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United States

Ten states go for carbon penalties -- Wind made relatively cheaper

While many energy experts agree that federal legislation to cap carbon emissions and trade carbon credits is coming to the US, few expect it any time soon. But three regional systems are well on their way to filling the federal void in the East, the Midwest and on the west coast. Their example could go a long way towards helping to decide what a federal system might eventually look like and what it might mean for the wind power market.

"My guess is that carbon policy will become the primary form of federal support for wind and that it will be an adequate form of support," says Ryan Wiser of Lawrence Berkeley National Laboratory (LBNL). "The most likely form of that policy at this point is cap and trade, but that's a long term statement." In the short term, wind's federal production tax credit must stay in place, he warns.

Relatively cheaper

Of the three regional cap and trade systems, furthest along is the Regional Greenhouse Gas Initiative (RGGI) on the west coast. Ten Northeast and Mid-Atlantic states recently completed an auction of 12.5 million carbon emission allowances that set a price of $3.07 per tonne of carbon emitted. The next auction is scheduled for December 17. While many believe an allowance price closer to $50 might eventually be required to make coal more expensive than other sources, the value is expected to ratchet up over time.

"The initial price is pretty low and I think people used it as a kind of a test auction," says John Wadsworth of Brown Rudnick's Climate Energy Group. "That's why there was a lot of activity but not a huge price."

Electricity generators operating in excess of 25 MW in the RGGI area will be forced to comply with the initiative over a three year period beginning January 1, when they must show allowances equal to the number of tonnes of carbon they have emitted. "The argument is that power plants will start factoring in the cost of these allowances into the price that they're selling the electricity for," Wadsworth says. "And then coal plants will tick up a couple of cents to account for the allowances they have to buy. So wind will become more valuable."

States will decide how to use the money they collect from RGGI based on individual statutes. In Massachusetts and Connecticut, 80% will go towards utility company energy efficiency programs. Some of the rest is expected to support renewables.

One state in the region, Pennsylvania, opted out of RGGI, creating a major problem for the initiative. Nearby states could choose to get their electricity from Pennsylvania's unchecked coal powered generation, causing what is known as "leakage" in the jargon of carbon traders. "The whole leakage issue may be one where it's good to see how it affects the market over the next three years," Wadsworth says. "It could be the main way that RGGI informs a federal system."

Still, Wadsworth is among those who believe the RGGI system is bound to work to at least some degree. "People probably thought RGGI was a trial balloon," he says. "But now that it's actually being enacted it will be in existence at least three years before the feds do anything. The House just put out a proposal and they're talking about 2012 being the very earliest they could do anything."

Spreading the cap

On the west coast, the Western Climate Initiative includes seven states and four Canadian provinces and expands on RGGI to include all emitting sectors: transportation, commercial buildings and residential fuels like natural gas. Under the plan, utilities and industries begin trading emission credits on January 1, 2012, while transportation and heating fuels have until 2015. Each state will decide how to distribute emission credits, selling at least 10% to polluters through an auction and likely giving away the rest for free at the beginning of the program.

The European Union created the world's largest emissions trading market in 2005, but its structure, in which most governments have awarded carbon credits for free, has been much criticised for being ineffectual. European governments are now taking steps to strengthen the system and are considering making electric utilities buy all their allowances by 2013, putting a stop to utilities profiting from sales of credits they were granted for free.

"It's important to establish the right price for an allowance," says Suzanne Leta Liou of Renewable Northwest Project. "You have to prevent the possibility of large emitters getting windfall profits and ensure that renewable energy and energy efficiency have a fair stake in the game."

The third initiative saw the light of day a year ago, when governors of nine Midwestern states and the province of Manitoba pledged to work toward their own regional cap and trade program to reduce carbon emissions. "I think virtually everyone, even within the utility industry, would recognise and acknowledge that federal climate policy is coming," says Wiser. "But once we have federal action, do these regional efforts continue, or are they then moot? And no one really knows the answer to that quite yet."

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