When Carbon Is Currency

(By HANNAH FAIRFIELD) - Amid steadily increasing carbon emissions, and a federal government hesitant to take the lead on climate legislation, 10 states have joined to create the first mandatory carbon cap-and-trade program in the United States. They aim to reduce emissions from power plants by 10 percent in 10 years.

Leaders of state environmental and energy regulatory agencies hammered out the detailed model for the program, the Regional Greenhouse Gas Initiative, over the course of three years. The program sets a cap on the total amount of carbon that the 10 states – as a whole – can emit. Starting in 2009, each state will receive a set amount of carbon credits for its power plants, and each plant must have enough allowances to cover its total emissions at the end of three-year compliance periods.

In 2003, George E. Pataki, then New York’s governor, invited governors of 10 other states from Maine to Maryland to discuss a program to cut power plant emissions. All but one of the states joined the program; Pennsylvania has observer status.

Officials have closely watched the European Union, which started its carbon trading market in 2005; analysts say the Europeans have stumbled on some fronts. ”We’ve learned a lot from the Europeans,” said Judith Enck, adviser on environment issues to Gov. Eliot Spitzer of New York. ”The way we distribute the allowances will be vastly different than the European experience.”

To build a carbon market, its originators must create a currency of carbon credits that participants can trade. In Europe, power companies received these credits directly and could buy or sell from one another as needed. But most companies passed the cost of the credits on to consumers even though they received them free – giving the companies windfall profits. Power companies in Britain alone made about $1 billion from free credits in 2005, according to a study by the British government.

Participants in the United States want to avoid that problem by selling some or all of the credits at auction, with the proceeds going to state energy efficiency programs.

In Europe, power companies were not the only businesses to profit from the new carbon market. Because power plants there can use credits earned from offset projects that take greenhouse gases out of the atmosphere (or put less of them into it), businesses wanting to earn offset credits inundated the Europeans with proposals – many of which would have a negligible effect on emissions or were for reductions that would have taken place anyway.

To sidestep that problem, the program here limits offsets to five categories: capture of landfill gas, curbs on sulfur hexafluoride leaks, planting of trees, reductions in methane from manure, and increased energy efficiency in buildings. Power companies can offset 3.3 percent of a plant’s total emissions from any combination of the five categories.

”We saw what happened in Europe, so we limited the categories and set our criteria upfront,” said Christopher Sherry, chairman of the regional program’s staff working group and a research scientist at the New Jersey Department of Environmental Protection. ”We did that so we would have assurance that the reductions actually take place.”

Although Northeastern states have taken the lead in inaugurating a mandatory carbon market, California and some of its neighbors are not far behind. Those states are watching closely; Mr. Sherry and others involved in the 10-state effort are already helping California figure out how best to accomplish its climate plan.

”The idea is to see what everyone else has done, and learn from it,” said Dale Bryk, a lawyer at the Natural Resources Defense Council who has been involved with the Northeastern regional program and California’s advisory committee. ”Let’s not start from scratch.”

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