The United States’ resistance to ratify the Kyoto Protocol and the introduction of state and regional regulations rather than national carbon market have limited US activity in the global carbon market. However, the development of a voluntary carbon market in the US has occurred to compensate for the lack of a national, regulated carbon market. The US has been driving the global voluntary carbon market supplying the majority of voluntary carbon credits and providing the largest source of demand (Ecosystem market place, May 2009). Though the US voluntary carbon market has grown substantially to reach a transaction level of nearly 84 million tons in 2008, it accounted for only 3% of the transaction volume of EU Emissions Trading Scheme (EU ETS). In addition to the voluntary carbon market, a development of voluntary market for renewable energy as well as energy saving projects, indirectly supporting carbon emissions reduction, has taken place in the United States. While small on a global scale, these voluntary efforts have had a positive effect on carbon reduction and policy change in the United States.

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The carbon market in the United States has developed slowly due to government opposition to regulating greenhouse gas (GHG) emissions and resistance to endorse the Kyoto Protocol. As a result, the US emitted 17 percent more CO2 emissions in 2008 compared to 1990, according to the German Renewable Energy Industry Institute (IWR). In contrast, a carbon market has flourished in Europe leading to Germany reducing its CO2 emissions by 17 percent and the United Kingdom achieving a 6 percent reduction over the same time period. However, the lack of federal regulations for reducing greenhouse gas (GHG) emissions in the US has stimulated the development state-based and regional carbon markets as well as voluntary carbon markets.

Many US states have introduced indirect GHG emissions regulations, including renewable portfolio standards (RPS), financial incentives for the installation of renewable energy, energy efficiency standards, building energy codes, and other government mechanisms to accelerate the development of renewable energy and the reduction of energy consumption. However, only one regional effort has started executing a cap-and-trade program while one state and two other regional initiatives have introduced policies to develop a cap-and-trade program in the future.

California was the first state in the US to introduce direct regulations for GHG emissions reductions. In 2002, the Pavley Bill required the California Air Resource Board (CARB) to limit the amount of GHG, especially CO2, emitted in auto exhaust. While CARB did introduce the regulations called Assembly Bill (AB 1493) in 2004, the opposition by the automotive industry and the US Environmental Protection Agency (EPA) resulted in legal proceedings which prevented the implementation of the California legislation. Florida is the second state that introduced GHG regulations. In June 2008, the state enacted the Florida Climate Protection Act, which authorizes the Department of Environmental Protection to develop an electric-utility cap-and-trade program. Pending legislative approval of the final plan, the cap-and-trade program may begin operation as soon as January 1, 2010. (PEW, July 2009)

The first direct regional mandatory and market-based carbon cap and trade policy in the US, the Regional Greenhouse Gas Initiative (RGGI), was introduced in December 2005 by the governors of seven Northeastern and Mid-Atlantic states: Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont. Since then, three other states - Massachusetts, Rhode Island and Maryland - have joined the initiative which mandates capping the regional power sector’s CO2 emissions from 2009 through 2014 at the annual level of 188 million tons of CO2 and reducing it by 2.5% per year (total 10%) during the 2015-2018 period. The RGGI apportions CO2 allowances among signatory states based on historical emissions and allows signatory states to allocate 75% of their allowances as they choose and attribute the rest to consumer benefit programs. The signatory states are not likely to allocate the allowances to electric generators for free, but instead sell them in a regional auction recognizing that generators are likely to pass the cost of allowances onto consumers, whether the allowances are received for free or purchased. The allowance auctions, where electric power generators buy, sell and trade CO2 emissions allowances, are scheduled to take place on a quarterly basis, with the next auction scheduled for September 9, 2009. More than 110 million allowances have been auctioned raising a total of $366.5 million since the first RGGI auction in September of 2008. During the fourth auction in June 2009 the clearing price of CO2 allowances amounted to $3.32 per allowance for the 2009 - 2011 control period and $2.06 per CO2 ton of allowances for the 2012 - 2014 control period. These prices are much lower in comparison to the August 2009 EU Emission allowances spot prices of around EUR 14.4 or US$20.6 per CO2 ton (European Energy Exchange, 2009).

In February 2007, another regional initiative, the Western Climate Initiative (WCI), was introduced to design a market-based approach for reducing GHG emissions involving California, Arizona, New Mexico, Oregon and Washington. Since 2007, Montana and Utah, together with the Canadian provinces of British Columbia, Manitoba, Ontario and Quebec, have joined the initiative. The cornerstone of the WCI strategy is a regional cap-and-trade program to be fully implemented in 2015 covering almost 90 percent of the GHG emissions in WCI states and provinces. WCI partners intend to develop implementation details for the WCI regional cap-and-trade program throughout 2009 and 2010, start reporting greenhouse gas emissions in 2011 for emissions that occur in 2010, and introduce the first phase of the cap-and-trade program on January 1, 2012, with a three-year compliance period. The second phase of the program will begin in 2015, when the program will be expanded to include transportation fuels and residential, commercial and industrial fuels, in addition to electricity fuels covered in the first phase.

On November 15, 2007, Illinois, Iowa, Kansas, Michigan, Minnesota, Wisconsin, and Canadian Province of Manitoba established the Midwestern Regional Greenhouse Gas Reduction Accord, the third regional initiative addressing carbon emissions reductions in the USA and Canada. Under this agreement, they agreed to establish regional GHG reduction targets consistent with the 60 to 80 percent recommended by the Intergovernmental Panel on Climate Change, and develop a multi-sector cap-and-trade system to support meeting the targets. The Governors of Indiana, Ohio, South Dakota and Ontario joined the agreement as observers to participate in the development of the cap and trade system. In June, 2009 the advisory group finalized their recommendations and these are yet to be endorsed by individual state and providential leaders.

Currently the US Senate is reviewing the 2009 American Clean Energy and Security Act (ACES) which was passed by the US House of Representatives on June 26, 2009. If the Senate passes the ACES, also called the Waxman-Markey bill, what would happen to the state- and regional-based incentives?

The ACES proposes a cap and trade system with a ceiling on CO2 emissions at the 2005 level of 7,602 million metric tons, a reduction of 3% by 2012, 20% by 2020; 42% by 2030, and 83% by 2050. The national cap-and-trade system would oversee and regulate carbon allowances and offsets and penalize entities such electric utilities and other energy-heavy industries deriving at least 30 percent of their annual heat input from coal, petroleum coke, or any combination of these fuels (ACES, section 116, page104). The ACES also includes a national combined renewable electricity/energy efficiency standard (RES). Under the RES, large electricity suppliers would be required to invest in renewable energy and energy efficiency submitting federal renewable electricity and electricity savings credits to meet the RES goal for each compliance year (ACES, section 610, page 16).

The ACES takes a significant step forward towards the implementation of a new and stronger system for the development of a low-carbon economy by accelerating the installation of renewable energy, energy efficiency and low carbon technologies. It is likely that the majority of the state and regional carbon market programs will follow the national policies and programs, even though their requirements might be more environmentally rigorous. However, the state and regional programs offer a trial and innovation opportunity for federal policies and programs.

The next blog will discuss how a voluntary carbon market has developed in the US alongside the state and regional carbon markets for the reduction of GHG emissions.

Over the past 10 years, US political leaders have played only a minor role in the global carbon offset market, changing their views about climate change and global warming with each new administration. Once a forerunner of the Climate Change Conference held in Kyoto, Japan in 1997, the United States failed to stay on the track, allowing the European countries to drive the development of a carbon offset market.

In the 1990s, the Clinton administration was involved in the crafting of the Kyoto Protocol, proposing the Joint Implementation Scheme to encourage international partnerships to enable low-cost reduction in greenhouse gas (GHG) emissions. Though the Clinton administration supported the Kyoto Protocol, it was not submitted for ratification after the Republican-led Senate made a statement that it would not ratify any treaty which did not include binding targets for developing nations expecting to be responsible for the majority of emissions in the future.

During the U.S. presidential campaign in 2000, George W. Bush promised to set mandatory targets for the reduction of CO2 emissions but expressed his reservation about participation in the Kyoto Protocol.(Dietrich, 2005) Later as president, he did not introduce domestic CO2 reduction targets. The U.S. also pulled out of the Kyoto Protocol discussions, with the Bush administration stating that the Protocol did not impose compliance on the countries responsible for the majority of CO2 emissions globally, and therefore, participation in such treaty could only cause serious harm to the US economy. The Bush administration also emphasized the importance of further scientific research about global warming, and proposed the use of alternative energy sources and “market-based incentives” such as a voluntary approach and energy-efficiency programs to reduce GHG emissions.(Dietrich, 2005)

The Kyoto Protocol required ratification by 50 nations in order for it to be recognized as a major international agreement according to United Nations. After Russia ratified the agreement in 2004, the Kyoto Protocol entered into force in 2005 without any reliance on US support. The Bush administration stayed isolated from the global debate on climate change throughout its eight-year term, continuing to favor an “aspirational” approach instead of mandatory CO2 caps to combat climate change. (Bohan, 2007).

President Barack Obama has been very outspoken about the importance of US involvement in climate change issues and the development of national regulations to reduce GHG emissions, lower energy consumption and accelerate the adoption of alternative energy technologies. However, Obama was not always supportive of the Kyoto Protocol. In 1998, as an Illinois senator, he voted for the bill condemning the Kyoto treaty and disapproving GHG emissions regulations in the state of Illinois to protect the coal industry, as Dilanian (2008) conveys in his article “Obama shifts stance on environmental issues”. The article states that Obama continued expressing his favoritism towards the coal industry during his election to the U.S. Senate in 2004 proclaiming that “there’s always going to be a role for coal” in Illinois. Dilanian (2008) points out that during Obama’s campaign for president, he addressed his opposition towards the bill by saying that the Kyoto treaty did not have “meaningful and achievable emissions targets,” and that he “did not believe that state agencies in Illinois should unilaterally take steps to implement a global policy on their own …”

However, in the U.S. Senate Barack Obama showed his favor towards environmental friendly policies by opposing then-President Bush’s air-pollution proposal for relaxing federal air pollution control restrictions. Although Obama continued sponsoring bills that provided coal subsidies, he shifted towards broader public interest the closer he moved towards the presidential elections.

In October 2007, Senator Barack Obama presented a plan to decrease the US dependence on foreign oil and fight global warming with a national “cap and trade” system across the economy to reduce greenhouse gas emissions including an auction system requiring power companies and other energy-intensive industries to pay for their pollution. He continued to encourage mandatory policies throughout his presidential campaign.

Thanks to growing global awareness of climate change issues and Obama’s emphasis on low carbon economy, the United States now is actively pursuing implementation of enforced reductions for GHG emissions and stronger energy efficiency legislation. As a result, the U.S. House of Representatives recently passed the Waxman-Markey bill (also known as American Clean Energy and Security Act - ACES) as a first step towards a regulated carbon market. The new legislation proposes national energy efficiency targets for residential and commercial buildings as well as a cap-and-trade mechanism mandating a reduction of 2005 emissions levels by 20% by 2020. The cap-and-trade system is set up to regulate carbon allowances and offsets for electric utilities and other energy-intensive industries. The Obama administration has repeatedly promised to pass federal legislation that would limit CO2 emissions in the United States, and continues to pressure the Senate to follow the House’s lead - emphasizing that the Waxman-Markey bill would create jobs, lower the cost of renewable energy and reduce oil dependency. In his speech at the first meeting of the Strategic Economic Dialogue between the United States and China on July 27, President Obama stressed the importance of the cooperation of world’s two largest emitters of greenhouse gases on climate issues.

The Kyoto Protocol expires in 2012. This December 2009, the UN and international government officials will meet in Copenhagen (UNFCCC COP15) to discuss the final details of a new climate agreement. The Obama administration plans to be actively involved in the negotiations of a new treaty trying to regain leadership in the international climate debate.  It remains to be seen whether Obama will act upon his words to become national and international leader in the fight against climate change.

The past resistance of the US government to establish national carbon reduction targets and to participate in the Kyoto Protocol has significantly slowed down the development of a carbon market in the United States. The next posting will describe how the carbon market has developed in the US in light of the resistance of the US government.