Until recently, the term "cap and trade" was used by only a limited few: academics, air quality regulators and the occasional pioneering member of Congress. That has all changed. Now, almost every major media outlet, numerous legislators and even high school students are floating the idea of how the country might develop a system to control carbon dioxide emissions through market incentives. What is "cap and trade" and how is Nevada preparing for the potential implementation of a nationwide cap and trade program? This article tries to address those questions.
"Cap and trade" is the term used to describe a system that (1) places an upper limit on total pollutant emissions (the "cap") and then (2) allows for the buying and selling of emissions credits among individual polluters (the "trade"), in order to (3) slowly reduce the overall pollution level in a cost-efficient manner (the goal). A cap and trade program can exist at the state, regional, national or international level and has been successfully used in the United States since 1990 to reduce sulfur emissions from power plants that cause acid rain. Current discussions at the federal level to implement cap and trade systems are now focusing on greenhouse gas ("GHG") pollutants, most specifically, carbon dioxide. Because carbon dioxide is so ubiquitous being produced by everything from human respiration to automobiles to power plants any proposal to develop a carbon cap and trade program could have a wide-reaching impact on many business sectors.
The basic steps for the implementation of a federal cap and trade program are well established. The government first sets a cap on total GHG emissions nationally and then either distributes or auctions pollution "allowances" to regulated entities. Each allowance represents a right to release a certain amount of carbon dioxide equivalent ("CO2e") into the environment, and the value of each allowance is determined by the total number available. This is a simple supply and demand equation; the fewer total allowances that exist in the market, the more expensive each allowance is.
Valuation of the allowances is important because the goal of the carbon market is to drive through economic incentives the development of innovative strategies to reduce pollution emissions. This occurs through variations in the marginal cost of GHG reduction among various polluters. For example, if it is cheaper for a power plant to implement technology that will reduce emissions rather than purchase allowances in the carbon market, simple economics will drive overall emission reductions. In fact, a power producer may be able to achieve reductions to such a degree that it can sell its allowances to others. The government will gradually reduce the overall pollution cap over time, thereby driving up the cost of individual allowances and further spawning innovation in order to achieve the target of cleaner air.
For a carbon market to be successful in reducing pollution, it must embody a concept known as "additionality." This means that innovations employed by a business to reduce its carbon emissions would not have occurred in the absence of the carbon market. In other words, the emission reductions must be driven by the ever-increasing cost to pollute, not by any other reason.
To ensure that the goal of the cap and trade program is achieved, a number of important factors must be taken into consideration. For example, will the scope of the market be limited to electricity generating facilities or will it also encompass the industrial, commercial and residential sectors as well? If the transportation sector is included, what will be the point of regulation: fuel distributors, individual drivers or somewhere in between? How will allowances be apportioned among sectors? Will the allowances be distributed or auctioned? How will the carbon market be overseen? These challenging questions must be addressed by any proposed cap and trade program to successfully achieve the desired emissions reductions.
Before a federal cap and trade program can be implemented, each state must conduct an inventory of its greenhouse gas emissions, which Nevada has already accomplished. Pursuant to a law passed during the 2007 legislative session, the Nevada Division of Environmental Protection ("NDEP") must complete a GHG inventory every four years. In December 2008, NDEP issued an updated inventory of GHG emissions and a projection of future GHG emissions through 2020. According to that document, in 2005, the most recent year for which historical data is available, Nevada's total statewide emissions of greenhouse gases were 56.3 million tons CO2e, which accounted for 0.8 percent of the GHG emissions nationally. The combustion of fossil fuel for electrical generation and transportation accounted for approximately 78 percent of Nevada's gross GHG emissions.
So far, Nevada has taken the position that the cap and trade framework might not be a good fit for the state. Instead, the Governor's Climate Change Advisory Committee has suggested that focusing on reducing Nevada's carbon "intensity" might be more appropriate. Carbon intensity is defined as GHG emissions per megawatt hour of energy generation. Nevada hopes to reduce its carbon intensity both through the development of renewable energy resources and the phasing out of older less efficient facilities.
A regional GHG cap and trade program, called the Western Climate Initiative, is currently being developed by a number of western states and Canadian provinces. Nevada has chosen to be an observer in this program, rather than an active participant.
Given that various forms of proposed climate change legislation are now making their way through the halls of Congress, Nevada could soon be subject to a federal cap and trade program. Although it is premature to anticipate the scope and reach of any such program, it is important that Nevadans gain an understanding of the general framework of cap and trade systems in order to prepare for their possible implementation and to provide informed comments to state and federal decision-makers on their potential local impacts.
Debbie Leonard is an attorney with the law firm of McDonald Carano Wilson. She works primarily in the fields of natural resource, land use and water law in addition to general civil litigation. Contact her through www.mcdonaldcarano.com or call 788-2000.
