Cap and Trade Resurrected? Some States Awaken to Its Economic Benefits

Evidence showing that cap and trade can bolster a new revenue stream has some state and federal officials quietly seeking answers.

Cap and trade is long dead in the United States, a victim of shifting political winds, fierce oil industry opposition and a weak economy.

Or is it?

Congress and a dozen Midwest and Western states abandoned plans for such programs during the past three years. That’s left California and nine Northeast states alone in their embrace of the scheme, which sets a ceiling on CO2 emissions and allows polluters to meet it by buying permits in auctions—and sends hundreds of millions of dollars into state coffers.

With many states in financial trouble—and with evidence building that cap and trade can bolster a new revenue stream and create jobs—some states are starting to take a second look.

In interviews with InsideClimate News, economists, analysts and state officials say that conversations on the topic are generally taking place quietly and under the radar in a few governors’ offices and in state legislatures, where both Democrats and Republicans dominate.

The catalyst was the release last fall of a 54-page economic analysis of the first mandatory carbon emissions trading scheme in America, the Regional Greenhouse Gas Initiative (RGGI). The report analyzed the $912 million in auction revenues that Northeast participants raked in from 2008 to 2011. It found that states netted $1.6 billion in economic benefits and created approximately 16,000 jobs by devoting proceeds to clean energy technologies, energy efficiency programs and other economic activities.

Since then, a handful of states, mostly in the Midwest but also in the deep South, have contacted RGGI officials about cap and trade, says Collin O’Mara, secretary of the Delaware Department of Natural Resources and Environmental Control. O’Mara chairs the board of directors for RGGI, Inc., the nonprofit corporation that helps states implement the initiative.

He believes people are confused. “The rhetoric at the national level isn’t matching the experience of states that are taking action. Folks are trying to figure out what’s the truth behind the numbers.”

They’re generally seeking answers to three questions, O’Mara says: How many jobs has RGGI created? What impact has cap and trade had on power plant operators? And, how have states benefited by steering RGGI money into energy-use reduction?

O’Mara declined to list the inquiring states out of concern that outing them would rile opponents and “stop the chance of progress.” Cap and trade, once a cornerstone national energy policy among Democrats and moderate Republicans, has become a target of conservatives, who call it cap and tax and say it’s emblematic of the Obama administration’s ‘big government’ approach.

Because of that scrutiny, Paul Hibbard, vice president of the Analysis Group, the consulting firm behind the RGGI report, says he’s “very surprised” at the interest in the study. State representatives and industry groups across the RGGI region and in California—as well as U.S. Department of Energy officials and federal legislative staff—have frequently brought in Hibbard and colleagues to explain their findings.

Hibbard says the RGGI study is unique because it examines cap and trade strictly from an economic angle. It doesn’t consider environmental impacts or whether the program is crucial for curbing global warming pollution.

“We just looked at the [auction] money and the impact of those dollars. We found that there’s absolutely an economic return for collecting cap and trade revenues. And that’s true almost regardless of how you use them,” he says. That includes in states like New York, which used tens of millions in cap-and-trade money to plug budget gaps.

RGGI launched in 2008 with bipartisan support from 10 states. The program only caps emissions from electric power plants.

Recently it has faced controversy that mimics the national debate. Republican lawmakers and Tea Party groups, led by Americans for Prosperity, have criticized RGGI for imposing heavy costs on power companies and their consumers. New Jersey Gov. Chris Christie withdrew his state at the end of last year. GOP-led efforts in Delaware, Maine and New Hampshire sought, but failed, to exit the pact.

Former Rep. Bob Inglis, a Republican from South Carolina, is floating a “revenue-neutral” cap-and-trade alternative that would return all of the money to consumers, under his new role as head of George Mason University’s Energy and Enterprise Initiative, E&E Daily reported this week.

Hopes in Minnesota, All Eyes on California

Over in the Midwest, Minnesota is one of the states that’s slowly reawakening to cap and trade’s economic benefits, says Ellen Anderson, senior energy and environment advisor to Democratic Gov. Mark Dayton and a former state senator.

Many state leaders recognize “the benefits could be absolutely enormous for us,” she says, but discussions are “not necessarily happening at the highest levels of government—at the moment.”

Minnesota was part of the regional cap-and-trade scheme, the Midwestern Greenhouse Gas Reduction Accord, with five other states and a Canadian province. In 2010, the pact was put on hold indefinitely, after Republicans swept the midterm elections and Congress failed to pass a national carbon trading law.

In Minnesota, Republicans took over the legislature for the first time in nearly 40 years.

“We’re sort of treading water at the moment in terms of the state’s official policy” on climate change and clean energy, Anderson says—with a tinge of hope. She explains that about 20 percent of state legislators won’t run for reelection in the 2012 elections, and says the new class could be much friendlier toward climate initiatives.

“Ask me then [about cap and trade], and I think things will be a lot different.”

What happens in California could be the real game-changer for states reconsidering cap and trade, says Alex Jackson, a San Francisco-based attorney for the Natural Resources Defense Council (NRDC), an environmental group that backs cap and trade, though for now he says most states are in “a holding pattern.”

If California’s scheme, which is slated to launch on Nov. 14, is proven to reduce climate-altering gases and drive economic growth “that’s when we’d expect the narrative to shift and … [other states] to start to get back on the table,” Jackson says. According to a study last month, power plants across the RGGI region slashed their emissions by 23 percent from 2009 to 2011, thanks partly to cap and trade.

California’s initiative is broader than the Northeast model, reaching polluters across the entire economy—from electric utilities and oil extractors to fossil-fuel burning factories. In 2015, the program will expand to include natural gas companies and transportation fuel producers and suppliers.

Projections of first-year proceeds range from $600 million to $1.8 billion and could reach nearly $8 billion a year by 2020. State legislators and environmental officials are still wrangling over how to spend that pile of money.

It’s a problem that many governors would like to have, some experts say.

“If I were a politician in another state, or someone working on the state budget, it would certainly get my attention,” says Derek Walker, director of strategic climate initiatives at the Environmental Defense Fund.

California’s experiment is clearly not stoking envy everywhere.

“Support for cap and trade has only decreased, not increased” in Washington state, says Ted Sturdevant, who directs the state’s Department of Ecology, which backs cap and trade. Washington was one of the founding members of the Western Climate Initiative (WCI), a carbon trading program, but has left that pact along with five other states.

“Will folks revisit cap and trade, or has it been clobbered so hard politically that folks aren’t going to pick it up again? I can’t answer that.” Keeping up the drumbeat on economic benefits may revive the debate, he says when asked.

Andy Ginsburg, administrator for Oregon’s air quality division, which also supports cap and trade, says of his state leaders: “I don’t think anybody has really turned back and looked at it again.”

Ginsburg says he believes Oregon, which also left the WCI, will be able to match California’s global warming emissions reductions, mainly through its proposed low-carbon fuel standard.

“But we won’t have the revenues from the market part of it,” he adds.

Leigh Raymond, director of the Center for the Environment at Purdue University, who has studied cap-and-trade policies since the mid-1990s, believes the allure of those cap-and-trade revenues will eventually prove irresistible.

“[Cap and trade] is going to be attractive to other states, and eventually even the federal government. … It just makes more sense to raise revenue for your state this way.”

He says this will be especially true if cap and trade can be shown to decrease electricity bills, as it has in all RGGI states, which have used proceeds on energy-saving programs to offset price hikes from the program.

“That’s what will eventually bring these policies back into the greater favor,” says Raymond.