Setting up carbon trading systems will for most US states be the strategy of choice for complying with the EPA’s Clean Power Plan, say policy experts involved in state regulatory processes.

The majority of states are likely to pursue carbon markets to help them meet the CPP rules, which set 2030 emissions intensity targets for each state’s electricity sector but offer a variety of alternatives for meeting them.

“It seems there’s a trend toward mass-based trading,” said Tom Lawler, who heads up the US office of the International Emission Trading Association.

He was referring to the buying and selling of tonnes of CO2e, versus a rate-based approach that mandates trade in kilowatt hours of carbon-free generation.

“The EPA did a lot of homework for states in terms of figuring out what the mass-based targets would be for each of them,” Lawler said, adding “I haven’t come across any states that are seriously contemplating rate-based trading.”

Observers involved in the planning process in several states told Carbon Pulse the mass-based approach – which translates the 2030 intensity targets into absolute emission values to create an allowance trading market like that of the EU – will win out due to it being easier and cheaper to implement.

In addition, states that choose the rate-based approach would be excluded from carbon markets because the units are incompatible, although they could trade with other rate-based programmes.

Regulators at federal and state levels continue to remain neutral as to the optimal path for compliance, while state officials insist they are evaluating all potential policies including carbon taxes or a rate-based approach.

The CPP aims to slash emissions from the US power sector by 32% below 2005 levels by 2030, and forms part of a wider national effort to cut overall US greenhouse gases by 26-28% during the same timeframe.

EXISTING SCHEMES

Gabe Pacyniak, mitigation program manager at the Georgetown Climate Law Center, said states have been able to see the benefits of existing mass-based programmes, for example RGGI in the northeast US and California’s market, which is linked to Quebec’s.

“Analysis has shown the cost-effectiveness of those programmes. There is interest from states in exploring that option,” he added.

Energy policy consultant Franz Litz also pointed out that some popular measures to cut state emissions, such as retiring old coal plants, are easier to implement under a mass-based approach.

The EPA compared rate- and mass-based approaches in an internal Rulemaking Impact Analysis, finding that mass-based would be cheaper to implement. Litz said states are conducting their own versions of this analysis to help guide their decisions.

RULE CHANGES

Meanwhile, the 10 states with existing carbon markets may have to change their rules because the schemes only cover emissions from the power sector or they allow the use of offsets.

Though California is on track to meet the EPA targets through emission-cutting measures achieved by its many non-carbon market policies, IETA’s Lawler said the state may still attempt to “redo” its economy-wide programme to comply with the EPA model.

“Given how it’s meeting the targets even without emissions trading, California would presumably be long in an EPA-compliant carbon market. From a leadership perspective, regulators could use that long position as a carrot to try and help neighbouring states come onboard.”

Lawler suggested California could “tell Wyoming or other coal-heavy states ‘joining in a programme with us could make compliance less expensive for you’.”

But another analyst who asked to remain anonymous offered the opposite argument, pointing out that regulators in environmentally-ambitious RGGI states and California could “wall-off” their programmes in order to set internal targets beyond the CPP’s requirements.

Trading with states that have lower targets decreases the ambition of the market’s overall cap, so states with the highest carbon reduction targets would want to link with others that have similar goals.

In any case, the EPA’s mass-based “model rule” – a default option that states can choose to implement, or that will apply automatically if they fail to present their own plan in time – allows for the trading of emission allowances.

“The best case scenario is that all states simply follow the mass-based model rule programme so there’s a de facto national carbon market,” Lawler said.

By Lisa Zelljadt – news@carbon-pulse.com