Friday, February 01, 2008

Emissions cap-and-trade schemes crisscross North America: which scheme will actually reduce emissions?
Three major state-level emission control initiatives have popped up in the U.S. Several Canadian provinces are involved. British Columbia and Manitoba are part of the Western Climate Initiative (WCI). Manitoba is also part of the Midwestern Greenhouse Gas Reduction Accord. And Ontario and New Brunswick are official observers of the Regional Greenhouse Gas Initiative (RGGI).

Meanwhile, U.S. state governors are looking into merging the three climate pacts.

Unifying these pacts will be a challenge. RGGI focuses only on the electricity generating sector, while the other two cover all sectors.

RGGI’s is the best approach. Focusing on power generation is the most direct and fastest route to massive emissions reductions, as Ontario’s 15 million tonne example has shown. Reducing the emission intensity of power generation, and then shifting more fuel end-use to electricity—for example, plug-in hybrid cars—is the way modern societies will dramatically drop their carbon output.

Will RGGI actually lead to emissions reductions without ruining the economies of the ten states it covers? There are three promising signs that the answer is yes—but only if the proceeds of carbon permit sales go to building new nuclear plants.

The first promising sign is in the form of the Republican front-runner in the U.S. presidential race. John McCain supports cap-and-trade, with auctioning of carbon permits. (His main rival, Mitt Romney, took Massachusetts out of RGGI when he was governor.) McCain thinks the auction proceeds should go, in part, to new nuclear plants, which he views as essential to any credible climate change strategy.

Second, the recently passed Energy Independence and Security act (H.R. 6)
included a provision that grants credits for nuclear-generated electricity when it is used to power electric vehicles. This builds incentives into that fuel-shift I mentioned above.

The third promising sign is a call by Barclays Capital for “the broadest possible participation [in RGGI] by as many players as possible.” Barclays says “it is extremely important that allowance markets are liquid, so that forward markets will develop, so they will be able to lock in their future RGGI allowance costs.”

For forward purchasing of carbon permits to have the intended effect, permits must be available on a scale that interests major investors. This means they must be based on utility scale, zero-emission, dispatchable power. Nuclear is the only generation technology capable of achieving this.

I predicted last year that effective carbon caps could spur a restructuring of utility ownership in the U.S. Some coal-fired utilities operating under serious cap-and-trade rules will end up looking like Ontario Power Generation, which owns 6,400 megawatts of coal-fired capacity and a roughly equivalent amount of operating nuclear capacity.

The question is, who will buy whom.


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