Behind the scenes, most states are exploring the benefits of carbon trading

Source: Emily Holden, Debra Kahn and Jeffrey Tomich, E&E reporters • Posted: Wednesday, October 14, 2015

Swaths of states are engaged in early regional talks about how to comply with U.S. EPA’s Clean Power Plan and whether to embrace carbon trading to keep costs down.

These “no regrets” discussions — mostly coordinated by nongovernmental organizations — offer a safe space for state air and electric regulators to share ideas and analyze how various paths forward might affect their power systems and economies.

Grid experts broadly agree that reducing nationwide greenhouse gas emissions would be cheaper if states that are short of their goals could purchase allowances or credits from states that can decarbonize at a lower cost. Even conservative states that have railed against cap and trade for years are looking at how those type of programs might be their best bet under the Clean Power Plan. But states are still working out the details.

Sue Tierney, a senior adviser for the Analysis Group, said the first instinct is to “look inward” within the state and not force governors to decide whether a state should trade. Still, “there are quite a few states that are hunkering down to try to figure things out,” she said.

Only states that choose similar types of plans will be able to trade with one another. That is why it’s so important for them to know what other states are up to, said Doug Scott, vice president of strategic initiatives at the Great Plains Institute, which is providing support to states within the Midcontinent Independent System Operator.

In a change from the draft rule, EPA made it much easier for states to pursue “trading-ready” compliance approaches that would allow them to work together without formally submitting a plan as a group. States around the country are exploring that concept.

In the West, the Colorado-based Center for the New Energy Economy has organized states in the Western Electricity Coordinating Council (WECC), which spans from the coast to the eastern edge of Colorado. In the Midwest, Scott’s group and the Bipartisan Policy Center are coordinating sessions among states within MISO. In the Southeast, Duke University’s Nicholas Institute for Environmental Policy Solutions is holding similar state dialogues. And in the Mid-Atlantic, states in the PJM Interconnection have formed a new coalition to focus on the Clean Power Plan (see related story).

The Center for Climate and Energy Solutions (C2ES) last week also launched an initiative to facilitate more talks among states, cities and companies considering market-based options for cutting carbon.

“Regardless of where states are publicly in their posturing and political maneuvering, at the agency levels and at the technical levels, many of them are also working hard to develop a good understanding of the Clean Power Plan final rule” and how trading may work, said C2ES President Bob Perciasepe.

Trading groups may sprawl across the nation

A key decision states must make is whether to pick a mass-based standard — which would cap annual carbon emissions outright — or a rate-based standard — which would require power plants to reach an average rate of emissions (measured in pounds of CO2 per megawatt-hour of electricity).

EPA has said mass-based states may not trade with rate-based states, and “by choosing a pathway, the state is committing itself to a particular universe of trading,” according to Patrick Knight, an associate with Synapse Energy Economics who has written blog posts on the topic.

Air regulators that must write state plans are most familiar with mass-based trading, and if more states choose it, the mass-based market will be bigger and produce cheaper allowances for sale.

“Most of the modeling I’m seeing is suggesting that the larger the bubble of compliance you can put over yourself, the more options, the lower costs you get,” said Tim Profeta, director of Duke’s Nicholas Institute.

But officials in several states — including Colorado and Georgia — have suggested it might make more sense for them to pursue rate-based standards so they can continue to build new natural-gas-fired power plants to meet growing demand without hitting an emissions ceiling.

Analysts working with states believe whatever trading systems emerge will be more national than regional — not like the Regional Greenhouse Gas Initiative, which New York’s governor said may link with California’s cap-and-trade system (ClimateWire, Oct. 9).

States that don’t border each other could easily trade, if they adopt similar standards, Tierney explained. Adopting similar standards, however, may mean undergoing tense political negotiations.

For example, preliminary research conducted by the utility Pacific Gas and Electric Co. for a recent Western states workshop suggests the WECC region would be a net seller of allowances in a national, mass-based trading program. Many states would be well positioned, including Arizona, California, Idaho, New Mexico, Nevada, Oregon, Utah and Washington. Others (Colorado, Montana and Wyoming) would “require meaningful additional abatement.”

Because WECC is overall well situated to comply, allowance prices would be lower in a regional program than in a national program, according to PG&E. But total system costs decrease as the scope of trading widens.

In other words, some states would benefit more than others in a large trading system. Wyoming’s governor, for example, has said trading might be the last resort for his state, but he worries credits will be prohibitively expensive. The state has one of the toughest goals in the country, requiring it to cut its power fleet emissions rate 44 percent below 2012 levels by 2030 (EnergyWire, Oct. 5).

The differing positions of states could make for odd dynamics.

“I’ve seen lots of circumstances in waste recycling and air emissions and other things where people say, ‘Well, this is better for you than for me, so how are we going to split the baby here?’ And then it gets into some sort of horse trading,” Tierney said.

Those may be the types of discussions states are headed toward through the winter when they start putting pen to paper.

As Federal Energy Regulatory Commission member Tony Clark said at a D.C. panel discussion late last month, “Regional compliance would be a more cost-effective way, in almost all cases, to comply with the plan … [but] the problem is the politics of this.”

In a single-state plan, “you can point to the wind farm, you can go to the ribbon-cutting at the new gas plant, you can point to jobs in your state. It’s always the challenge where the benefits are diffuse, but the pain is sort of precise in trying to create these regional plans, and I think the politics are going to be very tough in state capitals,” he said.

Additionally, a couple of states, including Oklahoma, have said they won’t write plans at all, as they plan to sue EPA.

The Southwest Power Pool (SPP), a grid organization that includes Oklahoma, has been critical of the rule but is trying to get ahead of that mentality.

“We encourage states to coordinate with each other and develop plans, even if they’re litigating. We understand that the states have rights to do that. We understand and respect that. We encourage them, though, to proceed in a parallel fashion to develop a plan” and not let a federal plan be imposed on them if litigation fails, said Lanny Nickell, vice president of engineering for SPP.

Calif., Wash. in a position to help

The West Coast is in a particularly interesting position for trading, as California and Washington state expect to exceed their EPA-assigned goals and are weighing whether to make large amounts of allowances available so that other states can keep fossil fuel generation online.

Utilities in California are pushing the state to consider trading allowances, but regulators have been circumspect (ClimateWire, Oct. 5).

California has an economywide trading system, so to mesh its program with other states’, it might need to isolate power plant allowances, market observers said last week at an Argus Media carbon market conference. California also would need to deal with its use of carbon offsets, which EPA does not allow for Clean Power Plan compliance.

Xantha Bruso, a manager in PG&E’s long-term energy policy branch, said the rule is “a tremendous opportunity for California to lead in the battle against climate change” by seeking “opportunities to collaborate with other states through regional or multistate approaches.” She said a uniform carbon price across WECC could make it easier to expand California’s grid operator and burgeoning energy imbalance market.

Washington, meanwhile, is moving fast to write a draft compliance plan by December and a final one by the summer of 2016, and trading is a big part of the ongoing conversation.

Washington can meet its goal with an existing renewable portfolio standard, existing energy efficiency measures and plans to close down its only coal-fired power plant. That likely will leave it with a compliance cushion to spare — or sell.

The state is considering three separate carbon-capping efforts — including two by ballot initiative — that could form the backbone of an interstate trading regime. Gov. Jay Inslee (D) wants to require businesses that emit more than 100,000 tons of carbon per year to reduce carbon within their own operations or buy offsets or credits from other companies.

“In spite of this not being a bona fide cap and trade, we think there’s opportunities around having conversations about linkage,” said Chris Davis, an energy adviser to Inslee.

“When we think about linkage through the Clean Power Plan, we tend to look at Montana in the hopes we can work something with them that gets us out of what we call ‘coal by wire’ in Washington,” he added.

However, at a listening session in Olympia, Wash., several weeks ago, Washington Utilities and Transportation Commission member Philip Jones said it became clear that environmental groups “don’t like the idea of emitting more and then trading with neighboring states,” even if it brings in revenue for the state. Some suggested retiring allowances instead.

Jones called the feedback “an eye-opener.”

“This is a national plan. This is not a Washington state plan, and so EPA is encouraging us to lower U.S. emissions overall. Isn’t that a good thing? And if we can help Montana, or Wyoming, or help some of these other states that are deficient, and perhaps even earn some revenue and site some new plants here or there — what’s wrong with that?” he asked.

Reporter Kristi E. Swartz contributed.