Greenhouse Gas Emissions: Changing U.S. Climate

Deck: 

The states are getting into the act on greenhouse emissions, and the power industry is getting more proactive. What policy measures are appropriate?

Fortnightly Magazine - February 2005

A growing number of U.S. utility companies have come out in favor of federal mandatory limits on emissions of carbon dioxide (CO2) from their facilities. Edison International's Chairman John Bryson recently called for a comprehensive national program to address global warming; eight companies constituting the "Clean Energy Group" support national "four-pollutant" legislation that would among other things seek to stabilize carbon emissions at 2001 levels by 2013; and Cinergy has voiced its support for mandatory limits on carbon emissions. Cinergy, which relies heavily on coal, is among the companies named in the landmark public nuisance lawsuit filed last July by a coalition of eight state attorneys general, led by New York's Eliot Spitzer. Furthermore, shareholder pressure has forced Cinergy and other companies to examine their risks related to climate-change regulation. Finally, companies doing business in states with mandatory carbon caps under development, such as those in Regional Greenhouse-Gas Initiative (RGGI) states, would rather have federal regulation extend those limits to the entire industry, thereby leveling the playing field on a national scale.

Proponents of mandatory carbon limits – though increasing in number – still constitute a minority within the utility industry. Most utilities prefer voluntary greenhouse-gas (GHG) emissions reductions, or take the view that CO2 should not be considered a pollutant at all. Yet if the current momentum continues, the utilities calling for mandatory GHG regulation will continue to grow. Shareholder resolutions, litigation, public scrutiny and state actions to regulate GHGs all contribute to this drive. This article provides an overview of the state regulation trend; actions taken by the utility sector to address GHG emissions; and industry views on proposed mandatory GHG caps to be implemented at the federal level.

Overview of State Climate Change Actions

Twenty-eight states have set forth plans to combat climate change by reducing their net emissions of GHGs, implementing policies that vary in scope and stringency. One example: seven states (New York, New Jersey, Rhode Island, Connecticut, Massachusetts, Maine, and Vermont) have adopted or have stated intentions to adopt California's requirement that automakers cut global-warming emissions from new vehicles by more than 29 percent in the next decade. Together these eight states comprise 26 percent of the American auto market, a portion large enough to cause automakers to re-evaluate the efficiency of their fleets on a national scale.1

Electric power generation accounts for approximately one-third of GHG emissions nationally, according to the Department of Energy's Energy Information Administration. Accordingly, in addition to targeting vehicle emissions, much of the recent effort by states has focused on the utility sector. More than a dozen state legislatures have passed renewable energy mandates, which require a specific percentage of electricity produced to come from renewable sources.

In November 2004, Colorado citizens became the first in the country to pass such a mandate by state initiative, requiring major utilities to produce 10 percent of electricity output from renewables by 2015. Twenty-three states collect revenue from utilities to create "public benefit funds" that are used to promote energy efficiency, research and development of new technologies, and renewable energy. In 40 states, citizens can sell electricity generated privately (via solar panels, for instance) back to their utility thanks to "net metering" programs.2

Perhaps more significantly, regional efforts that transcend state and even international borders also are taking place. At a recent Capitol Hill roundtable organized by the Sustainable Energy Institute (SEI), Josh Bushinsky of the Pew Center on Global Climate Change identified regional initiatives now under development (see Figure 1).3 In an effort initiated by New York Gov. George Pataki in 2003, nine Northeastern and Mid-Atlantic states (with two more observing), as well as five Eastern Canadian provinces, are working to develop a regional CO2 cap-and-trade program by April 2005 as a part of their broader cooperation on climate change. This Regional Greenhouse Gas Initiative (RGGI) aims to reduce GHG emissions to 1990 levels by 2010, and 10 percent below those levels by 2020. As Franz Litz of the New York State Department of Environmental Conservation stated at the SEI roundtable, these nine states are equivalent to the world's third-largest economy and account for more than 3 percent of world GHG emissions.

Regional efforts are ongoing in the West as well. In 2003, the governors of California, Oregon, and Washington announced plans to coordinate actions such as development of renewable energy technologies and accounting methods for GHG emissions. In June 2004, the Western Governors' Association unanimously accepted a proposal by Gov. Arnold Schwarzenegger of California and Gov. Bill Richardson of New Mexico, calling for the 18 states represented by the group to generate 30,000 MW of electricity from renewable sources by 2015 and to improve energy efficiency by 20 percent by 2020. Although specific policies have yet to be implemented, a working group has been formed to evaluate these proposals and provide recommendations in the next two years. In addition, the Western governors are developing a renewable energy tracking system that will facilitate the trading of renewable energy credits. The Canadian provinces of British Columbia and Alberta are collaborating in the development of this system.

International outreach by states is not limited to collaboration with Canada. Dialogue is ongoing between designers of emissions trading systems for RGGI and the European Union. Anticipating future emissions trading between the two regions, policy-makers are motivated to consider compatibility issues as they design their cap-and-trade programs.4

States also have joined forces in litigation against the utility industry. California, Connecticut, Iowa, New Jersey, New York, Rhode Island, Vermont, and Wisconsin filed suit in July 2004 against the country's largest emitters of CO2, a group of five utility companies responsible for 10 percent of the nation's annual CO2 emissions.5 The suit, based on the common law principle of public nuisance, is the first filed directly against utility companies for CO2 emissions and will seek emission reductions rather than financial penalties.

Bushinsky described the impact of these state actions at the SEI event, noting that the policies have spurred research and investment in new energy technologies and served as testing grounds for future policy. However, Bushinsky noted that the emergence of diverse state regulations may prove burdensome to utility companies operating in numerous states. He also added that the absence of federal regulation combined with the long capital-planning cycles faced by utilities create uncertainty for those making investment decisions. Bushinsky concluded that federal GHG regulations would benefit not only the environment but the utility industry as well.

The current patchwork of state regulation could create "leakage," the tendency of companies to move power generation to states with more lenient emissions requirements. State policy-makers also are challenged by the regional nature of energy markets as they set out to design effective policy. California, for example, imports over 22 percent of its power. Reducing California's contribution to climate change will require policies that reach beyond state lines. Regional efforts, such as RGGI, demonstrate attempts to address these issues.

Industry Responses

Though state GHG regulations are still emerging, some of America's largest utilities already are making voluntary efforts to cut emissions (see Figure 2). What's more, these companies come from a variety of quarters in terms of their fuel generating mix (see Figure 3). Speaking at the SEI roundtable, industry representatives identified state regulation and pending litigation as just two of the many motivations utilities have to reduce GHG emissions. Brent Dorsey, director of Corporate Environmental Programs at Entergy, said Entergy hopes state efforts like RGGI will serve as templates for a more universal approach. He added that Entergy believes an effective GHG federal policy would establish a reasonable cap on GHG emissions, equitably distribute emission allowances, create tradable credits that allow market forces to determine the most efficient fuel mix, and provide offset mechanisms that will allow for industry growth in a sustainable manner. Michael Bradley of the Clean Energy Group (CEG), a coalition of eight electric generating and distribution companies, said momentum is building for federal regulation of GHG emissions. Bradley stressed that state and regional efforts should be stepping stones towards federal action. He noted CEG's support for the Clean Air Planning Act (CAPA), a comprehensive four-pollutant plan sponsored by Sens. Tom Carper, D-Del., Lincoln Chafee, R-R.I., and Judd Gregg, R-N.H., which among other things would seek to stabilize carbon emissions at 2001 levels by 2013.

Desire to decrease the cost of future regulation has been an important incentive for companies to act voluntarily. By reducing emissions early and more gradually, these companies will be able to adjust to future regulations at lower cost. Insurers and investors, who are increasingly focusing attention on the risk that future regulation poses to utility companies, view early action favorably.

In addition, setting emissions targets encourages companies to "get in on the ground level," gaining knowledge of energy markets and technologies that are likely to become more prominent in the future. Even if a utility itself is not regulated, it may soon be able to sell its emissions reductions to companies regulated elsewhere through emissions trading markets. For instance, AEP, a large Midwestern coal user, is a founding member of the Chicago Climate Exchange, a pilot project that coordinates multi-sector trading of GHG emissions. In addition, utilities that actively engage in state efforts to address climate change, such as RGGI, play an influential role in policies that may someday serve as blueprints for federal regulation.

Many of these benefits, however, depend heavily on the likelihood of mandatory carbon limits and the timing of that legislation. In response to shareholder pressure, TXU, the country's fifth largest emitter of CO2, recently released a report detailing its decision not to undertake voluntary GHG emissions reduction measures. While it acknowledged many of the benefits described above, the company found that costs of voluntary measures were not warranted due to the high degree of uncertainty surrounding GHG legislation.

A company statement on the decision reads: "Whether an investment now would be justified depends importantly on timing-the time it would take to implement control options as well as the likely timing of any mandatory program."

TXU found that until carbon constraints were on the more immediate horizon and the specifics of those constraints could be more accurately predicted, investment in emissions reductions is too risky. TXU also fears that early reductions will result in lower emissions allocations under a future cap-and-trade program-i.e., no credit for early action. In addition, the company warned that the cost of voluntary reductions would not be recoverable in the market, and would instead be borne by shareholders in the form of reduced company profits.6 Regulatory uncertainty also has been cited by Duke Energy to explain its choice not to undertake voluntary emissions reductions.7

The limitations of the current regulatory environment were highlighted by Ethan Podell, former senior vice president at the Chicago Climate Exchange, in recent testimony before the Senate Committee on Commerce, Science, and Transportation.8 At present, only Massachusetts has instituted a mandatory CO2 cap-and-trade program, while outside that state steps to reduce emissions are being taken on a voluntary basis. Only those companies with prospects to sell allowances are acting, Podell stated, while potential buyers "are not yet prepared to join a voluntary cap-and-trade program." Thus, while voluntary measures by the utility industry demonstrate the ability to reduce emissions, and state regulations address climate change in a piecemeal manner, it appears that significant reductions in U.S. GHG emissions will require federal legislation that mandates participation.

The Debate Reaches Capitol Hill

As noted above, though still in the minority, a growing number of U.S. utilities now favor mandatory federal carbon caps. Shareholder resolutions, litigation, public scrutiny, and a patchwork of state actions to regulate GHGs all contribute to this drive. State policies in particular have the potential to affect utility views on federal action by:

  • Creating a clearer picture of the form of future federal regulation, thus reducing investment uncertainty;
  • Increasing demand for emissions reduction credits, thereby making emissions markets more efficient and less risky. The potential for financial gains in these markets increases incentive for utilities to voluntarily reduce emissions, regardless of their regulatory status;
  • Shortening the time period in which utilities expect federal action, thereby making investments in cleaner technologies more valuable in the short term; and
  • Encouraging companies operating in carbon-constrained-and mostly deregulated-states to push for federal regulation, while rate regulators in states without carbon constraints (which are largely regulated states) may be increasingly willing to accept the costs of carbon constraints, which can be passed on to ratepayers.

State measures to address climate have not, of course, gone unnoticed by policy-makers on Capitol Hill. As Alexandra Teitz, minority counsel at the House Committee on Government Reform, noted at SEI's roundtable, there is a history of state policies acting as catalysts for federal legislation, serving as policy testing grounds for legislators. But perhaps more important, Teitz added, state action creates a more favorable political climate for action at the federal level.

In the case of climate-change policy, it is too soon to tell if the state actions will prompt federal measures. The Bush administration recently announced its intention to push its "Clear Skies" proposal-addressing the power sector's emissions of SOx, NOx and mercury-through Congress early this year. The proposal does not include limits on GHG emissions.9 The chairman of the Senate Environment and Public Works Committee, Sen. James Inhofe, R-Okla., has committed to working with the president to pass Clear Skies and has been one of the harshest critics of climate-change legislation.10 Speaking at the SEI roundtable, John Shanahan, majority council on the Environment and Public Works Committee and representative for Sen. Inhofe, warned that "those who say the science is behind this are misleading us."

At the same time, two bipartisan bills-the Carper-Chafee-Gregg bill and another bill sponsored by Sens. Jim Jeffords, I-Vt., and Susan Collins, R-Me.-would impose limits on the power sector's emissions of carbon in addition to the other three pollutants. Meanwhile, Sens. John McCain, R-Ariz., and Joseph Lieberman, D-Conn., have vowed to reintroduce their bill, the Climate Stewardship Act (S.139), in the new term (following its 43-55 defeat last year).11 That bill targets all industries-not just the power sector-and would establish a cap-and-trade system for the nation's largest emitters. Finally, Sen. Chuck Hagel, R-Neb., intends to introduce an additional proposal in early 2005, and he conferred on the subject with British Prime Minister Tony Blair last December.12

At this time there is only speculation as to the second-term agenda of the Bush administration with respect to climate change issues. Most bets are that the administration intends to continue emphasizing the development of technologies and voluntary actions to cut emissions, and to reject the regulation of carbon and any international commitments to cut emissions.

But it is worth noting that Jeffrey Holmstead, EPA assistant administrator for air and radiation, told a coal industry conference last year that "there in some point in the future will be a carbon-constrained world," and that uncertainty regarding government policy on GHGs has "got to be frustrating for business people who are trying to anticipate" the future regulatory landscape. Depending on the degree of interest from industry, which appears to be increasing for the reasons cited earlier, pressure on the administration to take action on carbon could build. As the Wall Street Journal editorialized critically on Dec. 13, 2004, just as the COP-10 meeting in Buenos Aires got under way, there is a "budding corporate enthusiasm for mandatory reductions in greenhouse gases" and that "big business becomes a lobby for CO2 regulation."13

But for the moment the action is in the states, and the prospects for federal movement may depend on the actions of influential state governors like Arnold Schwarzenegger of California and George Pataki of New York.

 

Factors affecting power-sector attitudes towards climate change measures include:

  • State policies designed to cut GHG emissions
  • Litigation by states seeking GHG emissions reductions
  • Shareholder resolutions to disclose risk posed by climate change and by potential non-compliance with future requirements
  • Pressure from insurance companies to reduce risk
  • Prospects for lower bond ratings as financial analysts evaluate environmental risk exposure
  • Desire to "level the playing field" by companies operating in GHG-regulated states

[Editor's Note: Recently, the Sustainable Energy Institute convened a panel of federal and state officials, as well as utility sector and non-profit representatives, to share their views on the emergence of state-level regulations limiting GHG emissions and the implications for the utility sector. This article was based in part on the views expressed at the event. See http://www.s-e-i.org/september2004.html.]

 

Endnotes:

1. Danny Hakim, "Several States May Follow California's Lead on Cars," International Herald Tribune, Saturday-Sunday June 12-13, 2004, p. 15.

2. The description of state policies is based largely upon a recent report by the Pew Center on Global Climate Change: Climate Change Activities in the U.S.: 2004 Update, pp. 9-17.

3. From Josh Bushinsky, Pew Center on Global Climate Change, "Implications of State Climate Change Policies for the Utility Sector," presentation to Sept. 24, 2004 SEI Roundtable.

4. Under the Kyoto Protocol, EU countries will not be able to earn credit for emissions reductions in the U.S. However, regulated American companies may be allowed to buy emissions credits from the EU.

5. Utilities named in the suit are AEP, Southern Co., Tennessee Valley Authority, Xcel, and Cinergy.

6. For TXU's complete white paper, see http://www.txucorp.com/envcom/reports/Env_Study100104.pdf.

7. See Global Climate Change: Position on State, National, and International Policy. http://www.duke-energy.com/company/ehs/policies/gcc/.

8. Testimony delivered Oct. 1, 2003. Subject of hearing: McCain-Lieberman Climate Stewardship Act.

9. Juliet Eilperin, "White House to Push 'Clear Skies' Legislation; EPA Rule Put on Hold as Bush Seeks Bill," The Washington Post, Dec. 14, 2004, p A3.

10. Andrew Freedman, "Climate Change: Sen. Inhofe Denounces Climate 'Alarmism' as Clear Skies Debate Looms," Energy and Environment Daily, Vol. 10, No. 9, Jan. 6.

11. Andrew Freedman, "Climate Change: Stevens, McCain Sound Alarm Over Arctic Warming," Energy & Environment Daily, Vol.10, No.9., Nov. 15, 2004.

12. Robert G. Kaiser, "The Political Veteran; He Survived Vietnam and Won the Senate. Could Chuck Hagel Take the White House?," The Washington Post, Nov. 15, 2004, p. C1.

13. "Kyoto 'Capitalists'," The Wall Street Journal, Dec. 13, 2004, p. A16.