Michigan GREEN - Cap-and-Trade Issues

March 16, 2009

It may seem contradictory. But according to both industry and environmental groups, the discrepancies in policies can be explained. At issue: cap-and-trade.

Those strategies use the free market to reduce air emissions. And while the Obama administration supports such an approach when it comes to cutting carbon dioxide (CO2) emissions, it does not do so as it relates to mercury emissions. Both issues have risen to the top of Washington's agenda, raising an obvious set of questions as to why cap-and-trade may be appropriate in certain areas but not in others.

Let's start with mercury. Under the Bush administration, utilities that failed to meet restrictions could buy credits from other power facilities that complied with pollution limits. That regulation, enacted in 2005, was overturned last year by a federal appeals court in Washington, D.C. It said that the U.S. Environmental Protection Agency had violated the Clean Air Act by refusing to make mercury reductions mandatory.

Utilities appealed that decision to the U.S. Supreme Court, which just recently declined to hear the case. Obama's Environmental Protection Agency has said it would write new rules that would take effect around 2014 to restrict mercury emissions.

Environmentalists applaud that position, saying that cutting-edge public policy pushes forward utilities by giving the vendors who create the technologies the certainty they need to bring products to market. While cap-and-trade is used to curb sulfur dioxide emissions and is under discussion with respect to CO2, environmental groups say that it won't work with mercury. That's because mercury has a greater potential to fall back to earth and place prospective "hot spot" communities at risk.

"The biggest difference between CO2 and mercury is that mercury is both highly toxic and known to settle relatively close to its smokestack of origin," says Frank O'Donnell, head of Clean Air Watch. "So a cap-and-trade system for mercury! control would be cheaper than limiting emissions from every power plant -- which is why industry favored it -- but could leave 'hot spots' of toxic mercury near specific power plants. The Bush administration plan was both weak and slow off the mark. We believe a far more effective, although more costly, approach would be to require each plant to reduce emissions by 90 percent -- something that technically can be done today."

By contrast, O'Donnell says that CO2 releases have no such affiliated "hot spots." A ton of CO2 from the midwestern United States has the same planetary effect as a ton of it from China, he says. Cap-and-trade for CO2 would not just achieve notable emission reductions, he adds, but it could also be implemented in a cost effective way. And that's why most environmental groups favor cap-and-trade for those releases, he adds.

Contentious Polices

Creating a market-based regime for cutting CO2, however, is just as contentious as the one for mercury. The Obama administration is distinguishing itself from that of its predecessor by favoring such an approach.

The Democratic leadership is now crafting an energy package that is expected out by summer. Part of the bill will include cap-and-trade provisions on CO2 beginning in 2012. According to Obama's 2010 budget, the effort will bring in $79 billion in 2012 from selling credits to industry -- an amount that would hit $646 billion in 2019. The president furthermore says that a cap-and-trade proviso would reduce such emissions by 14 percent by 2020 and by 83 percent by 2050, all based on 2005 levels.

Many industrial concerns are worried that cap-and-trade will cause electricity prices to rise and that it will hurt the nation economically. Duke Energy's Chief Executive Jim Rogers, who supported Obama and who backs cap-and-trade, fears that if the credits are auctioned off -- as opposed to initially given away -- then it would cause electricity rates to jump 40 percent in some regions. Research firm, Point Carbon, adds that by 2020 electricity prices could increase by 7 percent.!

The cap-and-trade program for CO2 is modeled after an existing -- and effective -- one to cut sulfur dioxide that was enacted in 1990 Clean Air Act under the elder President Bush. The limit is now set at about half of the amount of sulfur (the leading cause of acid rain) released in 1980.

"There's a fundamental difference between CO2 and the other pollutants," says Jeff Holmstead, former head of EPA's air office. "People have generally assumed you could take cap-and-trade and scale it up to CO2. The biggest difference is that when cap-and-trade was implemented for acid rain, it was to get power plants to install pollution controls. All of industry collectively aims to put in pollution controls for all types of releases with the biggest plants but to do so in a realistic time period. Most folks do not believe it is possible to phase out current power plants and put in new ones in the kind of time frame -- at a reasonable cost -- that people are talking about."

Public-private sector partnerships are underway to commercialize both new mercury controls as well as carbon capture and sequestration technologies. The National Energy Technology Laboratory, for example, has field-tested concepts that it says can achieve at least 50 percent reductions in mercury emissions based on 1999 levels. At the same time, the government agency is actively working with private businesses to create zero-emissions power plants, which can also bury CO2.

While industry would prefer to wait until the technologies to curb power plant emissions are widely available before new rules would take effect, the Obama administration generally disagrees. Instead, it reasons that new mercury and CO2 laws will create certainty and thus permit technology developers to move forward. That, then, will form the next wave of jobs and usher in the tools to help clean the environment.

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