Saturday, December 16, 2006

Epic battle shapes up over power-sector emission caps in U.S.
Will a national cap-and-trade system be established in the U.S.? The answer depends on whom you ask. The two areas of the U.S. where a cap-and-trade system is either planned or about to be implemented—California, and the seven northeastern states that formed the Regional Greenhouse Gas Initiative (RGGI)—say yes. Fitch Ratings, a ratings service, says a national cap-and-trade system is imminent. So do a number of high profile senators, congressmen, and governors. And some observers of the public nuisance lawsuits against big emitters predict there will be a landmark ruling against a big emitter sooner or later.


But the devil is in the details, and that’s where those in the power industry who oppose cap-and-trade have the upper hand. Few prospective players agree on the basic rules of the game, even in cap-and-trade areas like the RGGI—although New York has said it wants to sell emission permits at auction rather than handing them out for free. (According to some, freely allocated permits are the reason the European Union’s Emission Trading Scheme had such a bad first year; see my November 12 post).

For example, to whom should emission permits be allocated: electricity distributors or generators? It is far from clear whether this market incentive would be more effective if targeted at one or the other. Who would—more to the point, who should—suck up the cost of permits? How quickly would this de facto carbon tax speed investment in nuclear and/or IGCC? Faster than the incentives the U.S. federal government has already provided, through the EPAct? Why not wait to see those results?

We in Canada need to pay attention to this. In fact, we should be actively involved: we trade electricity with the Americans. Emissions from their generating plants enter our airshed, and vice versa. There could be major commercial opportunities.

This question—allocating permits to generators or distributors of electricity—applies to deregulated electricity markets, where distributors and generators are usually separate companies. But the problem of how best to organize for-profit companies using understandable cost and service incentives has dogged deregulated markets everywhere. One of the biggest problems of deregulation has been figuring out the costs of transmission and distribution. A cap-and-trade system will add a further dimension of complexity. Opponents of cap-and-trade argue, fairly in my view, that governments need to really game these issues through before plunging headlong into creating an emission market.

Complexity becomes an even more powerful card in the case of regulated markets, where generators and distributors are different parts of the same company. Though the Federal Energy Regulatory Commission (FERC) could set rules that favour sales of low-emitting power across state or international boundaries (assuming the current or subsequent administration directed FERC to do so), state governments in regulated areas might have other ideas.

Lobbyists for coal-based utilities are working their federal and state government contacts furiously, sensing a shift in the political balance as a result of the November mid-terms. You can bet one of their main arguments is that cap-and-trade will drive retail power prices up. If this happens (they will surely point out), everyone will blame the government. Does any elected politician want to risk that?

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