2. Genesis:

3. The regional climate initiative in the Northeast and mid-Atlantic was initiated by then governor George Pataki of New York, invited 11 governors to participate in the development of a cap and trade program

4. 8 states agreed to participate in the negotiations

5. Representatives from the Eastern Canadian Provinces Secretariat and the Province of New Brunswick began observing the process;

6. Maryland and Pennsylvania also sent representatives to observe the process

7. In 2005, seven states entered into a Memorandum of Understanding, and then a Model Rule in 2006 for a Regional Greenhouse Gas Initiative (RGGI) [SLIDE 3]

8. Now ten members,

9. Also, several observers: Pennsylvania, the District of Columbia, and Eastern Canadian Provinces of New Brunswick, Ontario, Quebec

10. Key provisions:

11. RGGI initially regulates only power plant emissions, and only those plants generating more than 25 MW of power (which is about 95% of generating capacity from power plants)

12. Only regulates carbon dioxide emissions, unlike the UNFCCC/Kyoto Protocol, EU-ETS or some other regional initiatives

13. Represents about 10% of U.S. GHG emissions

14. Each State required to implement program through legislation or regulations [SLIDE 4]

15. Plan’s cap and trade program and goals [SLIDE 5]

16. Emissions are divided between the participating states, based on historical emissions and other considerations [SLIDE 6]

17. The emissions budgets of each respective state are then divided up among the regulated entities in each state, and they are provided allowances, with each allowance equal to 1 ton of carbon

18. Each entity must hold a number of allowances equal to their allocation at a prescribed point each year.

19. First compliance period began on January 1, 2009

20. At the end of 2020, it’s projected that carbon dioxide emissions levels should be roughly at 1990 levels

21. If this is achieved, it would constitute a significant reduction below BAU scenarios:

22. Without RGGI, estimated that emissions in RGGI states would increase 25% from current levels by 2020, so it’s a potential 35% reduction from BAU

23. Auction Provisions [SLIDE 7]

24. “Consumer benefits” that can be funded include: the use of revenue generated from the auction of allowances to:

25. Promote energy efficiency;

26. Directly mitigate electricity ratepayer impacts;

27. Promote renewable or non-carbon emitting energy technologies; and

28. Stimulate or reward investment in the development of innovative carbon emissions abatement technologies

29. Could be more than a billion dollars annually for RGGI, but much, much less right now

30. Benefits of an auction v. free allocation system for allowances:

31. Fairness: air is a commonly held resource, to be managed for the benefit of the public.

32. Thus, it is fair to require polluters to pay the public for the use of that resource, and to hold them responsible for the costs their pollution imposes on society;

33. Free distribution scheme can reward entities that emitted the most pollution in the past;

34. It also ensures that renewable energy sources, or more efficient sources are placed at disadvantage

35. Free distribution can award allowances to inside interests, not necessarily in the optimal fashion from a consumer welfare perspective;

36. Auctions halve the costs of a cap and trade program.

37. This may seem counter-intuitive, but in offering power into the market, a generator has to decide whether it is more profitable to produce electric power and expend the necessary CO2 allowances to do so, or not to produce electricity and instead sell its allowances to others.

38. If it decides to offer power, it is foregoing the opportunity to sell the allowances in favor of consuming the allowances;

39. This “opportunity cost,” which is the market price of the allowances, is a variable cost that will be included in generators’ marginal cost;

40. So, under a free allocation scheme, consumer are subjected to increased costs for power without any of the money being funneled back for either rebates or other programs that would lower their costs, e.g. energy efficiency, renewable development or rebates;

41. AND it provides a windfall to the power operators; we’ve seen this in the EU-ETS, and UK where windfall estimated at $500 million per year.

42. Overall, 86% of carbon dioxide allocation allowances in RGGI states have been auctioned

43. Results of auction process to date:

44. Since September 2008 bidders, including electric utilities, manufacturers, financial institutions, environmental groups, and individuals have participated in the RGGI auctions for CO2 allowances

45. Total amount of proceeds more than $871 million since September of 2008

46. Though should be emphasized that allowances only selling for $1.89 now, which indicates that demand is not that high

47. Appears cap set too low initially

48. Cap set in 2004 at 188 million tons, anticipating this would be exceeded by 2008, but mild weather and slowing economy caused emissions to decrease from 184.5 million tons in 2005 to 172.4 in 2007

50. RGGI permits limited offsets by power plants to meet their goals if regional spot price for allowances reach a certain level, so similar to the “safety valve” mechanism in the Bingaman bill

51. Similar to CDM or JI, but very limited in scope of projects and amount (5% of reported emissions if allowance price reaches $7.00) [SLIDE 8]

52. “Leakage” provision:

53. One of the problems that a regional cap and trade system (or a state system, e.g. California’s) might create is “leakage,” i.e. regulated power entities may begin to purchase significant amount of (presumably cheaper) power from:

54. non-regulated and dirty entities in other states;

55. or power plants in RGGI states with capacity below 25 MW [SLIDE 9]

56. Contemplation of Integration into a Federal Program [SLIDE 10]

58. Some analysts have expressed concern that RGGI might run afoul of the Compact Clause

59. What is the Compact Clause? [SLIDE 12]

60. What kind of “compacts” does the Clause prohibit absent Congressional approval?

61. Supreme Court in U.S. Steel Corp. v. Multistate Tax Commission said that only inter-state agreements that “increase the political power or influence of a state” and thus encroach on the “full and free exercise of the Federal authority” are subject to the Compact Clause

62. Example: Northeast Bancorp v. Bd. Of Governors of Federal Reserve System (S.Ct. 1985)

63. Facts:

64. Similar Connecticut and Massachusetts statutes authorize out-of-state banking companies to purchase an in-state bank if the prospective purchasing bank is found in another New England state that accords reciprocal privileges to the enacting state’s banks;

65. Petitioners argued, inter alia, that this violated the Compact Clause because the statutes allegedly constituted a pact by Ct. and MA to exclude non-New England banks

66. Holding:

67. Court did find that both legislatures favored the establishment of regional banking in New England, and there was evidence of cooperation among legislators, officials, bankers, and others in the two States in studying the idea and lobbying for the statutes.

68. However, Court rejected Compact Clause argument on several grounds:

69. No joint organization or body has been established to regulate regional banking or for any other purpose;

70. Neither State’s statute was conditioned on the other, and both free to repeal if they wish;

71. The application of the Compact Clause is limited to agreements that are 'directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States

72. But here, any state statute that conflicted with a federal mandate, e.g. FDIC requirements, would be preempted, rendering a Compact Clause argument academic

73. How about RGGI, or any other regional initiative?:

74. RGGI does establish a regional organization, which was signaled out by the Northeast Bancorp court as potentially problematic [SLIDE 13]

75. Though, while it does talk about a forum for “collective deliberation” in one provision, another part of the MOU establishment the Regional Organization expressly says it has no “regulatory or enforcement” authority, that being left to the individual states;

76. No enforcement mechanism for RGGI’s mandates (clearly a weakness), but maybe that also means it doesn’t increase the political power of the states since no binding enforcement;

77. While entities within a state subject to state laws and regulations, no regional enforcement provided for

78. Might be able to argue that now that federal government is regulating GHGs through Clean Air Act, state initiatives can no longer be viewed as usurping power, but rather are wholly concordant with federal objectives

79. Helpful that CAA efforts pretty capacious in terms of sectors and objectives, i.e. they seek to reduce emissions more than regional initiatives.

80. Western Climate Initiative

81. Western Governors Association, comprised of governors from 19 States, had endorsed regional initiatives to address climate change in 2006

82. In 2007, five governors, from California, Arizona, Washington, New Mexico and Oregon launched the Western Climate Initiative (WCI), subsequently joined by Governor of Utah and premiers of Manitoba and British Columbia

83. Several states also observers [SLIDE 14]

84. Potentially very important initiative because U.S. states in WCI encompass 20% of U.S. GDP and 76% of Canadian GDP

85. Key provisions:

86. Emissions reductions goals [SLIDE 15]

87. Note: many individual western States have very ambitious goals in longer term [SLIDE 16]

88. 2008: market-based mechanism established, cap and trade program beginning in 2012

89. In July 2010, WCI Partners released the Design for the WCI Regional Program

90. It’s a plan to reduce regional GHG emissions to 15 percent below 2005 levels by 2020

91. Note: scope is broader than RGGI in several ways: [SLIDE 17]

92. All GHG gases, not just CO2;

93. All sectors of economy

94. Encompasses 90% of economywide emissions in partners

95. New Entrant Criteria [SLIDE 18]

96. Uses “consumption” or load-based emissions estimates for electricity sector:

97. Important issue, because if you just use generated emissions by power plant, might not include imports from other states not subject to regulation [SLIDE 19]

98. Midwestern Greenhouse Gas Reduction Accord (MGGRA)

99. Established by six states and one Canadian province in late 2007: [SLIDE 20]

100. Illinois

101. Iowa

102. Kansas

103. Michigan

104. Minnesota

105. Wisconsin

106. Manitoba

107. Also: three observers, Indiana, Ohio and South Dakota

108. Encompasses 14% of total U.S. GHG initiatives, the largest percentage of the three regional programs

109. If it were a country, the MGGRA partners would be the seventh largest producer of emissions in the world

110. Key Provisions:

111. States were to establish Work Plan to establish targets for GHG emission reductions and timeframes consistent with states’ targets within 8 months, so by mid-2008;

112. Environmental agencies directed to establish cap and timeline to be consistent with prior commitments by the states that are participating, bounding the target between 60-80% below 1990 levels by 2050

113. Cap and trade system will be established

114. In separate document, a number of these states agreed to promote energy efficiency, accelerate development of carbon capture and sequestration, enhanced regional infrastructure to develop and delivery low and no-carbon fuels, goal of generating 10% of region’s electricity from renewables by 2015 and 30% by 2030

115. Advisory Group issued draft recommendations in 2008, including:

116. GHG Reduction Targets:

117. 20 percent below 2005 levels by 2020;

118. 80 percent reduction below 2005 levels by 2050

119. Continuous monitoring to potentially revisit targets

120. Broad scope, including electricity generation and imports; industrial combustion sources; fuels serving residential, commercial and industrial buildings; transportation fuels;

121. Cap and trade program;

122. Offsets program, limited to 20% of each regulated entity’s compliance obligation

123. Participation of entities outside U.S./Canada to be determined

124. Particularly significant initiative because many of the participating states are major producers and/or users of coal

125. 60% of electricity in region produced by coal, about 10% above national average

126. Total GHG emissions from agriculture in five of the six states (Illinois, Iowa, Kansas, Minnesota, and Wisconsin) are above 10 million metric tons of CO2 equivalent, placing these states’ agricultural sectors among the top-12 emitters, nationally

127. On the other hand, program appears moribund at this point (website isn’t even up), though some initiatives proceeding via the Midwestern Governor’s Association

128. Summary of Regional Accords

129. So, overall, we now have 22 states participating in three regional GHG pacts, with only the South as an outlier [SLIDE 21]

130. At the same time, should emphasize that regional initiatives, at least current incarnations, are not a panacea:

131. U.S. Energy Information Agency projects the national carbon dioxide emissions will equal 8.115 billion metric tons annually in 2030, up 63% from 1990 levels, with an average increase of 1.2% annually

132. By contrast, if regional initiatives achieve quantitative reduction targets, it would result in a reduction of just 460 million metric tons of carbon dioxide equivalent emissions by 2020, or a reduction of just 6.38% from business as usual scenario

133. Overall GHG emissions growth rate would only be reduced to 1.06% annually

134. On the other hand, some benefits of these initiatives include:

135. Educating the public about these issues and enlisting their buy-in to such efforts, which in turn can exert pressure on federal government

136. Federal government might also feel pressure from regulated entities to establish a comprehensive federal approach to avoid a patchwork of regional mandates;

137. Can serve as a laboratory to establish what works and doesn’t work as we seek to develop federal regulatory policies;

138. Can reduce fear of states being put at competitive disadvantage if they develop programs to reduce emissions

139. Storm clouds in terms of participation as consequence of GOP gains in 2010 mid-term:

140. Bill proceeding in NH legislature to withdraw it from RGGI, ditto in Michigan for MGGRA

141. States starting to funnel off auction funds to deal with large budget deficits

142. State Initiatives

143. State Renewable Portfolio Standards [SLIDE 22]

144. State energy efficiency and public benefit funds [SLIDE 23]

145. State alternative energy policies [SLIDE 24]

146. State emissions targets [SLIDE 25]