Waxman-Markey: State and Regional Cap-and-Trade Regimes

On Tuesday, March 31, House Energy and Commerce Committee Chairman Henry Waxman (D-CA) and Rep. Edward Markey (D-MA) released a “discussion draft” of the American Clean Energy and Security Act of 2009 – a climate change bill that will serve as the starting point for long-delayed congressional action on the world’s most pressing environmental program.  CPRBlog asked several Center for Progressive Reform Member Scholars to examine different aspects of the 648-page Waxman-Markey bill.  This entry, by Kirsten Engel, looks at how the bill’s cap-and-trade provisions would affect existing state and regional efforts – the “preemption” issue.

Perhaps one of the most-watched issues regarding federal climate legislation is how a cap-and-trade program established by such legislation would mesh with the existing and soon-to-be established state and regional greenhouse gas emission cap-and-trade programs. Currently, the United States has one regional cap-and-trade program up and running – the Regional Greenhouse Gas Initiative (RGGI), which covers ten northeastern and mid-Atlantic states – and several more in the offing. The latter include trading programs under development by California to implement 2006 state climate change legislation, AB 32, as well as a regional program called the Western Climate Initiative uniting seven states (including California) and four Canadian provinces, and a not-so-far advanced Midwest Greenhouse Gas Reduction Accord entered into in 2007 by six states and one Canadian province.

The bill released by Reps. Henry Waxman and Edward Markey, which would indeed establish a federal cap-and-trade program, has some particular things to say about this meshing issue, and they are a little surprising. It is anyone’s guess at this point whether they will be met favorably by the states involved.

The intent of the legislation appears to be to clear the decks of state and regional programs to help a federal cap-and-trade program get up and running unencumbered by the complex issues involved in meshing with such sub-national programs, while, at the same time, allowing such programs to kick in at a later date. Hence the bill does two important things: it provides for the exchange of allowances issued by RGGI and California for federally-issued allowances (Sec. 790, p. 478) and it preempts the operation of any state or regional cap between the years 2012 (the date the federal cap-and-trade program will go into effect) and 2017 (Sec. 861, p. 527).

With respect to the exchange of allowances, the bill requires EPA to establish regulations to govern the exchange of any allowance issued by California or RGGI prior to December 31, 2011 for a federal allowance. Importantly, the bill seeks to make the holders of these state and regional allowances whole by mandating that they receive compensation “sufficient to compensate for the cost of obtaining and holding such State allowances,” which will ensure that firms are not left out-of-pocket for any discrepancy between the average auction price of the state and regional allowances when purchased and the cost of federal allowances when exchanged. (What exactly is meant by compensating for the costs of “holding” state and regional allowances is not explained in the legislation.) The bill provides only for an exchange of allowances issued by RGGI and California and not by any other state or regional cap-and-trade regime. This leaves the participants in the Western Climate Initiative (WCI) out in the cold (or at least with a strong signal not to bother pushing forward with development of their program) as the WCI, in addition to California, is currently aiming to have its cap-and-trade regime up and running by 2012. See Western Climate Initiative, Design Recommendations for WCI Regional Cap-and-Trade Program (Sept. 23, 2008) available here.

The five-year preemption provision will certainly discourage states and regions from pursuing the development of their own regional cap-and-trade programs for the immediate future. One wonders if any of the regions will have an interest in jump-starting their programs after this enforced senescence. In any case, the preemption provision will give the federal cap-and-trade program an opportunity to establish itself and work out any kinks without the additional complications involved in interfacing with a state or regional program. While seeming to guarantee states and regions that they can, in fact, establish their own programs after 2017, by eliminating such programs during the 2012 to 2017 time period, it will also have the effect of ensuring that such subsequently-operative programs work around the federal program, rather than vice-versa.