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Economic and Environmental Considerations Drive State Innovation in GHG Initiatives

November 22, 2016 by Jeffrey J. Cook

The Washington Department of Ecology published the Clean Air Rule on September 15, 2016, becoming the 11th state to adopt a market-based cap and trade program to reduce greenhouse gas (GHG) emissions. Washington joins California and nine northeastern states in adopting such a program (Figure 1).

Fig1_States-with-GHG-reduction-programs

Figure 1. States with Market-based GHG Reduction Program

Though each of these 11 states has adopted some form of a cap-and-trade program, the policy structures and scopes vary. These differences are partially explained by the goals of the policymakers that designed them and reflect policy innovation at the state level. This article discusses these policies and examines the underlying goals that shaped each program.

California’s program is the most expansive as Assembly Bill 32 (AB 32), enacted in 2006, requires a reduction in statewide GHG emissions to 1990 levels by 2020. In 2016, California enacted Senate Bill 32 (SB 32) which requires an additional 40% reduction in emissions from 1990 levels by 2030. These reductions are partly achieved through the state’s cap and trade program. The program covers about 85% of California’s carbon emissions including electricity producers, large manufacturers, and transportation fuel providers that emit 25,000 metric tons of CO2 equivalent (CO2e). California is in the second compliance period (2015-2017) that requires regulated entities to reduce their emissions from the 394.5 million metric tons of CO2e cap in 2015 to 370.4 million tons in 2017 and eventually 334.2 million tons in 2020. This more comprehensive program was developed to achieve the legislature’s stated goals of reducing California’s contribution to climate change and retaining its position as an environmental leader. California also considered this an opportunity to support existing economic drivers such as agriculture and tourism while opening new markets in a carbon-restrained future.

In comparison, nine northeastern states participate in the Regional Greenhouse Gas Initiative (RGGI), which requires GHG emission reductions from the power sector in those states. In 2016, the Carbon Dioxide (CO2) emissions cap is 86.5 million tons and this cap declines 2.5% per year through 2020. RGGI was initially launched in 2005 and the RGGI signatory states argued that this program would reduce the region’s reliance on imported fossil fuels, while supporting the regional economy. These states also opted for a regional program because it was a more cost effective approach to reducing emissions than if individual states produced their own standalone policies. To date, RGGI states have stayed under their compliance cap, while the program has generated nearly $2 billion in auction proceeds for investment in the regional economy.

Attention to the costs and benefits of the program was important for RGGI signatory states as they highlighted the importance of preserving and enhancing the economic welfare of their citizens when launching the program. In comparison, California may have been able to build such a comprehensive program because its economy ranks as the sixth largest in the world, allowing more opportunities for cost-effective emissions reduction. Even in this case, California linked their program with the Canadian Province of Quebec in 2014 to broaden opportunities.

Fig2_Washington-State-Compliance

Figure 2. Washington State Compliance Thresholds

In 2016, Washington State launched a unique program focused on the largest GHG emitters in the state. Washington requires those facilities that emit more than 100,000 metric tons of CO2e to reduce their GHG emissions 1.7% per year from 2017 through 2035 (from facility specific baselines).[1] The program is divided into three-year compliance periods and with each period the threshold for regulation declines by 5,000 metric tons. By 2035, any facility that emits more than 70,000 CO2e  will be subject to the rule (see Figure 2).

Washington’s Governor, Jay Inslee, directed the Washington Department of Ecology to finalize this rule, citing climate change as an “existential threat to our state.” Inslee also noted that this was a less comprehensive policy than could have been adopted had legislation proposed in the 2015 session been enacted. As such, the more limited nature of this program was required because of the narrow existing statutory authority.

Overall, these three examples illustrate that while addressing the cause of climate change was one of the goals of each of these policies, other factors, namely economic and political considerations, played into the structure and scope of each program. For example, the RGGI states were concerned about the cost of emission reduction, while in Washington, legislative inaction limited the scope of the program that the Governor could adopt. These factors then influenced the type of program adopted in these states. These factors were also at play in the California context, but the unique nature of the state in terms of the size of its economy, along with its strong history of supporting environmental protection, likely mitigated the impact these factors had on the outcome.

Looking forward, the state of Oregon is currently evaluating how a market-based GHG reduction program might operate. Like other states, Oregon will have to balance a variety of different, sometimes competing priorities when designing a policy. If implemented, Oregon would become the 12th state to adopt such a program.

[1] Some of the effected industries in the state include natural gas distributors, petroleum fuel producers, power plants, and metal manufacturers among others.

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