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Six US States Withdraw from the Western Climate Initiative - November, 2011

 

Six US States Withdraw from the Western Climate Initiative - November, 2011  

Tom Markowitz - Wednesday, November 23, 2011

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Six US States Withdraw from the Western Climate Initiative
© Enerhope.com 2011
November 23rd , 2011

On November 17th, six US States, New Mexico, Arizona, Washington, Oregon, Montana and Utah, formally withdrew from the Western Climate Initiative (“WCI”), a multi-state greenhouse gas reduction and cap-and-trade partnership. The remaining participants in the WCI are California and the Canadian provinces of British Columbia, Manitoba, Ontario and Québec.

The withdrawal of the six states was reported by Bloomberg on November 17th:
http://www.vancouversun.com/business/states+withdraw+from+emissions+trading+group+Western+Climate+Pact/5726883/story.html

Founded in 2007, the WCI was intended to unite 11 states and provinces in a common program to reduce greenhouse gas emissions and to participate in a WCI-wide cap-and-trade program. The overall target is to reduce total greenhouse gas emissions by each participating state by 15%, between 2005 and 2020. The intended launch date for the WCI cap-and-trade program was January 1st, 2012.

The official history of the WCI appears in the WCI website,
http://www.westernclimateinitiative.org/history

Why did 6 States Withdraw from the WCI?
An example of a state which decided to withdraw from the WCI is Arizona, whose decision  was reported in the Arizona Daily Sun on November 17th:
http://azdailysun.com/news/local/state-and-regional/brewer-withdraws-arizona-from-climate-initiative/article_6dbee72b-e2fb-5194-873b-a6f3031ee5f4.html

We should not blame the polarized USA political scene as the sole reason for the mass withdrawal. The leaders of the WCI made strategic mistakes which were at least as important as the USA political situation in causing the withdrawal of most of the participants.

Here are some of the mistakes:

Too Big, and Too Complex
Here is a description of the WCI program from the WCI web site, cited above:

“This multi-sector program is the most comprehensive carbon-reduction strategy designed to date. When fully implemented in 2015, it will cover nearly 90% of greenhouse gas emissions in WCI Partner states and provinces, including those from electricity generation, industry, transportation, and residential and commercial fuel use.”

The enormous size and complexity of the system described above severely burdens the proposed cap-and-trade system.

Cap-and-trade succeeds in regulating direct emissions by large, direct emitters. Cap-and-trade does not succeed in reducing indirect emissions, which must be addressed by other, non-cap-and-trade policies and programs.

Capping fuel distributors for their indirect emissions, i.e. for emissions by their customers, is a serious mistake. Motorists who buy and consume gasoline from service stations will not be under any regulatory obligation to reduce their greenhouse gas emissions. Instead, the motorists will see a price increase between 4% and 8% in the price of gasoline, varying with the week-by-week price of Allowances. The motorists will resent this price increase but will not reduce their emissions.

Similarly, capping natural gas distributors for indirect emissions by their customers will not result in emission reductions. Residential and commercial customers will see increases between 4% and 9% in the price of natural gas, not a big enough increase in price to cause any emission reductions.

Historical data (New York Times, May 2, 2010) shows that between 1990 and 2007, the average USA price of gasoline (adjusted for inflation), climbed from $1.87/USgallon (1990) to $2.95/USgallon (2007) (a 58% increase, 1990-2007) but the changes in the price of gasoline had no effect on total greenhouse gas emissions from gasoline combustion, which climbed steadily from 966 Mt CO2e (1990) to 1187 Mt CO2e (2007).

(The gasoline emissions data are from the following USEIA site:) http://www.eia.doe.gov/oiaf/1605/ggrpt/carbon.html#transportation

The minimum emission “threshold” for a site to be obliged to participate in the WCI cap-and-trade system is 25,000 tonnes/year of CO2e. This threshold is so small that many medium-sized enterprises with no knowledge of emissions reporting, trading or reductions will be required to report their emissions and retire allowances and offsets at the end of the year. Supervising this massive number of capped facilities will place a huge administrative burden on WCI partner governments.

A 2009 USEPA report showed that a threshold of100,000 tonnes/year would capture 53% of all USA emissions under the cap, and would cap 6,269 facilities. Lowering the threshold to 25,000 tonnes/year would increase the number of facilities under the cap by 62%, but would increase the total emissions under the cap by only 2%.

Here is the URL of the USEPA Report mentioned above:
http://www.epa.gov./climatechange/emissions/downloads09/GHG_RIA.pdf

Bureaucracy
Between 2007 and 2011, the multi-state WCI bureaucracy expanded, without producing a cap-and-trade system that the public could understand. Although the WCI has struck many committees and produced some voluminous documents, necessary facts are still missing. The January 1st, 2012 start-up date for the WCI cap-and-trade system is approaching quickly. What will be the total cap for all WCI participants in 2012? What will be the individual cap for each participant?

The Champion Disappeared
Without doubt, the champion of the WCI (and the champion of California’s own cap-and-trade system) was muscleman-turned-movie star-turned-California Governor Arnold Schwarzenegger, who added his personal charisma to WCI announcements, until January, 2011, when he terminated his political career and announced that he'll not be back.

Economics vs. Political Reality
Classic economic theory says that a big market, with many buyers and sellers, is more efficient than a little market. In a big market, the discipline of the market place ensures that suppliers deliver products of high quality and low price.

This economic rationale was used in 2007 to propose the WCI, a huge, multi-state greenhouse gas cap-and-trade system, with trading of allowances and offsets across state boundaries, e.g. a capped facility in California could buy and retire allowances from Arizona to meet its regulatory obligations.

Unfortunately, this multi-state rationale breaks down, when political leaders look at predictions of the resulting flow of funds between states. No political leader wants to commit his or her state (or province) to a cap-and-trade system where hundreds of millions of dollars per year flow out of the state to pay for allowances and offsets from other states. In the negotiations to determine the state caps and state allowance allocations, each state’s environmental goals are replaced by the prospect of gaining revenue for the state, through allowance sales to other states.

Too Slow
Unfortunately, the size of the WCI bureaucracy, the reluctance of the partners to commit to the implementation of the cap-and-trade system, and the disagreements of the partners over allowance allocation delayed the start-up date. The WCI is now almost five years old, and has not yet announced the total megatonnes in the first year WCI-wide cap.

During these (almost) five years, the political landscape of the USA has changed. The USA is now preoccupied with the economic recession, and has little time for environmental programs. US cap-and-trade advocates have not demonstrated coherently the economic benefits of a cap-and-trade program.

Cap-and-trade was supported by both Democratic and Republican US political leaders in 2007, when the WCI was founded.  However, by 2010, Republicans and conservatives had become bitterly opposed to what they described as, “cap-and-tax.”

This change in political attitudes by the Republican Party is described in the Enerhope video, Sarah Palin Defends America against Cap-and-Trade,
http://enerhope.advancedwebsites.ca/_blog/October_1st,_2010_-_Sarah_Palin_Defends_America_against_Cap_and_Trade .  

By 2010, cap-and-trade had become so vilified by conservatives that it was used as a denunciation in political campaigns. Republican rivals for nomination for various electoral contests began to hurl dramatic accusations at each other about each other’s former support of “cap-and-tax.”

Allowance Allocation
The Design for the WCI Regional Program mentions that each participating state or province may allocate allowances to its capped facilities according to its own plans. http://www.westernclimateinitiative.org/component/remository/general/program-design/Design-for-the-WCI-Regional-Program/

However, the Design emphasizes auction, not free-allocation, as the preferred method for allowance allocation.

The WCI appears to be following the seriously troubled RGGI cap-and-trade system in auctioning allowances. Auctioning of allowances adds to the price of electricity and consumer products, and is perceived as an unfair tax by opponents of cap-and-trade. The consumer of products of capped facilities must pay the price of the products, plus the price of emission reductions, plus the auction price, plus the price of speculation by investors.

The mechanics of auction create the need for secrecy, which contradicts the need for transparency in the cap-and-trade system.

Proponents of allowance auctions reply that the state’s revenue from cap-and-trade is used to finance emission reduction projects.

However, in at least one RGGI state, some of these revenues have been used to pay down the state deficit, instead of financing emission reductions.

The alternative to auctioning of allowances is free allocation of allowances to capped facilities, according to a fair scheme, under a hard cap. The successful cap-and-trade programs which reduced smog gases from USA electricity generators in the late 1990s featured free allocation.

Current Situation
With the departure of the six states in November, 2011, the WCI now consists of California and four Canadian provinces. Here is a brief, province-by-province status report on cap-and-trade in these five jurisdictions:

California
On October 20th, the California Air Resources Board adopted a regulation to implement a cap-and-trade program for California greenhouse gas emissions, starting in 2013.
For a description of this event and Enerhope’s commentary, go to:
http://www.enerhope.com/_blog/California_Cap-and-Trade_-_Some_Cause_for_Concern

Ontario
For a description of Ontario’s commitment to the WCI and cap-and-trade, and Enerhope’s commentary, go to:
http://enerhope.advancedwebsites.ca/_blog/Ontario_Drifts_Toward_Cap_and_Trade   Cap-and-trade was not mentioned in the Speech from the Throne that opened Ontario’s new Legislative session, on November 22nd.

Québec
Québec will implement cap-and-trade for greenhouse gases on January 1st, 2013. (Québec has not yet published the final version of the regulation.)
Approximately 100 large, direct emitters will be under the cap. The minimum emission threshold for being placed under the cap will be 25,000 tonnes/year of CO2e. Allowances will be allocated by free allocation and by auction. In 2015, Québec will add distributors of transportation fuels and residential and commercial fuels under the cap. Trading in allowances and offsets originating outside Québec is not mentioned in the draft regulation.
http://www.mddep.gouv.qc.ca/changements/plan_action/projet-reglement/droits-emission-ges.pdf

British Columbia
B.C.’s commitment to a WCI cap-and-trade system is unclear. According to the Vancouver Sun (November 18th):
"We haven't made a final decision at this point," B.C. Environment Minister Terry Lake said in a (Vancouver Sun) interview on Thursday (November 17th), referring to cap-and-trade. "What we want to do is leave our options open, we want to make sure we don't rule out any options for B.C.
" B.C. has no intention of leaving WCI, even though the province has yet to commit to cap and-trade, he said.”
http://www.vancouversun.com/technology/states+abandon+carbon+trade+partnership/5731555/story.html

Manitoba
At the beginning of 2011, Manitoba requested public comments on a proposed greenhouse gas cap-and-trade system, within the WCI. The deadline for public comments was March 15, 2011. Some of the submitted comments are published on web sites of NGOs. However, Manitoba has not made any announcements about cap-and-trade in the past year.
http://www.gov.mb.ca/conservation/climate/capandtradeconsultation.html

The Future
It is doubtful that the WCI will implement a multi-state cap-and-trade system for greenhouse gases. Six of the original eleven participants have just withdrawn from the WCI. The remaining five participants include one USA state which is committed to cap-and-trade, one (possibly) committed Canadian province, and three other provinces in various stages of hesitancy.

The best plan of action for the foreseeable future would be for each of these states and provinces to implement a greenhouse gas cap-and-trade system for direct emissions by large direct emitters within its own borders. A successful cap-and-trade system would feature free allocation of allowances to specified capped sites under a (declining) hard cap, a lively offsets system, and a vigilant, transparent tracking system for allowances and offsets.

If and when the individual state and province cap-and-trade systems prove their success, then they can consider inter-state trading and retirement of allowances and offsets.

 


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