UK -- are pushing for rapid adoption of reforms that would bolster the price of allowances and cause further reductions in emissions.
2. China
In 2013, China began testing a cap-and-trade mechanism by rolling out "sub-regional" cap-and-trade systems in seven cities and provinces.7 China's share of the world's population and carbon emissions makes their relatively small first step really quite large. For example, one of the provinces involved in the pilot project -- Hubei -- has a population of nearly 60 million.
More recently, China and the United States released a joint announcement
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expressing their intent to work toward further carbon emission reductions.8 China declared its intent to halt its increase in carbon emissions around 2030, and to install new renewable energy resources at a rate that will constitute 20% of its energy-producing portfolio by 2030. China also agreed to work toward a new global climate change protocol.
B. Carbon taxes around the world
1. British Columbia
The Province of British Columbia adopted a carbon tax in 2008.9 It contains several innovative features. First, it is "revenue neutral," meaning that the revenues it raises get returned to businesses and individuals by reducing their other taxes. So the $1 billion a year it raises gets offset by about $1 billion in tax reductions elsewhere. This has the effect of making carbon-intensive activities more expensive than less carbon-intensive activities, while recycling all the revenue back to consumers and producers.
Second, British Columbia started the tax at the relatively low level of $10 per ton of carbon emitted, then raised it gradually to its current rate of $30. This rate is relatively high compared to the prices seen in most cap-and-trade allowance markets, but the use of gradual increases seems to have avoided any significant economic impacts.
British Columbia decided to impose the tax on almost all sectors of its economy, though some "trade-exposed" sectors argued for exemptions to protect them from untaxed competitors outside the province. The agricultural sector won some limited exemptions, but many other sectors that might face competition did not. It remains to be seen whether this will cause the "leakage" of carbon emissions, due to increased production outside the province.
Interestingly, in 2013 British Columbia's center-right government conducted a thorough five-year review of the carbon tax, and decided to keep it as is. Their economic analysis showed that the tax had had only a small impact on the province's economy, which continued to grow well as compared to other Canadian economies without a carbon tax.
Finally, the tax seems to work in reducing emissions. Statistics Canada has shown that the tax caused consumption of petroleum products in the province to decline by 16%, compared to an increase of 3% in the rest of Canada.10
2. India
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With over a billion people, India is the second...
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