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Carbon and the Constitution

State GHG policies confront federal roadblocks.

Fortnightly Magazine - April 2009

in the control regions of each of the RGGI states. 48 Those facilities that do not have to purchase allowances in order to operate and sell wholesale power ( e.g., unregulated out-of-state carbon-emitting power plants selling power into an RGGI-regulated state) thus will collect a price for their wholesale power reflecting the cost of RGGI allowances embedded in the highest hourly clearing price paid for power, even though they have no RGGI compliance costs.

Major fights have erupted in California over the allocation and auction of CO 2 emission allowances. One battle is whether allowances will be dispersed without charge to load-serving entities, and if so, whether the traditional load served or the traditional level of emissions should constitute the basis for distribution. 49 The California investor-owned utilities in May 2008 submitted comments to regulators, urging California to allocate carbon allowances to all emission sources based on historical power output, rather than emissions output, employing a uniform GHG baseline. 50 This would favor the award of allowances to less-carbon intensive sources and utilities. Surplus allowances could be sold. Dynegy and other independent power providers in California that operate higher-carbon electricity generators, believe that allowances should be distributed based on historic emissions levels, rather than power output, to “recognize the reliability benefits conferred by such sources,” and the “loss of market value of these resources.” 51 However, environmental groups charge that any allocation based on historic emissions “[g]randfathering ... rewards historical polluters, penalizes early actors, could lead to windfall profits, and asks the biggest polluters to reduce their emissions the least.” 52

The concept of auctioning carbon allowances and capturing substantial payments has been extremely attractive to carbon regulators across the United States. Seven Western states participating in the Western Climate Initiative also recommended that 25 percent to 75 percent of total emission allowances be auctioned in their own proposed regional market design. 53 But several state regulators, including those from California and Washington, also have acknowledged that the states could be legally preempted in their efforts to regulate carbon. 54

Motives for Auctioning Allowances

Environmental officials in the various carbon-regulating states have declared that the rationale for auctioning 100 percent of the carbon allowances is to increase the cost of carbon-emitting power generation and capture of profits as state revenues. In New York, for example, the lead RGGI state, the New York Department of Environmental Conservation (NYDEC) has issued public statements claiming that the decision and purpose of the auction of 100 percent of carbon allocations is to prevent affected electric generators to reduce the rate of return that power generators receive pursuant to their FERC-approved market rates, which NYDEC considers to include “excess” profits. 55 Thus, the auction policy is designed to alter, through state regulation, the “just” and “reasonable wholesale interstate” rates previously established pursuant to FERC-approved tariff or market design. Thus, the auction is designed to impose and regulate carbon costs by altering the market prices at which power from different generation sources trades at the wholesale level from wholesaler to retailer.

Various documents and reports issued by the