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Putting a Price on Carbon

How EPA can establish a U.S. GHG Program for the Electricity Sector.

Fortnightly Magazine - February 2014
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The U.S. Environmental Protection Agency (EPA) is moving forward to establish a Federal Clean Air Act program to reduce the greenhouse gas emissions of the electric power sector. It has already proposed rules for new power generators and will do so soon for existing electricity generators.

The EPA can draw from the experiences of 10 states, representing 29 percent of the U.S. economy, and two provinces, representing 32 percent of the Canadian economy, which have carbon markets in operation valued at over $1 billion. The five-year old Regional Greenhouse Gas Initiative (RGGI) is the first market-based regulatory program in the United States to address greenhouse gas emissions. California and Quebec are now implementing economy-wide GHG reductions programs launching their power sector components a year ago in 2013. 

The states, utilities, and electricity sector have led the way with precedents and innovations from which the EPA can draw. Thirty states have renewable energy or alternate energy standards, and seven states have established voluntary standards, for a total of 37 states. Fuel conversions are occurring in virtually every state, most often as a market response to fuel prices, but often also assisted by market rules and regulatory decisions. At least 25 states have dedicated funding for energy efficiency or energy efficiency resource standards. The effectiveness and efficiency of various programmatic initiatives can be measured and verified as part of the best system of emissions reduction.

Figure 1 - North American CO2 Reduction Programs

The states, utilities, and electricity sector have led the way with regulatory precedent and innovations from which the EPA can draw. Yet how the federal government will incorporate, coordinate with, and build upon these existing initiatives isn’t clear.

The two key questions are: How deep will EPA’s reduction guidelines go? Once we know how deep the regulatory dive will be, the second question is how can utilities, generators, and regulators find the most cost-effective GHG reductions? President Obama’s 2013 climate action announcement and EPA’s recent and pending actions make these very timely questions.

Market-Based GHG Programs

Carbon emission trading has been adopted in 51 countries, states, and provinces, plus five major cities in China. 1 At the beginning of 2014, five major North American programs are aimed at reducing the power sector’s greenhouse gas emissions – namely, RGGI, California’s AB 32, Quebec, Alberta, and British Columbia. Three of the five programs distribute government-issued CO 2 allowances and then require regulated entities to secure allowances or government approved offsets to cover emissions proportionate to their GHG emissions. Alberta’s program is an intensity-based system that requires the purchase of offsets, emissions performance credits, or the payment of fees. The fifth program in

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