Obama climate plan stirs cap and trade from deep sleep

A view of the Ravenswood Generating Station, which uses natural gas, fuel oil and kerosene to power its boilers, in Long Island City, New York, on Aug 3.
A view of the Ravenswood Generating Station, which uses natural gas, fuel oil and kerosene to power its boilers, in Long Island City, New York, on Aug 3.PHOTO: EPA

WASHINGTON, United States (Reuters) - Dreams that a cap-and-trade market could become a force for lowering carbon emissions died in the U.S. Senate in 2010, scuttled by politics and a bad economy.

On Monday, cap and trade was revived by the president, acting alone.

President Barack Obama's climate plan embraces cap-and-trade markets as a way to cut power plant emissions blamed for warming the planet.

It rewards 11 states in the U.S. Northeast and California that already have carbon markets by giving them credit for their early actions.

And the plan could incentivise more states, including some in the heavily coal-reliant Midwest, to eventually join in.

"To understate it, there has been a reticence to discuss cap and trade policies in the United States," since 2010, said Tom Lawler, the Washington, D.C. representative for the nonprofit group International Emissions Trading Association.

"Maybe it was dead, maybe it was dormant, but now it looks like the option of choice."

Cap-and-trade markets use the power of capitalism to cut emissions. Power plants that cut carbon pollution under a set limit, either by moving from coal to natural gas or by investing in renewable energy and efficiency, earn credits they can sell to power plants that choose not to make the investments.

As the emissions limit set by government falls over time and the cost of permits rises, market forces are expected to drive overall emissions down.

Mr Obama's climate plan gives states the opportunity to trade carbon credits amongst themselves, without the need for interstate agreements. The Environmental Protection Agency said it is committed to supporting states that want to trade carbon credits.

Mr Jason Bordoff, a former top adviser to Mr Obama on energy and the founding director of the Center on Global Energy Policy at Columbia University, said cap and trade will benefit the economy and the environment "at the lowest cost to consumers and businesses."

There is already a cap-and-trade system in place for traditional smog-forming pollutants like sulfur dioxide, giving regulators and utilities a familiar tool to comply with the Clean Power Plan.

Cap and trade also gives states some flexibility to decide when to run coal and gas plants in order to ensure steady power supplies, said Mr Chuck Barlow, vice-president of environmental policy and strategy at New Orleans-based power generator Entergy Corp.

Whether more states will soon join the group of 10 in the East that trade credits in the Regional Greenhouse Gas Initiative (RGGI) or other states in the West will join California, is an open question.

States have until September 2016 to submit plans to reduce emissions and compliance does not begin until 2022.

Senate Majority Leader Mitch McConnell, a Republican from coal-producing Kentucky, has urged governors from all 50 states to refuse to participate in the Clean Power Plan. A handful have indicated that they will refuse.

Under Obama's plan, states that refuse to form their own programme to meet the emissions targets will be subject to a federal plan that could pressure them to join cap-and-trade markets.

McConnell spokesman Don Stewart said the lack of interstate compacts is the Achilles' heel of the clean power plan. "Without an instate agreement, it's not enforceable so what state is going to sign up?"

But even before Monday's roll out of the rule, some states in the coal-dependent Midwest asked the administration to create ground rules for them to participate in cap-and-trade markets.