Greenhouse Gas Reductions: California Action and the Regional Greenhouse Gas Initiative

Greenhouse Gas Reductions: California Action
and the Regional Greenhouse Gas Initiative
Updated August 31, 2007
Jonathan L. Ramseur
Environmental Policy Analyst
Resources, Science, and Industry Division

Greenhouse Gas Reductions: California Action and
the Regional Greenhouse Gas Initiative
Summary
In the absence of a federal program requiring greenhouse gas (GHG) emission
reductions, a growing group of U.S. states are taking action in this arena. Significant
actions have been undertaken in California and by a coalition of states from the
Northeast and Mid-Atlantic regions.
California has undertaken several initiatives that seek to reduce GHG emissions.
In 2004, the state issued regulations to reduce GHG emissions from motor vehicles.
At least 14 other states have indicated that they plan to implement California’s new
vehicle requirements. In 2006, California passed two climate change statutes. The
first establishes a statewide cap on GHG emissions. The second, once it becomes
applicable, effectively limits the use of coal-generated electricity in California. The
state has also taken action to reduce the carbon intensity in its transportation fuels.
The Regional Greenhouse Gas Initiative (RGGI), a partnership of10 Northeast
and Mid-Atlantic states, sets up a cap-and-trade system aimed at limiting carbon
dioxide emissions from power plants. The cap is scheduled to take effect in January
2009 and cap carbon dioxide emissions at 188 million short tons through the end of
2014. In 2015, the cap would begin to decrease, so that by 2018, emissions would
be capped at 10% below the initial level. Because some observers see RGGI as a
possible model for a federal cap-and-trade program, several of RGGI’s design
elements are generating interest and debate.
Predicting the precise consequences of these state-led climate change actions is
difficult. The actions may affect energy markets to some degree by encouraging the
use of fewer carbon-intensive fuels. Many observers suggest that the range of state
actions will catalyze federal activity. Industry stakeholders are especially concerned
that the states will create a patchwork of climate change regulations across the nation.
This prospect is causing some industry leaders to call for a federal climate change
program. If Congress seeks to establish a federal program, the experiences and
lessons learned in the states may be instructive.
The RGGI and climate change activities in California are aggressive, but the
resulting emission reductions may be offset by increased emissions in states without
such requirements. This is a primary limitation of state climate change programs.
Legal challenges to the state actions, particularly those that may affect interstate
commerce, represent another obstacle.

Contents
In troduction ......................................................1
Climate Change Actions in California..................................1
Statewide Emission Reduction Program............................2
Implementation ...........................................3
Emissions Leakage.........................................3
Linkage with Other Emissions Trading Programs.................4
Regional Emission Reduction Program.............................4
Greenhouse Gas Performance Standard.............................5
Motor Vehicle Emissions........................................8
Transportation Fuels...........................................9
The Regional Greenhouse Gas Initiative...............................10
Emission Allocation...........................................11
Safety Valve.................................................12
Emissions Cap...............................................13
Emissions Leakage............................................15
Issues for Congress...............................................15
Potential Effects of State Actions................................15
States as Policy Laboratories................................16
Possible Economic Impacts.................................17
Patchwork of Regulations..................................18
Limitations of State Actions....................................18
Legal Challenges to State Actions................................19
List of Figures
Figure 1. California Greenhouse Gas Emissions, Historical and
Projected Levels Compared with 2020 Target........................2
Figure 2. Sources of California Electricity, by Fuel Type and Location
of Generation (based on 2005 data)................................7
Figure 3. Comparison of Observed Emissions (2000-2006) from
RGGI States with Emissions Allowed under RGGI Cap
(2009-2018) .................................................14
List of Tables
Table 1. Top Carbon Dioxide Emissions by Nation and
Selected U.S. States (2003 data).................................16

Greenhouse Gas Reductions:
California Action and the Regional
Greenhouse Gas Initiative
Introduction
The connection between greenhouse gas (GHG) emissions in the atmosphere
and climate change has motivated efforts to achieve reductions of GHG emissions.¹
In 1992, the United States ratified the United Nations’ Framework Convention on
Climate Change (UNFCCC), which called on industrialized countries to initiate GHG
reduction. However, in early 2001, President George W. Bush rejected the UNFCCC
1997 Kyoto Protocol, which called for legally binding commitments by developed
countries to reduce their GHG emissions.
In the absence of a federal program requiring GHG reductions, a growing
number of U.S. states are taking action in this arena. Although a majority of states
have addressed climate change to some degree (e.g., by creating GHG inventories or
state action plans²), the most aggressive actions have come from a smaller group of
states, including California and a coalition of states from the Northeast and Mid-
Atlantic regions.
California recently enacted several laws that seek to reduce GHG emissions.
The first section of this report discusses the activity in California. The second
section focuses on the Regional Greenhouse Gas Initiative (RGGI), a cooperative
effort of 10 states in the Northeast and Mid-Atlantic regions to reduce carbon dioxide
emissions from power plants. The report’s final section considers these state-led
actions from a federal policymaking perspective, examining the potential effects,
limitations, and legal challenges of state-led climate change actions.
Climate Change Actions in California
In the environmental policy domain, California is generally on the more
proactive side of the regulatory spectrum. The state’s recent climate change actions
continue this pattern. California has enacted several significant pieces of climate
change legislation, each addressing GHG emissions in different ways. A recent

¹ This report does not address the debates associated with the climate change science, nor
the role of human activity. See CRS Report RL33849, Climate Change: Science and Policy
Implications, by Jane A. Leggett.
² For a discussion of these actions, see CRS Report RL33812, Climate Change: Action by
States To Address Greenhouse Gas Emissions, by Jonathan L. Ramseur.

executive order from the governor supplements the state’s climate change statutes.
This section discusses the actions California has taken to decrease its GHG
emissions.
Statewide Emission Reduction Program
California enacted legislation in September 2006 establishing a comprehensive
GHG reduction regime. The legislation — AB 32, The Global Warming Solutions
Act — directs the California Air Resources Board (CARB) to develop and implement
a statewide program that would reduce the state’s GHG emissions to 1990 levels by
2020. Recent emission levels (based on 2004 data) are approximately 15% higher
than emission levels in 1990.³ However, assuming a business-as-usual trend (i.e.,
without accounting for any GHG reduction requirements either under way or under
development), GHG emissions are projected to increase (Figure 1).
Figure 1. California Greenhouse Gas Emissions,
Historical and Projected Levels Compared with 2020 Target

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³ In 2004, California generated 492 million metric tons of carbon dioxide-equivalent
(MMTCO2E). This amount includes emissions from imported electricity but excludes
combustion of international fuels, as well as carbon sinks. The most recent report estimated
that an analogous value in 1990 was 427 MMTCO2E. See California Energy Commission,
Inventory of California Greenhouse Gas Emissions and Sinks: 1990 to 2004 — Final Staff
Report, December 22, 2006, Table 6, p. 25.

Implementation. Although AB 32 is far-reaching in principle, the law’s text
does not include many crucial details. Instead, the statute grants considerable
authority to CARB, which is charged with establishing the framework and
applicability of the program. For example, the law does not specifically require the
use of a market-based system, such as a cap-and-trade program, to reduce GHG
emissions. Instead, AB 32 authorizes CARB to develop regulations to “achieve the
maximum technologically feasible and cost-effective greenhouse gas emission
reductions....” Moreover, the statute does not include a list of regulated emission
sources or categories, but instructs CARB to determine which sources should be
controlled to meet the statewide target. These decisions, which will likely affect the
entire California economy to some degree, entrust CARB with significant
responsibility.
Although the law grants considerable discretion to CARB, the statute does
dictate a schedule for various agency deadlines. The following dates highlight
significant milestones of the mandatory schedule:
^!June 30, 2007: CARB was to identify the early reduction options,
which can be implemented prior to the mandatory program, and for
which a facility will receive emissions credit. On April 20, 2007,
CARB submitted proposed early actions, which are to be
implemented via regulation and enforceable by January 1, 2010.⁴
^!January 1, 2008: CARB must establish the 1990 baseline, which⁵
becomes the 2020 emissions cap.
^!January 1, 2008: CARB must develop a mandatory reporting scheme
for sources affected by the cap. Sources report emissions for four
years in order to establish accurate facility baselines.
^!January 1, 2011: CARB must finalize regulations, including possible
market-based programs, that will implement the statewide emissions
cap.
^!January 1, 2012: CARB begins to implement and enforce the
mandatory emission reduction program created in 2011.
Emissions Leakage. When setting up an emissions control program, AB 32
requires that emissions “leakage” be addressed. The Environmental Protection
Agency (EPA) states that emissions leakage

⁴ CARB, 2007, Proposed Early Actions to Mitigate Climate Change in California.
⁵ Note that the 1990 GHG emissions baseline (and thus the 2020 cap) is based on estimates
from multiple economic sectors and is difficult to quantify precisely. For example, past
estimates of 1990 levels range from a low of 425 million metric tons of carbon dioxide
equivalent (MMTCO2E) to a high of 468 MMTCO2E. This is a 10% variance between low
and high estimates. See California Energy Commission, Inventory of California
Greenhouse Gas Emissions and Sinks: 1990 to 2004 — Final Staff Report, December 22,

2006, p. 4.

occurs when economic activity is shifted as a result of the emission control
regulation and, as a result, emission abatement achieved in one location that is
subject to emission control regulation is offset by increased emissions in⁶
unregulated locations.
In recognition of emissions “leakage,” the statute requires regulators to account
for GHG emissions created by any source of electricity that is consumed in
California. CARB must develop a structure that will count emissions connected with
electricity that is generated from outside the state. Without this provision, California
utilities might have a financial incentive to import more electricity from out-of-state
generators, who are not subject to the cap. In such a scenario, California emissions
would decrease, but the benefit would be negated by increased (uncounted)
emissions, or leakage, in neighboring states.
Linkage with Other Emissions Trading Programs. When developing
the emission reduction program in California, AB 32 instructs CARB to consider
other GHG reduction regimes, including the Regional Greenhouse Gas Initiative
(discussed below) and the European Union’s emission trading program. This
instruction might open the door for future emissions trading between California and
other states. To catalyze this trading relationship, California Governor
Schwarzenegger issued an executive order⁷ just a few weeks after signing AB 32,
calling for CARB and other state agencies to create a “market-based compliance
program with the goal of creating a program that permits trading with the European
Union, the Regional Greenhouse Gas Initiative and other jurisdictions.”⁸
Regional Emission Reduction Program
California is also a participating in the development of a regional GHG emission
reduction program. Governor Schwarzenegger and the governors of four western
states — Arizona, New Mexico, Oregon, and Washington — formed the Western
Climate Initiative (WCI) February 26, 2007.⁹ Utah and two Canadian provinces —
British Columbia and Manitoba — joined several months later. In August 2007, the
states and provinces set a regional, economy-wide target to reduce GHG emissions
to 15% below 2005 levels by 2020. By August 2008, the participating state/province
agencies agreed to develop a “market-based multi-sector mechanism, such as a
load-based cap and trade program” that will seek to reduce GHG emissions in the
region.

⁶ See Environmental Protection Agency (EPA), Office of Air and Radiation, 2003, Tools of
the Trade: A Guide To Designing and Operating a Cap and Trade Program For Pollution
Control, Glossary.
⁷ Executive Order S-17-06 (signed October 16, 2006).
⁸ The proposed trading relationships may raise constitutional issues. For example, the U.S.
Constitution states that “No State shall, without the Consent of Congress, ... enter into any
Agreement or Compact with another State, or with a foreign Power....” (Article I, Section

10, Clause 3).

⁹ For the text of the agreement, see [http://www.westernclimateinitiative.org/].

Although the WCI is still in early development, there are several issues that may
hinder its implementation. As noted, the WCI is an agreement between the states’
governors. To implement the program, the states’ legislatures would need to enact
laws to carry out the initiative’s objectives. This may present an obstacle if a state’s
legislative branch finds fault with the reduction program developed by states’
executive branch officials. In addition, the inclusion of British Columbia and
Manitoba may raise legal issues, particularly constitutional concerns. Article I,
Section 10, Clause 3 of the U.S. Constitution states that “[n]o State shall, without the
Consent of Congress ... enter into any Agreement or Compact with another State, or
with a foreign Power....” It is uncertain whether this clause (the “compact clause”)
will create legal hurdles for the WCI.
Greenhouse Gas Performance Standard
California recently developed a GHG performance standard for the electricity
sector that aims to influence investment in long-term power generation. Although not
directly requiring emission reductions or offsets from specific facilities or sources,
the standard should influence future GHG emission levels by affecting which energy
sources (coal, oil, natural gas, etc.) are used to generate electricity for consumers.
The GHG performance standard, pursuant to legislation enacted in September
2006 (SB 1368), forbids electricity producers — “load-serving entities”¹⁰ — from
entering into new “long-term financial commitments”¹¹ with power plants unless the
plant’s GHG emissions are as low or lower than those of a new, combined-cycle
natural gas facility. This emissions performance standard will apply to both in-state
power plants and out-of-state facilities that seek to export electricity to California.
The law directs the California Public Utilities Commission (PUC) to issue standards
for investor-owned facilities, which in 2003 accounted for 68% of the electricity
consumed in California.¹² The PUC issued interim performance standards January
25, 2007. To address the electricity consumption from publicly owned utilities,¹³ the
statute directs the California Energy Commission to issue comparable regulations by
June 30, 2007. As of the date of this report, these regulations are still under
development.¹⁴

¹⁰ Defined as “every electrical corporation, electric service provider, or community choice
aggregator serving end-use customers in the state.” SB 1368 (codified in Public Utilities
Code, Section 8340(h)).
¹¹ Defined as a “new ownership investment in baseload generation or a new or renewed
contract with a term of five or more years, which includes procurement of baseload
generation.” SB 1368 (codified in Public Utilities Code, Section 8340(j)).
¹² See California Energy Commission, Electricity Consumption by Utility Type, at
[ h t t p : / / www.e n e r gy. c a . go v/ e l e c t r i c i t y] .
¹³ Publicly owned utilities accounted for 27% of California’s electricity consumption in
2003. Self-generation units made up the remaining percentage (about 5%). See California
Energy Commission, Electricity Consumption by Utility Type.
¹⁴ On March 10, 2007, the CEC proposed regulations. The final regulations were submitted
to the Office of Administrative Law June 1, 2007, but were disapproved by that body June
(continued...)

The new performance standards complement the statewide GHG reduction
program. The implementation of AB 32 is several years away (irrespective of legal
challenges). The performance standards act as a stop-gap measure, preventing further
utility investment in carbon-intensive fuels while the state is crafting an economy-
wide reduction regime.
As previous power commitments expire and are exchanged with contracts that
meet the new GHG performance standard, California’s portfolio of energy sources
will change. The statute and its accompanying regulations, once in full effect, would
appear to prohibit California consumers from using electricity generated by
conventional coal-fired power plants. Compared with a combined-cycle natural gas
plant, a conventional coal-fired power plant emits more than twice the amount of
carbon dioxide per kilowatt-hour. Using current technologies, coal-fired generators
would fail to meet the new emissions standard.¹⁵
From 2002 through 2005, approximately 20% of California’s electricity was
generated from coal (Figure 2).¹⁶ As the law takes effect, California will likely need
to reduce/conserve a comparable amount of energy or replace the coal-generated
electricity with alternative sources of power.

¹⁴ (...continued)

29, 2007. For more information, see [http://www.energy.ca.gov/ghgstandards].

¹⁵ As technology advances, coal-fired plants might be able to reduce GHG emissions
through carbon capture and sequestration (CCS). However, this remains a future prospect:
“There is relatively little experience in combining CO² capture, transport and storage into
a fully integrated CCS system. The utilization of CCS for large-scale power plants (the
potential application of major interest) still remains to be implemented.” Intergovernmental
Panel on Climate Change (IPCC), 2005, IPCC Special Report Carbon Dioxide Capture and
Storage, Summary for Policymakers, p. 8. See CRS Report RL33801, Direct Carbon
Sequestration: Capturing and Storing CO², by Peter Folger.
¹⁶ The percentage of California’s electricity generated from coal should decrease, because
a large coal-fired plant (Mohave facility) was shut down at the end of 2005. California
Energy Commission, Gross System Electricity Production, at [http://www.energy.ca.gov/
electricity].

Figure 2. Sources of California Electricity, by Fuel Type and Location
of Generation (based on 2005 data)

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The new performance standards will affect not only California, but also other
states in the West. Although California’s electricity imports generally fall between
22% and 32% of the state’s total electricity consumption, its imports are responsible
for 39% to 57% of the total GHG emissions linked with its electricity.¹⁷ This is
because most of California’s in-state electricity is produced from sources other than
coal, whereas most of the state’s imported electricity is generated through coal
combustion (Figure 2). Once the standard takes effect (and former power contracts
expire), the coal-fired plants in neighboring states, which previously provided
electricity to California, will need to look elsewhere for customers. The same goes
for coal-fired power plants still in development in western states, which may have
been designed, at least in part, to serve California consumers.¹⁸ Arguably, the GHG
¹⁷ California Energy Commission, 2006, Inventory of California Greenhouse Gas Emissions
and Sinks: 1990 to 2004, p. 12.
¹⁸ See Memorandum from Michael Easley, Chairman of Wyoming Infrastructure Authority,
to California Energy Commission (October 5, 2005); Chris Holly, “California PUC Issues
(continued...)

performance standards disproportionately affect the neighboring states that have
historically exported coal-generated electricity to California consumers. This
possible consequence may raise legal issues, such as a state’s general inability to
regulate interstate commerce. These issues are discussed at the end of this report.
Motor Vehicle Emissions
The U.S. transportation sector accounts for a substantial percentage — 28% in
2004¹⁹ — of the nation’s GHG emissions. Automobiles and light-duty trucks (fueled
by gasoline or diesel) generate the majority — 63% in 2004 — of the nation’s
transportation-related GHG emissions.²⁰ The transportation sector is the single
largest source of the primary GHG, carbon dioxide, in 14 states.²¹
California’s transportation sector, in particular, generates almost 41% of the
state’s annual greenhouse emissions.²² Regarding the regulation of air emissions
from motor vehicles, California is in a unique position. California is the only state
with conditional authority — the state needs to obtain a waiver from the EPA — to
develop motor vehicle pollution standards that are as stringent or more stringent than
federal requirements.²³ The law permits other states to choose between federal
standards or California’s more stringent provisions.²⁴
In 2002, California enacted the first state law (AB 1493) requiring GHG limits
from motor vehicles.²⁵ As directed by the statute, the California Air Resources Board
(CARB) issued regulations in September 2004 limiting the “fleet average greenhouse
gas exhaust mass emission values from passenger cars, light-duty trucks, and
medium-duty passenger vehicles.”²⁶ The fleet average caps first apply to model year

¹⁸ (...continued)
IOU Greenhouse Rules; Muni Nixes Coal Deal,” The Energy Daily, December 15, 2006.
¹⁹ EPA, 2006, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2004,
Executive Summary, p. ES-13, at [http://epa.gov/climatechange/emissions/usinventoryreport.
html].
²⁰ The transportation sector also includes emissions (in descending order) from heavy-duty
trucks, aircraft, boats, and trains. EPA, 2006, Inventory of U.S. Greenhouse Gas Emissions
and Sinks: 1990-2004, pp. 3-8, at [http://epa.gov/climatechange/emissions/usinventory
report.html].
²¹ Based on 2003 data. EPA, Energy CO2 Emissions by State, at [http://epa.gov/
climatechange/emi ssions/state_energyco2inv.html ].
²² California Energy Commission, 2006, Inventory of California Greenhouse Gas Emissions
and Sinks: 1990 to 2004, p. 8.
²³ Other states are preempted from doing so. See Clean Air Act Section § 209, codified at

42 U.S.C. § 7543.

²⁴ Clean Air Act § 177, codified at 42 U.S.C. § 7507.
²⁵ AB 1493 (or the California Vehicle Global Warming Law) was signed into law by
Governor Gray Davis on July 22, 2002.
²⁶ Title 13, California Code of Regulations § 1961.1.

2009 vehicles. The caps become more stringent annually, so that by 2016, the fleet
average would be 30% below the 2009 level.
At least 14 states have formally adopted or announced plans to follow the
California regulation.²⁷ In order for the states to implement this standard, California
must receive a waiver from the EPA. California requested a waiver (as required by
Section 209 of the Clean Air Act) in December 2005, but the EPA has yet to respond.
Although the EPA has approved every California waiver request since 1975, it
displayed a reluctance to use the Clean Air Act to control GHG emissions, arguing
in federal court that the Clean Air Act does not authorize the EPA to regulate GHG
emissions for the purpose of addressing climate change.²⁸
However, an April 2, 2007, Supreme Court decision (Massachusetts v. EPA)²⁹
provided clarification on this issue. The Court found no doubt that the Clean Air Act
gives EPA the authority to regulate GHG emissions (in this case, from new motor
vehicles). After the decision, some observers speculated that the Clean Air Act
waiver would be the most direct impact of the decision. EPA Administrator Johnson
announced that he would decide whether to grant the waiver request by the end of

2007. For more discussion regarding this issue, see CRS Report RL34099,

California’s Waiver Request to Control Greenhouse Gases Under the Clean Air Act,
by James E. McCarthy.
Transportation Fuels
To complement California’s statewide GHG reduction program, the governor
issued an executive order (signed January 18, 2007) establishing a low carbon fuel
standard (LCFS). The LCFS aims to reduce the carbon intensity of California’s
transportation fuels by 10% by 2020. California currently relies on petroleum-based
fuels for 96% of its transportation needs.³⁰ Achieving the carbon intensity reduction
is expected to replace 20% of the state’s gasoline consumption with less carbon-
intensive fuels.³¹ The LCFS would apply to all refiners, blenders, producers, and
importers of transport fuels.
The order states that transportation fuels shall be measured on a full fuel cycle
basis. Thus, regulators must factor in all of the energy used and potential GHGs
emitted during the fuel’s development (extraction or production), delivery (via
vehicle or pipeline), and final use (combustion). Corn-based ethanol, for example,
is expected to play a role in meeting California’s LCFS. To comply with the full fuel

²⁷ The 14 states are Arizona, Connecticut, Florida, Maine, Maryland, Massachusetts, New
Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and
Washington.
²⁸ For a historical discussion of these issues, see CRS Report RL32764, Global Warming:
The Litigation Heats Up, by Robert Meltz.
²⁹ The ruling is available at [http://www.supremecourtus.gov/opinions/06pdf/05-1120.pdf].
³⁰ Executive Order S-01-07, signed January 18, 2007.
³¹ California Office of the Governor, The Role of a Low Carbon Fuel Standard in Reducing
Greenhouse Gas Emissions and Protecting Our Economy, January 18, 2007.

cycle assessment, regulators must consider the energy needed to produce fertilizers,
operate farm equipment, transport corn, convert corn to ethanol, and distribute the
final product. For more information on these issues, see CRS Report RL33290, Fuel
Ethanol: Background and Public Policy Issues, by Brent Yacobucci.
The LCFS executive order enhances alternative fuel legislation (AB 1007) that
California passed in 2005.³² AB 1007 requires the California Energy Commission
(CEC), in partnership with other agencies, including CARB, to develop and adopt a
State Alternative Fuels Plan. CEC officials have stated that they expect to submit the
plan in September 2007.³³ The executive order directs CEC to supplement this plan
with a compliance schedule for meeting the 2020 LCFS target.
The Regional Greenhouse Gas Initiative
The Regional Greenhouse Gas Initiative (RGGI) is a market-based effort by 10
states — Connecticut, Delaware, Maine, Maryland,³⁴ Massachusetts,³⁵ New
Hampshire, New Jersey, New York, Rhode Island, and Vermont — to reduce carbon
dioxide emissions from power plants. RGGI has been under development since
2003, when states from the Northeast and Mid-Atlantic regions began to discuss
setting up a cooperative effort to reduce carbon dioxide emissions. Subsequent
meetings and workshops culminated in a Memorandum of Understanding (MOU)
that was signed in December 2005. A primary strategy of RGGI is to create a
program with flexibility, so that in the future other emission sources/sectors, GHGs,
and states could be included.
The initiative would set up the nation’s first mandatory cap-and-trade program
for carbon dioxide. Starting in January 2009, RGGI states have agreed to implement
a cap of 188 million short tons of carbon dioxide emissions from power plants. The
cap is intended to stabilize emissions through the end of 2014. In 2015 and each
subsequent year, the emissions cap would be lowered incrementally, so that by 2018,³⁶

the cap would be 10% below the initial level.
³² The governor signed AB 1007 September 29, 2005.
³³ California Energy Commission’s Letter to Assembly Speaker Nuñez requesting delay of
AB 1007 Report (June 25, 2007), at [http://www.energy.ca.gov/ab1007/documents/
index.html].
³⁴ Maryland Governor O’Malley signed RGGI’s Memorandum of Understanding on April
20, 2007, making Maryland the first state that was not an original RGGI participant to join
the regional initiative.
³⁵ Massachusetts and Rhode Island were involved in RGGI’s development from the
beginning. However, both states’ governors declined to sign the Memorandum of
Understanding in 2005, citing costs as their primary rationale for not participating.
Massachusetts and Rhode Island joined RGGI as participants in January 2007.
³⁶ RGGI Memorandum of Understanding, signed by participating state governors on
December 20, 2005, and further amended August 8, 2006; both versions are available at
[ h t t p : / / www.r ggi .or g/ mode l r ul e .ht m] .

In a cap-and-trade system, regulators set a cap (or limit) on the overall emissions
of a given gas from a specified group of sources, such as power plants. The
emissions allowed under the new cap are then allocated in the form of credits (or
permits) to individual sources. Sources that emit more than their allowance must buy
credits from those who emit less than their allowance, thus creating a financial
incentive for sources to reduce their own emissions.
The RGGI cap-and-trade program is to be implemented by the individual states.
Each RGGI state will need to establish its own law and/or regulation to administer
and enforce the emissions reduction program. However, each state will base its
law/regulation on a detailed model rule that was developed by the participant states.
To facilitate administration of the trading program, the MOU calls for the states to
create a non-profit, regional organization. This organization is to provide technical
assistance to the RGGI states and help maintain consistent implementation across
state lines.
Depending on various design details, cap-and-trade systems can vary
significantly. The cap level and cap applicability (i.e., when the cap takes effect and
which sources are affected) are perhaps the primary variables regarding the impact
of the program. Other details, such as emission allocation and whether to include a
safety valve, can further alter the character of a cap-and-trade program. Some
observers consider RGGI to be a model for a possible federal cap-and-trade program,
and thus several of RGGI’s design elements are generating interest and debate.
These issues are discussed below.
Emission Allocation
One specific feature of RGGI — the emission allocation scheme — is drawing
both praise and criticism. In both RGGI’s Memorandum of Understanding and its
Model Rule, states agreed that at least 25% of emission allowances will be allocated
for a “consumer benefit or strategic energy purpose.” This action would require
power plants to purchase the set-aside allowances, most likely through an auction,
instead of receiving them at no charge. Several states³⁷ have indicated that they
intend to allocate 100% of their states’ allowances through an auction process. In
other emission trading programs, auctions have been used, but to a much lesser
ex tent.³⁸
Stakeholders have raised various issues regarding this format. For example,
power companies may not be able to share part of the allowance costs with their

³⁷ Vermont, New York, Maine, and Massachusetts, for example.
³⁸ For example, in the U.S. sulfur dioxide trading system, the EPA sets aside 2.8% of its
annual allowances to be sold at auction. The European Union’s Emission Trading System
(EU ETS) allows nation states to withhold 5% of their nation’s allowances for auction.
Although only 4 of the 27 EU member states have chosen to auction a portion of their
allowances, the amount available for auction will increase to 10% in 2008.

customer base if the companies have a long-term, fixed-price contract.³⁹ On the other
hand, if utilities are able to pass along the additional costs, consumers worry that
their electricity bills may increase. Policymakers have some flexibility to address
these issues, because they can decide how best to use the revenues generated from
the allowance auction. For instance, states could use the auction revenues to provide
tax cuts to the affected industries, or to assist low-income families with paying for
increases in energy bills. Largely due to this flexibility, the auction approach is
considered more cost-effective than distributing allowances (for free) based on past
or predicted emission rates.⁴⁰ For more discussion regarding these issues, see CRS
Report RL33799, Climate Change: Design Approaches for a Greenhouse Gas
Reduction Program, by Larry Parker.
Safety Valve
In a cap-and-trade system a safety valve allows policymakers to control the costs
of complying with the emissions reduction program. A traditional safety valve would
allow affected sources (e.g., power plants) to purchase credits at a fixed price ($X/ton
of carbon dioxide) instead of reducing emissions. The price cap could be set high
enough above market value so that facilities would consider it only during extreme
circumstances or unforeseen events. Thus, the incentive to reduce emissions would
remain, but the price cap (or safety valve) would assure the industry that it will not
have runaway compliance costs.⁴¹ The main disadvantage of a safety valve is that its
inclusion may limit the desired emission reductions, especially if the safety valve is
set too close to market value. In addition, a price cap may keep costs low enough
that this would reduce the economic incentive to invest in new technologies.
RGGI does not have a safety valve in this traditional sense. However, RGGI
does allow for compliance flexibility if the carbon dioxide allowance price reaches
a certain level. For example, if certain price thresholds are breached,⁴² facilities
receive an additional year to demonstrate emissions reductions. Also, in these cases,
companies may cover a greater proportion of their emissions by purchasing credits
from other facilities or other allowable emission offsets, instead of reducing
emissions internally.
If a national cap-and-trade regime were adopted, a traditional safety valve might
become an important bargaining chip. Reportedly, the lack of a price cap, which
could control costs to industry and consumers, was a central factor behind former

³⁹ Dallas Burtraw and Karen Palmer, Summary of the Workshop to Support Implementing
the Minimum 25 Percent Public Benefit Allocation in the Regional Greenhouse Gas
Initiative, Resources for the Future Discussion Paper, September 2006.
⁴⁰ Dallas Burtraw et al., 2001, The Effect of Allowance Allocation on the Cost of Carbon
Emission Trading, Resources for the Future Discussion Paper 01-30.
⁴¹ For more background on safety valves, see CRS Report RL33799, Climate Change:
Design Approaches for a Greenhouse Gas Reduction Program, by Larry Parker.
⁴² RGGI has two price thresholds: $7/ton (2005$) and $10/ton (2005$).

Massachusetts Governor Romney’s decision to withdraw his state from RGGI
participation in 2005.⁴³
Emissions Cap
The level and timing of the emissions cap in a cap-and-trade program are
important considerations for policymakers. In general, a carbon dioxide cap level
and start date represent a balance between the benefits of climate change mitigation
and the economic burden imposed on the affected sources.⁴⁴ Political feasibility is
often a factor when setting an emissions cap.⁴⁵ The RGGI 2009 cap was not based
entirely on past emission levels (or expected levels), but was developed through a
negotiation among the states.⁴⁶
One emissions cap strategy is to establish a cap that would take effect relatively
quickly but only require stabilization or modest reduction in emissions. The RGGI
cap resembles this approach. An advantage to this strategy is that it allows market
forces to affect behavior at an earlier date — for example, encouraging technological
development or influencing investment decisions in less carbon-intensive energy
sources.
It is uncertain whether RGGI’s initial cap — 188 million short tons of carbon
dioxide — will be higher than actual emissions when it takes effect in 2009 (Figure
3). The cap is slightly above (about 4%) the average emission levels observed
between 2000 and 2002. RGGI designers anticipated that emissions would gradually
increase, so that actual levels would approximately match the cap in 2009. However,
Figure 3 indicates this may not occur. Emissions were relatively stable between 2001
and 2004; they increased in 2005 but dropped substantially in 2006.⁴⁷ Figure 3 shows
the 2006 emissions are 13% below the 2009 cap.
If actual emissions are below the cap when it goes into effect, the effectiveness
of the RGGI program may be impacted. The allowance price might drop to such a
low level that facilities would have no financial incentive to make reductions beyond
their required allocation.⁴⁸ This potential problem may be alleviated by the

⁴³ See, for example, Robert Stavins (2006), “A Utility Safety Valve for Cutting CO2,” The
Environmental Forum, vol. 23, no. 2, March/April, 2006, p. 14. Note that Massachusetts
rejoined RGGI in January 2007.
⁴⁴ Although some may contend that this is not an either/or choice, most economic studies
find that reducing carbon dioxide emissions will entail economic costs. That debate is
beyond the scope of this report.
⁴⁵ See EPA, Office of Air and Radiation, 2003, Tools of the Trade: A Guide To Designing
and Operating a Cap and Trade Program For Pollution Control, pp. 3-9.
⁴⁶ Per conversations with RGGI stakeholders.
⁴⁷ The emissions data for 2005 and 2006 were estimated by: Point Carbon, 2007, “Emissions
Trading in the US: Is RGGI over-allocated?” This study states that its calculations are
consistent with the approach taken by RGGI to estimate emissions from earlier years.
⁴⁸ This problem occurred during the first phase of the European Union’s Emission Trading
(continued...)

opportunity for affected sources to bank emission reductions for future use, when the
cap will likely be lower than expected emissions. The RGGI program allows
unlimited banking. The ability to bank reductions effectively spreads the costs of
emission reduction over time. Banking emissions would reduce compliance costs
in the future, but also increase the value of current allowances (because they can be
sold later). The incentive to make additional reductions would remain.
Figure 3. Comparison of Observed Emissions (2000-2006) from
RGGI States with Emissions Allowed under RGGI Cap (2009-2018)

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Another tool that RGGI states may use to address the possibility of over-
allocation is an emissions auction reserve price. Several states have stated they intend
to distribute 100% of their states’ allowances through an auction process. If the
supply of allowances exceeds demand (as Figure 3 indicates may occur), the price
of allowances will be very low. With an auction system, states could set a reserve
price, or price floor, below which allowances would not be sold. States could remove
the unsold allowances from the market entirely, effectively lowering the state’s
⁴⁸ (...continued)
System. For more discussion see CRS Report RL34150, Climate Change: The EU
Emissions Trading Scheme (ETS) Gets Ready for Kyoto, by Larry Parker.
⁴⁹ The RGGI website does not have the emissions data for Maryland for 2003-2004. In the
above graph, 2003 and 2004 emissions for Maryland were assumed to be consistent with
previous years.

emission cap, or states could retain the unsold allowances and sell them in future
auctions.⁵⁰ This second option would distribute costs over more years, and likely
help control price volatility. There is some indication that states that employ an
auction will use a reserve price.⁵¹
Emissions Leakage
A critical design detail — electricity imports from non-RGGI states — remains
unresolved. RGGI faces the same “leakage” challenge as California. For example,
if an RGGI state lowers its emissions by importing more power from a non-RGGI
state, the emissions reductions in the RGGI state would likely be negated by an
emission increase (or leakage) in the exporting state. The opportunities for leakage
are partially related to the price difference between high-carbon fuels and low-carbon
fuels. For instance, if the price of natural gas rises in comparison to coal, there will
be more of an incentive to import the cheaper electricity from non-RGGI states.
RGGI states have established a working group to examine how best to address this
issue. The group plans to submit a report to state agency leaders by December 2007.
Issues for Congress
The Regional Greenhouse Gas Initiative (RGGI) and the climate change
developments in California raise several issues that may be of interest to Congress.
This section discusses some of the potential effects of these actions by states, the
limitations of these actions, and legal challenges that may hinder or halt
implementation of the emission reduction programs.
Potential Effects of State Actions
From a global perspective, many U.S. states emit significant amounts of GHGs.
If individual U.S. states were classified as sovereign nations, 18 U.S. states would
rank in the top 50 for nations that annually emit the primary GHG: carbon dioxide.⁵²
Compared with other nations, Texas, the combined WCI and RGGI states, and
California rank as top carbon dioxide emitters (see Table 1).

⁵⁰ Alternatively, states could retire the unsold allowances, effectively lowering the state’s
emission cap for that year.
⁵¹ In an interim report regarding auction design that was requested by RGGI officials, the
authors recommended using a reserve price when distributing allowances through an
auction. See Dallas Burtraw, et al, 2007, Auction Design for Selling CO2 Emission
Allowances under the Regional Greenhouse Gas Initiative: Phase 1 Research Report
(Draft).
⁵² This is based on 2003 data from the World Resources Institute, Climate Analysis
Indicators Tool, at [http://cait.wri.org/].

Table 1. Top Carbon Dioxide Emissions by Nation
and Selected U.S. States (2003 data)
^Co^unt^ry^{, St}^a^t^{e, o}^r^CO²^Em^issioⁿ^s^Co^unt^ry^{, St}^a^t^{e, o}^r^CO²^Em^issioⁿ^s
^Gr^o^u^p⁽^m^illio^{n m}^e^t^r^{ic t}^o^ns)^Gr^o^u^p⁽^m^illio^{n m}^e^t^r^{ic t}^o^ns)
^Uⁿⁱ^t^e^{d S}^t^at^es^5,778^T^e^x^a^s⁷¹⁹
^C^hⁱⁿ^a⁴^,497^R^G^G^I^s^t^at^es⁶⁰⁶
^Eu^ropean^Uⁿⁱ^oⁿ⁴^,003^Uⁿⁱ^t^e^{d K}ⁱⁿ^g^dom⁵⁵³
^R^u^s^sⁱ^an^F^e^deratⁱ^oⁿ¹^,581^C^aⁿ^a^da⁵⁴⁴
^Japan¹^,258^S^o^u^t^h^K^o^rea⁴⁸⁹
^In^di^a¹^,148^It^al^y⁴⁶⁸
^G^e^rm^an^y⁸⁶⁵^Mexⁱ^co⁴⁰⁰
^WC^{I s}^t^at^es⁷³⁰^C^a^lⁱ^f^ornⁱ^a³⁹⁵
^So^urce^:^P^r^e^p^ar^ed^b^y^{CRS w}^ith^d^a^{ta f}^r^o^m^W^o^r^l^d^Reso^u^r^{ces I}ⁿ^stitu^{te, Clim}^{ate A}ⁿ^aly^s^{is I}ⁿ^dⁱ^cato^r^s
^T^{ool, at [h}^ttp://cait.w^r^i.org^/^{] Note th}^{at th}^{e carbon}^diox^{ide data ex}^clu^d^es^lan^d^u^s^{e ch}^an^g^e^s^.
^No^te:^W^C^{I s}^t^atesⁱⁿ^clu^d^{e A}^r^izon^{a, C}^a^lif^ornⁱ^{a, New}^Mexⁱ^{co, Oreg}^on^{, Utah}^,^an^d^W^a^s^hⁱⁿ^g^t^on^.^R^GGI
^s^t^atesⁱⁿ^clu^d^{e C}^oⁿⁿ^ecticu^t^{, Delaw}^a^re,^M^aⁱⁿ^{e, Mary}^lan^d^{, Mas}^s^ach^u^s^etts^{, New}^Ham^p^s^h^{ire, New}^J^e^rs^ey^,
^New^York^{, an}^{d Verm}^on^{t. R}^h^{ode Is}^lan^d^is^ex^{pected to}^s^oon^j^oⁱⁿ^,^an^d^its^em^is^sⁱ^on^s^{are in}^clu^d^{ed abov}^e.
States as Policy Laboratories. A primary argument in support of
individual or cooperative state climate change action is that states can serve as
laboratories for policymaking. States can test different ideas and policies on a
smaller scale, and help determine which climate change solutions are most
appropriate. Many of the RGGI states and California have acted as pioneers in other
environmental policy venues — for example, automobile emissions standards in
California and acid rain provisions in New England states. Such programs often act
as precursors or even models to federal environmental regimes.
Most federal legislative proposals that seek to control GHG emissions would
employ a cap-and-trade emissions regime.⁵³ There has been some debate regarding
how a cap-and-trade program might work on a national level. Although the federal
acid rain program, which involves sulfur dioxide emissions trading, is generally
considered a success, some emissions trading programs have encountered problems

⁵³ See CRS Report RL33846, Climate Change: Greenhouse Gas Reduction Bills in the 110^th
Congress, by Larry Parker, and Brent D. Yacobucci.

during implementation.⁵⁴ State programs, such as RGGI, may offer the opportunity
to iron out logistical details that would be crucial in a national cap-and-trade system:
^!Which sources to regulate.
^!How to allocate emissions allowances.
^!How high to set the emissions cap.
^!When to allow offsets instead of actual reductions.
^!Whether to include a safety valve, and if so, how high to set it.
State programs can inform federal policymakers in other ways. The political
process by which states create climate change policy can be enlightening and perhaps
adaptable on the federal level. For instance, by examining the development and
passage of state legislation, federal policymakers may better understand the
motivations of different stakeholders and learn how best to frame the issues.
Possible Economic Impacts. The mandatory emission reduction programs
in California and RGGI will likely have economic effects on consumers, businesses
and manufacturers, and possibly interstate commerce.⁵⁵ The most immediate effects
of the emissions programs (at least the ones furthest along in development) will be
on the automotive manufacturing and electricity generation sectors.
For automotive manufacturers, the California motor vehicle regulations —
which at least 12 states plan to implement — will likely have the effect of dividing
the market, potentially requiring the manufacture of a different class of cars to meet
the new standards (scheduled to apply in 2009). For automotive companies, this
raises the issues of the technical means of meeting the standard, marketing, ensuring
compliance, and pricing. Depending on how the emission limits are to be met, they
may also influence fueling infrastructure. State governments will need resources to
enforce the standards. Consumers in regulated states may face higher prices for
vehicles.
For the electric generating sector, the California and RGGI requirements will
likely promote generation from low carbon-intensive fuels, while curtailing
generation from high carbon-intensive fuels, such as coal. California’s GHG
performance standards will reach into neighboring states as well, effectively barring
electricity imports generated by conventional coal-fired power plants. As coal-fired
plants tend to produce lower-cost electricity, the result of these requirements may be

⁵⁴ For example, the Southern California’s Regional Clean Air Incentives Market
(RECLAIM), which was implemented in 1994 to reduce emissions of nitrogen oxides (NOx)
and sulfur dioxide (SO²), saw a 50-fold increase in NOx allowance prices during the
2000-2001 California energy crisis. The European Union’s GHG trading system has also
experienced drastic swings in allowance prices during its start-up years, making planning
and decision making difficult for participating entities. For additional information on the
EU trading system, see CRS Report RL33581, Climate Change: The European Union’s
Emissions Trading System (EU-ETS), by Larry Parker.
⁵⁵ The question of whether and in what circumstances states can regulate interstate
commerce may raise legal questions, which are discussed below.

to increase electricity prices within the states that limit emissions, and possibly lower
prices in states without such emission standards.
If the GHG limitations on motor vehicles and electricity increase prices in the
regulated states, businesses and manufacturers may factor this cost into location
decisions. There is some concern that regulated industries will have a financial
incentive to move (and thus transfer jobs) to states (or nations, such as Mexico or
Canada) that do not limit GHG emissions.⁵⁶ Others fear that emission limits will
raise the cost of living and doing business within those states, although in theory such
effects can be at least partially addressed through the design of the emissions
reduction program.⁵⁷
Patchwork of Regulations. One concern shared by many observers,
particularly industry stakeholders, is that state climate change programs (in the
absence of a federal program) will create a patchwork of regulations nationwide. It
is claimed that a patchwork system of standards may hinder a company’s efficiency
and possibly create economic burdens for firms that operate in multiple states. The
prospect of regulations that vary from state to state is moving some companies to
support a federal climate change program with comparable requirements across the
entire United States.⁵⁸
Limitations of State Actions
Climate change has been described as the “ultimate global commons problem.”⁵⁹
The global warming and climate impacts associated with increased GHG emissions
in the atmosphere cannot be linked with specific emission sources. Unlike localized
reductions in other air pollutants (e.g., sulfur dioxide, particulate matter), when an
emissions source reduces its carbon dioxide emissions, it does not generate a
corresponding local climate change benefit unless there are similar widespread
reductions around the world.
From a practical standpoint, the actions of one or a small group of states cannot
by themselves significantly affect the global accumulation of GHG emissions in the
atmosphere. However, as discussed above, actions now under way in California and
states in the Northeast and Mid-Atlantic regions may create examples and/or models

⁵⁶ This is also a central argument against having federal emission limits without cooperation
with other large economies (e.g., China and India).
⁵⁷ A cap-and-trade program with an auction system (as discussed above), for instance,
would generate revenues that could be funneled to parties who bear an unfair percentage of
the program’s costs. See, for example, National Commission on Energy Policy, 2007,
Allocating Allowances in a Greenhouse Gas Trading System.
⁵⁸ For example, the newly created United States Climate Action Partnership (USCAP), an
alliance of major businesses and leading climate and environmental groups, calls on the
federal government to enact legislation requiring significant reductions of GHG emissions.
See [http://us-cap.org].
⁵⁹ Robert Stavins, 2006, “A Utility Safety Valve for Cutting CO2,” The Environmental
Forum, vol. 23, no. 2, March/April, 2006, p. 14.

that will prove instructive in more widespread applications. Moreover, when
business and industry have confronted a growing patchwork of state requirements,
these sectors have historically begun to favor a national policy — as has begun to
happen in the case of state-level actions on climate change. However, the lack of a
national program or a truly global approach to GHG emissions reductions does limit
what individual states can accomplish in actually reducing GHG emissions and
accumulations.
Legal Challenges to State Actions
Legal challenges may halt or hinder state action. The possibility of legal
challenges creates considerable uncertainty regarding the future of state climate
change actions, particularly the more aggressive programs. There are already several
lawsuits against state actions that seek to regulate GHG emissions from motor
vehicles. Car dealers and trade associations have filed suits in California, Vermont,
and Rhode Island seeking to halt the regulations on various grounds. For example,
the plaintiffs contend that California’s regulations are preempted by the Energy
Policy and Conservation Act (P.L. 94-163), which directs states not to regulate fuel
economy standards. It in uncertain what role the Massachusetts decision may play
in these proceedings, because some of the arguments in these cases (e.g., the
relationship between conflicting federal and state policing concerning climate
change) were not addressed in the Massachusetts case.
Further litigation confronting the more recent state actions is anticipated. Many
expect a legal challenge to the RGGI program when the first state’s rule is officially
issued.⁶⁰ In addition, some observers question whether California’s recently enacted
GHG performance standards are constitutional.⁶¹ They argue that the performance
standards disproportionately affect the neighboring states that have historically
exported coal-generated electricity to California consumers, raising the question of
whether the California standard, in effect, regulates interstate commerce.
The degree to which a state can influence interstate commerce is central to the
debate regarding state-led climate change activities. The U.S. Constitution grants
Congress the power to regulate interstate commerce.⁶² U.S. courts interpret this as
a limitation on the states’ ability to regulate interstate commerce.⁶³

⁶⁰ New York state is expected to be the first state to issue its rule implementing RGGI,
according to statements made from state officials at a climate change workshop: Pew Center
on Climate Change, Innovative Approaches to Climate Change: A State and Regional
Workshop, Washington, DC, October 10-11, 2006.
⁶¹ See Brian Potts, 2006, “Regulating Greenhouse Gas Leakage: How California Can Evade
the Impending Constitutional Attacks,” Electricity Journal, vol. 19, issue 5, June 2006.
⁶² Article I, Section 8, Clause 3.
⁶³ For more discussion of these issues, see CRS Report RL30315, Federalism, State
Sovereignty, and the Constitution: Basis and Limits of Congressional Power, by Kenneth
R. Thomas.

The legal arguments in these cases (and expected cases) are complicated and
beyond the scope of this report. Moreover, many of the legal and constitutional
issues chart new ground. For these reasons, many observers have concluded that it
is difficult to predict how the courts will interpret and decide these issues.
Regardless of the ultimate strength and outcome of the legal arguments opposing
state-led climate change policies, affected stakeholders will almost certainly
challenge the implementation of emission reduction programs. It is uncertain how
long these anticipated legal challenges might delay GHG reductions in the states.