Is there no carbon pricing in the USA ?
• Congress is not enacting new climate legislation
(Waxman-Markey, 2009 – not enacted)
• EPA “Clean Power Plan” faces opposition
• “U.S. Leaves the Markets Out in the Fight Against
Carbon Emissions” – Eduardo Porter, New York Times,
July 1, 2015, p.B1
• “A Carbon Tax is Not Feasible or Practical” –
Steven Cohen, Huffington Post, June 8, 2015
• Yes and No – the game is still afoot …
Pew Research Center, “Public and Scientists’ Views on
Science and Society,” January 29, 2015, p.49
US public opinion on upswing re: climate ?
US emissions have been declining
– as China, India rise
Carbon pricing initiatives in the USA –
Toward new national and international regimes
1. Carbon markets
A. Subnational –
i. RGGI (9 states)
ii. California (with links to Quebec, Ontario)
B. National –
1. New climate law? Waxman-Markey bill (2009): passed by House,
but not by Senate (no vote)
2. Environmental Protection Agency (EPA) regulations, under older
Clean Air Act (CAA) – the “Clean Power Plan” (under CAA section
111) and more
C. International – prospects for linking ?
2. Carbon tax?
– Proposals in Congress (e.g. McDermott, Whitehouse, Schatz)
3. Social Cost of Carbon (SCC) for policy analysis
CDC Climat & ADEME, ClimasCOPe, no. 1, April 2015, p.3
Carbon markets and taxes are appearing around the world –
CDC Climat & ADEME,
ClimasCOPe, no. 1, April 2015, p.3
(prices in Euros)
RGGI – 9 states California
Started MOU 2005; trading 2009 Enacted 2006; trading 2013
Target 45% below 2005 level by 2020 (cap
tightened in 2012)
1990 level by 2020; 80% below
1990 by 2050
Emissions covered Electric power; ~ 20 % of ~ 80 mt
from ~168 entities in 2012)
~ 85% of ~459 mt from ~ 450
entities in 2012
Gases covered CO2 CO2, CH4, N2O, HFCs, PFCs,
Allocation 90% by auctions Transition from free to auctions
Offsets Up to 3.3% of compliance; only in
some sectors in the 9 states.
Up to 8% of compliance; only in
some sectors in US. Considering
adding int’l REDD, and Mexico.
Linking 9 states’ markets linked via MOU Quebec; Ontario …; WCI ...
Cost containment Banking. Allowance reserve (10 mt);
trigger price $6, increasing at
$2/year. Auction floor price ($2.05).
Banking. Allowance reserve (4%,
then 7%); trigger price $50,
increasing. Auction floor price
Mandatory; via US EPA; 3:1 penalty Mandatory; 3rd party verification;
Recent carbon price ~ US $ 5 ~ US $ 12
From IETA / EDF / CDC Climat, RGGI Case Study, April 2015, p.13
RGGI market price, 2008-15
From IETA / EDF / CDC Climat, California Case Study, April 2015, p.18.
California auction price, 2012-15
A national climate policy in the USA?
• Obama Administration target in US INDC:
– Reduce overall US emissions 26-28% below 2005
level by 2025
– US-China joint announcement (2014); for an early
advocacy of this path, see Stewart & Wiener,
Reconstructing Climate Policy (2003)
• How to achieve this target?
– New law? In the meantime: under older Clean Air
Act (CAA), US Environmental Protection Agency
(EPA) regulations – section 111 “Clean Power
Plan” and more – following the US Supreme Court
decision in Massachusetts v. EPA (2007)
Massachusetts v. EPA (U.S. Supreme Court, 2007)
• Mass. et al. asked EPA to list GHGs under CAA 202 (mobile sources).
• EPA (in G.W. Bush administration) denied this petition, arguing:
– GHGs are not “air pollutants” under CAA. Too big an issue to be covered
under CAA without clear language (FDA v. Brown & Williamson doctrine).
– CAA is poorly suited to regulating GHGs.
– GHGs are a subject of international negotiations, foreign policy concerns.
• US Sup.Ct. held (5-4): GHGs are “air pollutants” under CAA 202.
– Dissent by Justice Scalia: “air” vs. “atmosphere” ?
– GHGs are presumably also covered under other sections of the CAA.
– EPA must confront “endangerment” finding for GHGs.
• It is unclear when EPA can decline to undertake an endangerment evaluation.
Can EPA set priorities among pollutants under CAA?
– EPA issued Endangerment Finding in December 2009 (Obama admin.).
Upheld in Coalition for Responsible Regulation v. EPA (DC Cir., June 2012).
• EPA’s authority reaffirmed in AEP v. Connecticut (US Sup.Ct. 2011).
– Held: tort/nuisance claims are displaced by EPA’s authority under CAA
U.S. Clean Air Act (CAA)
Enacted 1970, amended 1977, 1990
Some key sections:
• 101 – Purpose
• 108 – Listing “criteria air pollutants”
• 109 – National Ambient Air Quality Standards (NAAQS)
• 110 – State Implementation Plans (SIPs)
• 111 – New Source Performance Standards (NSPS)
– plus existing sources under 111(d)
• 112 – Hazardous Air Pollutants (HAPs) (air toxics)
• 202 – Mobile sources (automobiles, trucks) (also airplanes)
• 115 – International reciprocity
• 615 – Stratospheric Ozone
Major EPA rules on GHGs, so far
• GHG Reporting Rule (2009) (new legislation!)
• Mobile sources: fuel economy standard (2010)
– Under CAA. Hence application of “PSD”; Tailoring Rule
– Airplane emissions: EPA endangerment finding, June 2015
• Electric power – “electric generating units” (EGUs)
– President’s climate action plan, June 2013
– New sources: CAA 111(b) rule, proposed January 2014
– Existing sources: CAA 111(d) rule, “Clean Power
Plan,” proposed June 2014 (… final rule July 2015 ?)
• State plans due in 2016 (later if multi-state)
• EPA review of state plans …
Source: Kyle Aarons, “Carbon Pollution Standards for Existing Power Plants: Issues and Options,”
C2ES, March 19, 2014, p.2.
Source: Kyle Aarons, “Carbon Pollution Standards for Existing Power Plants: Issues and Options,”
C2ES, March 19, 2014, p.3.
(in the USA)
Karl Hausker et
al., “Delivering on
the US Climate
WRI, May 2015,
EPA “Clean Power
Plan” seeks to
help achieve the
US INDC target of
26-28% below its
2005 level by
2025 – by
reducing the US
sector 30% below
its 2005 level by
2030 (one of the
in the blue line
EPA “Clean Power Plan” is based on CAA §111 –
“New Source Performance Standards” (NSPS)
• §111(b) authorizes EPA to set emissions standards for
new and modified pollution sources
– NSPS are set for each source category; within each category,
standards may vary according to class, type, size of source
– NSPS are “performance standards” (not “design
standards”); EPA does not mandate specific technology. An
NSPS “reflects the degree of emission limitation achievable through the
application of the best system of emissions reduction [BSER] which
(taking into account the cost of achieving such reduction and the non-air
quality health and environmental impact and energy requirements) the
Administrator determines has been adequately demonstrated.”
• §111(d) authorizes EPA to regulate existing sources –
– if they would be covered by a 111(b) NSPS if they were new
– if they are not also being regulated under §109 or §112
EPA has proposed 2 rules for GHGs per§111
• New sources: In January 2014, EPA proposed a standard for GHGs
from new electric generating units (EGUs) under 111(b). BSER:
• For natural gas EGUs: emissions rate 1000 lbs/MWh, i.e.
about the same rate as recent new gas EGUs.
• For coal EGUs: 1100 lbs/MWh, lower than recent coal
EGUs, hence requiring carbon capture & sequestration (CCS).
– EPA forecast of impact on cost, and on GHG emissions: zero.
• Existing sources: In June 2014, EPA proposed a standard for GHGs
from existing EGUs under 111(d) (about 1000 plants, 3000 units).
– “BSER”: 4 “building blocks”: coal plant efficiency; shift to gas;
shift to nuclear and renewables; end user efficiency
– State-by-state: targets, implementation plans
– Rate-based targets (emissions per electricity output, tons/kwh)
Questions facing EPA in using
CAA§111 for GHGs
• Legal challenges (after Final rule is issued)
– 111(b) for new sources: coal – is CCS “adequately demonstrated”?
(Energy Policy Act says EPA cannot cite DOE-funded CCS projects.)
– 111(d) for existing sources: Depends on the 111(b) rule? Barred by
112 coverage of EGUs (even if not for GHGs) ? (Two versions of 111 !)
Do the 4 ‘building blocks’ = BSER? Meaning of “source”? State targets?
Constitutional challenges – federalism, takings, etc.
• Policy issues for electric power sector
– National target: 30% below 2005 by 2030 (part of US INDC).
– State targets: vary, ~10% to 70%. Rate-based; mass-based?
– Flexibility within each state to choose abatement options.
– Multi-state plans invited... = Trading markets?
Gina McCarthy EPA Administrator,
Sept. 25, 2014 (remarks at RFF, transcript pp.16-17)
“Well, one of the challenges that we have … is to explain the difference between
regulating under this section of the Clean Air Act and what Congress might do to
adopt a cap-and-trade program or a market-based solution. This is not that. This is
111(d), which looks at what can we do to get some best practices out there to reduce in
this particular sector, which is just the fossil fuel fired plants. …
“Building blocks, and it’s basically shifting to cleaner supplies and getting the waste
out of the system, whether it’s at the facility or more generally, and it’s pretty simple.
We looked at what other states have been able to do, what their progress is, how
they’ve been able to take advantage of it, what kind of pace that it takes to do these
things. And we took a moderate approach to each one [state], so that they’d have
flexibility to take whatever approach they wanted, relying more heavily on building
block two than one than three. And then we gave each state a goal, and that’s how we
articulated the overall reduction we would achieve.
“Now, there are many states that have wanted us to recognize actions that have
happened earlier. And we’re looking at that, and we’ll take those comments very
seriously, but the one caution I would sort of lay down at this point is it’s not going to
look like a cap-and-trade program. This is not about carbon offsets. This is not about
achieving a particular national target. It never was. It is about applying the Clean Air
Act in a way that’s going to be legally defensible, but still be aggressive in terms of
achieving the reductions.” (emphases added)
Carbon prices under the EPA 111(d) “Clean
• EPA forecast of carbon prices in the year 2030
(under Proposed version of rule) ($/ton CO2e):
• State-by-state mode: range from $0 (in California) to
$101 (in West Virginia).
• Multi-state mode: range from $24.64 to $32.77.
• Narrower range of prices in multi-state mode implies
that promoting emissions trading markets across states
would be more cost-effective.
(EPA RIA, June 2014, simulations spreadsheet; Billy Pizer, Duke Univ.)
• Note: the Final Rule may differ (July 2015 ?).
Toward a US national carbon market via 111(d)?
1. EPA’s proposed rule invites multi-state plans
– Trading could occur within several multi-state markets – like RGGI, and
California/Quebec/Ontario. And, they could link among each other.
– Like “clubs” at international level – exclusive benefits? Federal power.
2. Each state plan could allow national trading – without
expressly enacting it – by adopting key “common
elements” (Monast, Profeta, Tarr & Murray, NI PB, March 2015):
– the same unit of compliance as other states (e.g. mass-based)
– a common (or linked) tracking system
– recognizing reduction credits from other regulated sources
– other features not too different among states (e.g. price collar)
3. EPA could adopt a national “FIP” …
4. EPA could issue a Final rule that creates a market …
§ 111(d) and State Implementation Plans (SIPs)
• Under §111(d)(1), EPA must use a “procedure
similar” to §110. (how “similar”?)
• Under §110, each state of the USA must:
– Submit a State Implementation Plan (SIP) to EPA that
provides for “implementation, maintenance, and
enforcement” of the National Ambient Air Quality Standard
(NAAQS) within that state. (But under §111, there are no NAAQS;
instead, the SIPs must achieve the “standard of performance” per the
– Adopt its SIP within 3 years after EPA promulgates NAAQS
(or any revision)
– Adopt emission limitations and other control measures (to
meet NAAQS or other standards)
– Adopt air quality monitoring and reporting systems
– Adopt enforcement mechanisms
Toward a US national market: from SIPs to
Federal Implementation Plans (FIPs)
• EPA could create a national market through a “FIP.”
– Voluntary opt-in (as in NOx trading 1998-2008; CAIR 2005)
– Mandatory (as in SO2 trading market 1990) ?
• §111(d)(2) authorizes EPA to adopt FIPs, if EPA
finds that a state plan is not “satisfactory.”
• Similarly,§110(c)(1) also provides that EPA shall promulgate
a FIP, within two years of:
– (a) EPA finding that the State has failed to submit a SIP, or did not
satisfy the minimum criteria in its SIP, or
– (b) EPA disapproving of a SIP submission, in whole or in part (unless
the State corrects the deficiency and EPA approves the revision).
• “FIP” is defined in§302(y) to include economic
incentives, allowance trading, and auctions.
(Could EPA use other CAA sections ?)
• Why use §111 vs. other sections of CAA ?
– Can EPA use both 111 and 109 (or 112) ? No: 111(d)(1) precludes.
– What about using only 109 ? (NAAQS; cost.) Or 112 ? (MACT; cost.)
– EPA is already using 202 (mobile sources), GHG reporting rule, etc.
• CAA § 115
– Authorizes EPA to address transnational pollution, if:
• Transboundary impacts
• Reciprocity in policies by the affected countries
– Never (?) used. Seems designed for US-Canada reciprocity, but its
language is broader. Parameters remain unclear.
• CAA § 615
– Authorizes EPA to address pollution that “may reasonably be anticipated to
affect the stratosphere, especially ozone in the stratosphere, and such effect
may reasonably be anticipated to endanger public health or welfare.”
– Could include climate, though written for ozone. Parameters unclear.
Social Cost of Carbon (SCC)
• SCC = estimated damage from emitting 1 ton of GHG
– Used in government decision making: BCA of policies, projects
– Used in Canada, France, Germany, Mexico, Norway, UK, USA, …
• USA government development of SCC so far
– US Court of Appeals, 2008: wrong to set at zero
– 2010 SCC: ~ $ 26 (central est. of impact in 2020, at 3% discount rate)
– 2013 SCC: ~ $ 43
• Future development of the SCC
– Need to review methods/models, discounting, foreign impacts, etc., and
update SCC regularly. Pizer et al., Science (5 December 2014).
– Long-term economic growth effects raise SCC further. Revesz et al.,
Nature (2014); Moore & Diaz, Nature Climate Change (2015).
– Extreme tail risks. Cedronsky et al. (2011): raise SCC by 3x.
– Ancillary impacts. Shindell, Climatic Change (2015): adding health, air
pollution, etc. raises SCC from $10-$67 to $27-$150.
SCC used in Benefit-Cost Analysis (BCA) of
EPA 111(d) rule “Clean Power Plan”
Climate Change Impacts (only) Health Impacts (Co-Benefits) of
correlated Pollutants, plus …
Domestic Global Domestic Climate
Climate Change $ 3 $ 31 $ 3 $31
Health Co-Benefits $45 $45
Total Benefits $ 3 $ 31 $48 $76
Total Compliance Costs $ 9 $ 9 $ 9 $ 9
Net Benefits (Benefits – Costs) - $ 6 $ 22 $ 39 $ 67
Benefits and Costs in 2030 (billions of US dollars; using SCC of $43, at 3%
discount rate; domestic climate impacts estimated as 8.5% of global SCC;
midpoint of range of health impacts) (from US EPA, RIA, June 2014, tables
ES-7 and ES-10; and Rob Stavins blog, June 19, 2014).
Source: Carbon Disclosure Project, Global Corporate Use of Carbon Pricing (Sept. 2014).
SCC / carbon price now used by 150+ private enterprises, from $6 - $90:
The Future of Carbon Pricing/Markets?
• Evolving carbon markets
– EU ETS
– USA/Canada subnational and national
– China pilot programs and national
– Others e.g. NZ, Japan, Korea, Kazakhstan, etc.
• Linking across these markets?
– Stewart & Wiener (2003): US-China & EU linking
– Will COP 21 facilitate or impede – help or hurt ?
• SCC: Diffusion around the world ?
– Complement, or alternative, to treaties/COPs