NJ figures in dispute over cap-and-trade success

July 30, 2011 - 11:44 AM

TRENTON, N.J. (AP) — New Jersey's expected pullout from a 10-state pact to reduce greenhouse gas emissions is among the latest developments in a nationwide dispute over whether cap-and-trade programs work and what limitations states should place on energy producers to curb the heat-trapping gases blamed for global warming.

At the crux of the debate is an irony that those with competing priorities are unlikely to resolve: In order for cap-and-trade to be effective, it must come at a price — an added operating cost for energy producers, who then pass it on to the homes and businesses that buy their electricity.

Cap-and-trade programs set limits on the amount of pollution a company can release, require companies to get permits for each ton they emit and allow them to trade emission allowances using the market to set the price. The programs came into practice after the 1990 Clean Air Act established a market-based approach to reducing acid rain.

But opponents say the programs hurt the economy when power plants pass the cost of buying emissions on to customers. They say emissions are dropping not because of cap-and-trade programs but because of the economic downturn and the reduced cost of natural gas, a cleaner source of energy.

Gov. Chris Christie announced in May that by the end of 2012, New Jersey would withdraw from the Regional Greenhouse Gas Initiative. He called the program a failure.

Emissions in the region are down about 30 percent below the cap, and the three-year-old program has generated almost $900 million in proceeds, including $105 million for New Jersey, according to RGGI Inc., the group that administers the initiative. Christie used more than $60 million to ease the state's budget crisis, as officials have in other states.

There also is an excess of available permits, which are selling at just under $2 per ton — the absolute lowest allowed at the quarterly auctions where permits are sold. The number of bidders is steadily decreasing, from 82 at the first auction to just 47 at the most recent one in June. That eliminates any incentive for power companies to lower their own emissions so they can sell unused permits to other companies at a higher price.

"This leads people to think, 'Well, what's the deal with this program? This is a tax,'" said Paul Tesoriero of Evolution Markets, an emissions brokerage firm. "It causes people to question the validity of cap-and-trade."

Almost everyone agrees the initial cap — which was set in 2005 — was way too high. Most expect it will be adjusted down at the next opportunity, in 2012. But program supporters say that is not proof the program has failed, and add that diverting the funds for other uses amounts to impairing the program's success and then blaming it for failure.

"Christie got it right in one respect, which is that emissions are way down, and it's not primarily due to RGGI," said Peter Shattuck, carbon markets policy analyst for the nonprofit Environment Northeast. "Where he makes a jump is saying RGGI is a failure."

The initiative established a long-term framework and sends a signal that unlimited emissions are a thing of the past, he said. Focusing exclusively on emission rates ignores the revenues the pact has generated for clean energy projects, Shattuck and others said.

"There's no question the cap is inflated," said Dale Bryk, director of Air and Energy Programs for the Natural Resources Defense Council. "The cap is not what's reducing pollution. It's the reinvestments in reducing energy costs, energy efficiency and downward pressure on demand."

Xavier Walter of Home Energy Team, a Southampton, N.J.-based energy efficiency firm, said he's hired 12 full-time staff and a half-dozen part-time staff in the past two years as a direct result of funds generated from the permit sales. Walter's group was one of about 225 businesses that signed a July letter to governors in the 10 states urging them not to abandon the pact.

Elsewhere in the United States, cap-and-trade is in a period of uncertainty. California pushed back its planned 2012 implementation of a statewide trading system by one year. A Midwest initiative slated to start in 2012 has been delayed. In February, Arizona pulled out of the Western Climate Initiative, which is to be phased in starting next year.

Federal cap-and-trade legislation failed in Congress last year. And New Hampshire lawmakers voted in March to pull out of the pact that New Jersey is in, but Gov. John Lynch vetoed it, arguing that state funds generated from permits were helping New Hampshire businesses and families cut back on energy use.

"The whole system is not working as it was intended to work. It's a failure," Christie said in announcing New Jersey's pullout.

The Democrat-controlled Legislature passed a bill in June to force Christie to change course, but the Republican Christie is expected to veto that bill, and Democrats don't appear to have the votes to override his veto. Christie has until mid-August to act on the measure.

With a veto almost certain, cap-and-trade supporters are looking at two possible options. One is a rarely used legislative maneuver where lawmakers could gut the regulations Christie's administration will need to put forward in order to implement the withdrawal, by declaring those rules as inconsistent with the Legislature's intent. Only a majority vote would be needed.

The other option has to do with new regulations expected from the federal Environmental Protection Agency in September affecting how much greenhouse gases that power plants can emit. Shattuck said seven of the 10 states have already asked the EPA to substitute their participation in the regional pact for compliance with the federal regulations. That could give Republicans cover to support the pact despite objection from pro-business interests.

"New Jersey is going to have to do something about CO2 for its power plants one way or another, once the EPA moves ahead," Shattuck said. "You have a political out for Christie."

Besides New Jersey and New Hampshire, the pact includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New York, Rhode Island and Vermont.

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Reach Josh Lederman at http://www.twitter.com/joshledermanAP.