Sustainable Life • Deal to 'cap and trade' regional emissions could get look by '09 Legislature
by: JIM CLARK, David Van’t Hof, sustainability and renewable energy policy adviser to Gov. Ted Kulongoski, is helping to develop a “cap and trade” program with the Western Climate Initiative to regulate carbon emissions in the region.

Last Thursday, a hotel in downtown Portland was temporarily the center of the global warming fight for the western United States and Canada. The single topic that more than 500 particpants tossed around all day was a concept that merges bottom-line economics with the battle against climate change.

The concept, called 'cap and trade,' would mandate a limit on industrial greenhouse gas emissions by equating them with credits that can be traded on the open market.

And it could be coming to Oregon soon. Thursday's event at the downtown Hilton was the first stakeholder meeting of the Western Climate Initiative, an intergovernmental group co-founded by Oregon Gov. Ted Kulongoski to address climate change.

A primary focus of the group is designing a regional cap-and-trade program that will be presented to the Oregon Legislature when the 2009 session starts next January. If the Legislature approves the program, said David Van't Hof, the governor's sustainability and renewable energy policy adviser, the earliest it could be launched would be 2010.

'This thing has the potential to reach out and touch everyone in Oregon in one way or another,' said state Rep. Chuck Burley, R-Bend, who attended the stakeholder meeting.

While a program still is being developed, a range of the state's carbon dioxide emitters could be required to participate, from large utilities like Portland General Electric to manufacturers like Intel Corp. The costs, both to companies and, by extension, to customers, are unknown.

What is cap and trade?

It's a market-based mechanism designed to keep emissions of certain pollutants - or, in the case of the current trend, greenhouse gases associated with global warming - below a set level.

The goal is achieved like this: Credits based on various sources' carbon emissions are released onto an open market where they are bought and sold by participants in the cap-and-trade program, usually larger players in the industrial and power sectors. Those who exceed the caps would have to buy credits on the open market to comply.

The concept is not a new one. In the 1980s, acid rain - caused by sulfur dioxide and nitrogen oxide emissions primarily from coal plants - was degrading forests, killing fish and compromising human respiratory systems.

To get coal-fired power plants to reduce emissions of the pollutants, the Environmental Protection Agency mandated the Acid Rain Program, which phased in the trading of an allotted amount of pollution credits with a goal to cut emissions in half.

Companies could decide for themselves how to clean up their operations and those that continued to exceed caps were fined.

The EPA said the program surpassed pollution reduction goals while also generating money. It now is seen by many environmentalists and economists as a proven way to use the market to protect the environment.

The model now is being used to try to combat global warming.

In addition to credit trading, there is another, more abstract component in play: carbon offsets.

Whereas allowances can be used in a given market as a direct credit for emissions, offsets are less direct. Essentially, they are investments in projects like tree-planting or renewable energy projects that are believed to counter carbon emissions. Those offset projects usually are outside the geographic area covered by the caps.

For example, if a company wants to offset a ton of carbon dioxide that it is emitting, it may invest in a tree-planting project that will suck a ton of carbon dioxide out of the air.

The carbon offset market currently is unregulated, but last week the Federal Trade Commission held its first public hearing exploring the validity of offsets.

Programs taking hold

In recent years, problems have emerged with both voluntary and mandatory cap-and-trade programs.

The Chicago Climate Exchange, a voluntary cap-and-trade system that started in 2003, has been criticized for not better regulating the carbon offsets that are allowed as part of the program.

And the European Union has been staggering through the infancy of its government-mandated Emission Trading Scheme, which kicked off in 2005 and ran into problems resulting from the system's approach to setting the caps and distributing the allowances.

But the markets continue to develop. Last year, 10 northeastern states created the Regional Greenhouse Gas Initiative, the first mandatory cap-and-trade system in the United States to focus on reducing greenhouse gas emissions.

The program mandates electric power plants to reduce emissions by 10 percent by 2020 through the use of both credit trading and offsets.

In the absence of federal action, the West may be next, and likely will be looking at a more economywide program, Van't Hof said.

The Oregon Department of Environmental Quality, as directed last year by Kulongoski, is writing rules that will define who will be required to report greenhouse gas emissions.

When solidified, the rules most likely will apply to most of the 1,200 sources in the state already regulated for air pollution.

Utilities already report their emissions, but the Oregon Rural Electric Cooperative Association has expressed concern about additional costs that small power companies would incur should they be required to comply.

Emissions reporting is key to a cap-and-trade system, since there must be a way to track and verify cap compliance.

Approval's still far off

Last fall, New York City Mayor Michael Bloomberg came out against cap and trade, joining the voices of economists and politicians who prefer a carbon tax imposed on the largest emitters of greenhouse gases.

Van't Hof said that caps should encourage an entrepreneurial spirit and create economic opportunity in the region.

'We want to create as much opportunity for innovation as possible,' he said.

As participants shoulder the cost of compliance, consumers are likely to feel their pain.

Since electricity consumption now accounts for about 40 percent of carbon emissions nationally, utilities will be challenged with staying below their caps; whether they choose to buy credits or invest in lower-emitting alternative power supplies, they will be spending money.

While most details still are unresolved - who will be required to participate, what the caps will be, what role offsets will play - Van't Hof said a proposal is scheduled to be finished by August and taken to the Legislature next year.

Other initiative members - seven states and two Canadian provinces - will decide whether to join the regional program.

Burley says it's too early in the design process for him to know whether he would support a regional cap-and-trade program.

'We have to pay close attention to the potential impacts on our state economy,' said Burley, who voted against last year's Renewable Portfolio Standard, due to his concern about energy costs. The standard passed and requires utilities to obtain a quarter of their energy from new renewable sources by 2025.

'Our members are concerned about global warming,' said John Ledger, vice president of Associated Oregon Industries, the largest comprehensive business association in the state, with about 1,700 members, more than 300 of them manufacturers. 'Everybody knows something's got to be done. But it's got to be something that works.'

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