How U.S. Climate Plan Can Follow China and Europe—Or Not

The United States aims to lead other countries with its climate plan. Yet one of its key but lesser-known tools, carbon trading, has already taken root across the globe.

In the last decade, 17 “cap and trade” systems—covering 35 countries and a dozen states or provinces—have sprung up to curb global warming. They cap total emissions of heating-trapping carbon dioxide but allow emitters to trade pollution allowances.

Such a trading system gets new life in President Barack Obama’s Clean Power Plan—in somewhat backdoor fashion. Five years ago, Obama failed to get a controversial cap-and-trade bill passed in Congress. Now, states can opt to launch a market or join existing ones in California and the Northeast.

“States can enter into markets the EPA can manage and keep track of,” Gina McCarthy, administrator of the Environmental Protection Agency, said Tuesday at a Washington, D.C. forum. Indeed, under the plan, trading becomes the default federal option for states that don’t submit plans for cutting emissions.

“It’s a ready-made plan” that focuses on emissions trading, McCarthy said, adding it will offer states flexibility and could spur clean energy innovation. “The U.S. can grab some leadership here.”

The plan’s final 1,560-page rule, unveiled last week, is much more explicit about carbon trading that the proposed version last year. “It makes a 180-degree turn and embraces trading as the way to go,” says Tom Lawler, Washington, D.C. representative of the nonprofit International Emissions Trading Association, which promotes cap-and-trade.

The rule even says: “It is reasonable to anticipate that a virtually nationwide emissions trading market for compliance will emerge.” (Learn about five of the plan’s common myths.)

The Idea Starts With GOP Support

The U.S. has experience with cap-and-trade, though that hasn’t quieted critics such as the pro-business Chamber of Commerce, which says it will hike power prices. Many economists say it’s a cost-effective way to curb emissions. Here’s why: Polluters get tradeable allowances to emit a certain amount. If one can make cuts cheaply, it can sell its unneeded permit (for a profit) to those that would find cuts costlier.

The idea initially had GOP backing and some Democratic opposition. In 1990, former President George H.W. Bush signed a bill creating a cap-and-trade system to cut the sulfur dioxide emissions causing acid rain.

Obama touted that system when unveiling the final version of his Clean Power Plan. “We cut acid rain dramatically, and it cost much less than anybody expected—because businesses, once incentivized, were able to figure it out,” he said Aug. 3 at the White House.

“It was highly successful,” says the ”Putting a Price on Carbon” report by the World Resources Institute, a research group. The report says the program gradually lowered allowable emissions and reached its goals in 2007—three years ahead of schedule—at costs lower than those projected for typical regulations.

The Acid Rain Program prompted other trading schemes focused on greenhouse gases, including a nine-state Northeastern compact known as the Regional Greenhouse Gas Initiative (RGGI) and another in California that’s linked to the Canadian province of Quebec. However, a trading program in the Midwest failed to thrive. (Read about the demise of the Chicago Climate Exchange.)

Carbon Trading Expands Abroad—With Hiccups

The only national carbon-trading programs emerged abroad, starting in 2005 with the European Union’s 31-country Emissions Trading System.

Others have followed in New Zealand, Switzerland, Australia, Kazakhstan and, this year, South Korea. Since 2013, China has launched seven regional pilots in advance of a national program, slated to begin as early as 2016. Brazil and Mexico are looking at trading systems as part of their climate plan, and other countries such as Denmark and Norway have opted instead to tax carbon emissions.

“The reach of carbon pricing is steadily increasing,” says a 2014 World Bank report on the topic, noting emissions trading programs are now worth about $30 billion.

Yet some programs have struggled. Last year, coal-reliant Australia repealed its cap and trade when it became the world's first developed country to strike down a law that put a politically divisive prices on carbon. This week, it unveiled a 2030 climate target that critics called "lackluster."

The EU’s trading system, the world’s largest, has had serious problems. Studies suggest it has helped curb carbon emissions but not nearly as much as expected.

“The biggest problem is that the financial crisis got in the way,” says Noah Kaufman, a climate economist at the WRI, noting the recession pushed economic growth and energy demand far below what was forecast. He says emissions caps are based on these forecasts.

As a result, the caps weren’t tough enough, resulting in a surplus of allowances and insufficient incentives for low-carbon investments. (Learn more about the EU’s trading crisis.)

The RGGI program in the U.S. Northeast had some of the same problems, early on, but fixed them. It established a mechanism for adjusting the cap, which it lowered last year and will continue to tighten. It also created the first allowance auctions, which set a minimum price and reinvest the proceeds into energy efficiency as well as renewable power. In 2012, despite regional economic growth, its states collectively cut power plant emissions by 40 percent from 2005 levels.

“We’re definitely learning from programs like the European Union,” though each system is unique, says Vicki Arroyo, executive director of the Georgetown Climate Center, affiliated with Georgetown University.

What about China? Its seven pilots now comprise the world’s second-largest cap-and-trade system, but their shorter-term emission caps raise questions.

“It’s not transparent how the caps are set or adjusted” and very few trades have occurred so far, says Clayton Munnings, who’s studied China’s carbon trading as a research associate for Resources for the Future, a think tank. He says it’s too early to tell what impact they’ll have, especially since China is taking other steps to reduce its air pollution, or what the national program will look like.

Still, he says China has “revitalized cap and trade,” and if it succeeds, “it will open the door for more countries in Asia and other non-market economies.”

Whither a U.S.-Wide Cap-and-Trade?

The Clean Power Plan, which offers carbon trading as one way states can meet their individual emission targets, is certainly not the cap-and-trade system envisioned by the Waxman-Markey bill that passed the U.S. House in 2009 but died in the Senate.

“It’s the closest thing we could get to it,” Arroyo says. She expects the rule, which aims to slash U.S. power plant emissions 32 percent by 2030 from 2005 levels, will withstand lawsuits and get off the ground. On Thursday, 15 state attorneys general petitioned a federal court to block it, saying the plan goes beyond EPA's legal authority.

States refusing to submit a compliance plan, due next year, could eventually be plugged into a multi-state trading system. “In some ways, they could make 'no' the right answer,” says Lawler of the International Emissions Trading Association.

California and the RGGI states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, and Rhode Island—are expected to meet their Clean Power Plan targets without doing anything new. (The ninth RGGI state, Vermont, doesn't have any fossil-fuel power plants and has no target.)

In fact, California could meet its target years ahead of schedule. Its trading system covers not only power plants but also factories, transportation fuels and other major carbon sources.

“California would seem to be a good model,” says the WRI’s Kaufman. Its system, which launched trading in 2013, is the first to link to a foreign province, Quebec, and it sets ambitious emissions caps that gradually tighten.

Whether other states gravitate toward California, RGGI, or another model remains to be seen. They don’t need to start cutting emissions until 2022, two years later than the plan originally proposed.

“Overall progress at the national level in China and the United States may take some time,” says Alexandre Kossoy, senior financial specialist at the World Bank, in releasing the organization’s 2014 report. Still, he says, “it is remarkable that the world’s two largest emitters are now home to carbon pricing instruments.”

The story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.]

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