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.

Copy from my Column from Sustainable Industries July 2009

The American Clean Energy and Security Act, known as the Waxman-Markey bill, is “a rare opportunity to rise above parochial concerns to enact a bill with a profound national impact,”according to President Barack Obama. Republican critics are attacking Democrats as pro-business and anti-consumer and small business, which is ironic as the GOP is the “The Party of ExxonMobil (NYSE: XOM) and Peabody coal. “Using this tactic, the GOP wants to hold the line against the climate change bill, even though Duke Energy (NYSE: DUK), Johnson & Johnson (NYSE:NJN) and Shell Corp., along with other businesses and environmental organizations, are backing the bill. “I find it extremely amusing that suddenly the Democrats are being attacked for being too friendly to business creation,” Senator Barbara Boxer (D-Calif.), chairwoman of the Senate Environment and Public Works Committee, has said. The GOP argues that the Waxman-Markey bill would create higher energy costs for small business and consumers.

The real issue is the bill does not go far enough. It needs to create an “energy-efficiency and renewable energy set aside”-or green building carbon offset program-which rises above the regulatory approaches to energy efficiency. The Waxman-Markey bill provides for an economy-wide cap-and-trade program. The cap reduces greenhouse gas (GHG) emissions to 17% below 2005 levels by 2020, and 83% below by 2050. Offsets (project-based reductions) are limited to 2,000 million metric tons CO2 equivalent per year, or 30% of U.S. emission reductions, split evenly between domestic and international offsets. Domestic offsets do not include offsets from green buildings.

However, federal regulators are closely watching California, which is holding public hearings about AB32 implementation [see "California gives legs to AB32, Sustainable Industries, December 2007]. Members of the San Francisco Carbon Collaborative, including Carbonflow, have made significant progress with the regulators on getting an “energy efficiency set aside” into the discussion for possible inclusion in AB 32. This is an important first step, as California is known as a global leader in energy related legislation.

Simultaneously, at the recent CarbonExpo in Barcelona, many expressed interest in a Global International Protocol on Energy Efficiency and Renewable Energy set asides. Under the Waxman-Markey bill, energy efficiency would be achieved through a renewable electricity standard, a low-carbon fuel standard, and energy efficiency programs and standards for buildings, lighting, appliances, as well as vehicles and stationery sources and fuels.

These are all good initiatives. But according to Anne-Marie Warris, author of the Voluntary Carbon Standard, “the problem is that it relies on energy efficiency measures to be applied as the natural turnover of building stock takes place,which is estimated to take anything from 500 to a 1,000 years….which is time we simply do not have to prevent climate change,” Warris says.

Indirect sources of emissions

The Waxman-Markey bill relies on capping direct sources of emissions such as power plants and other smokestack industries. The bill’s definition of domestic offsets includes agriculture,landfill, waste-to-energy projects and biomass. But, it does not include green building offsets. The conventional wisdom is that cap-and trade should be restricted to direct industrial sources, because there are fewer of them and they are already heavily regulated. The bill follows the reliance on reductions from direct sources and forecloses on the possibility to achieve reductions from indirect sources, such as buildings that consume electricity despite their cost effectiveness.

“As a result, a valuable incentive for voluntary GHG reductions is lost, the low-hanging fruit of increasing energy efficiency in buildings goes unpicked, and industrial sources are required to shoulder a greater share of required GHG reductions, all of which increase the societal cost for addressing climate change and makes it less politically feasible to accomplish,” says Donald Simon, an attorney for Wendel, Rosen, Black and Dean.

Huge potential with existing buildings

Existing regulation leading to emissions reductions through “green” construction techniques usually comes in the form of building codes that reach only new construction and substantial renovations. Yet the majority of GHG in the built environment come from existing buildings. Current government incentives “are helpful but inadequate because they do not achieve sufficient market penetration and rely on limited government funding that can disappear in lean budget years,” Simon says. Domestic green building offsets would allow regulated industries to choose between reducing their own emissions or purchasing offsets from others who are able to reduce theirs at lower cost.

This would reduce the overall cost of climate change regulation for consumers because the market would exploit the lowest cost GHG reductions. Green building carbon credits would provide a large funding source that partially finances energy efficiency improvements. Poorer communities would benefit, as credits would fund energy efficient and renewable energy upgrades to existing building stock at a more accelerated rate than building codes currently create.

Making energy upgrades affordable

Moderate House Democrats and Republicans say that under a cap-and-trade program, ordinary people would incur higher energy costs over time because most have not upgraded their homes and small  businesses with energy-efficient technologies.

However, by allowing green building offsets into the federal cap-and-trade system, subsidies to poorer communities for increased energy costs would not be necessary. Their buildings would be retrofitted by the private sector using the dollars from green building offsets. Ultimately, these people would consume up to 50 percent less energy, with no net energy cost increase. Green building offsets would allow construction companies, project developers, engineers and architects to initiate energy efficiency and renewable energy building projects. And, revenue from the sale of the credits would fund projects and create new “green” jobs. Without this small inclusion to the Waxman-Markey bill, the Democrats may miss a chance to pass sweeping climate change legislation in 2009.