Policy Levers for Sustainability: The State Level
4 The U.S. national government plays a crucial role in sustainability management; however, in recent years Congress has gridlocked on these issues. As happened in the 1980s, state governments have stepped in and filled the gap. State governments have at their disposal many of the same tools and mechanisms that the federal government has but, given the dysfunction in Washington lately, they seem better able to use them. For example, although Congress failed to adopt comprehensive climate change legislation, the U.S. is still on its way to achieving the target reduction of 17 percent from 2005 levels by 2020—the goal that President Obama announced at the 2009 U.N. climate talks in Copenhagen. Contributing factors include the economic slowdown, anticipated greenhouse gas (GHG) regulations under the Clean Air Act, and trends in relative fuel prices and energy efficiency. However, progress can also be attributed to a number of actions implemented at the state level over the past decade (Burtraw and Woerman, 2012, 1–2). States have not waited for the federal government to take up sustainability agendas. They are designing programs that complement national programs and compensate for gaps in federal policy. They are going ahead with energy policies, climate plans, infrastructure upgrades, and transportation planning to enhance their sustainability and attract businesses and residents to their states. Many of these initiatives are undertaken within the context of broad state sustainability plans or state climate action plans, and some are taken up as independent policies. This chapter summarizes some of the many innovative and exciting policy options, tools, and programs that states across the country are implementing, including regional and multistate initiatives. We’ve organized this chapter into three main sections: “Energy Policies,” “Transportation Policies,” and “Climate Adaptation and Infrastructure.” Most of the chapter examines energy issues because they are central to the sustainability challenge; we look at what states are doing to reduce fossil fuel reliance, reduce carbon emissions, and encourage renewable energy and energy efficiency. We examine how states use regulations and standards, then move on to which innovative financial methods they have developed to facilitate these changes. Finally, we will look to transportation policies, including emission standards and fuel efficiency, and climate resiliency and infrastructure. Climate change is often at the top of the sustainability agenda. Mitigating climate change is most often addressed in the form of energy policies aimed at encouraging use of renewable energy, reducing our greenhouse gas emissions. To achieve these goals, we assess two types of policy instruments: (1) regulatory tools and standards, and (2) financial tools and mechanisms. Both can serve to incentivize the behaviors and change needed to move toward more sustainable energy use. Regulations and standard setting are key components of sustainability policy. Currently, there is no clear national energy policy, but states have developed a series of important energy regulations and standards to improve energy efficiency, encourage renewable energy, and improve system access and the grid. These efforts include cap and trade, renewable portfolio standards, energy efficiency standards, building codes, interconnection and grid standards, and feed-in tariffs. They are serving to advance the field of sustainability and clean energy, and to encourage investment, innovation, and the development of local clean technology industries in regional economies. Economists often point to carbon taxes as the most efficient and effective method for reducing greenhouse gas emissions, but new taxes are exceptionally difficult to enact. An alternative, achievable strategy is through cap and trade systems. Cap and trade programs have helped to reduce emissions, improve local and regional environments, and protect public health. A national cap and trade system for greenhouse gases is unlikely in the near term, but several multistate partnerships are having a positive impact. These programs can have a significant effect on pollution at the regional level that, when aggregated, can influence the performance of the country as a whole. One of the most notable programs is the Regional Greenhouse Gas Initiative (RGGI, pronounced “Reggie”), which began as a collaboration between ten Northeastern states to cut their carbon dioxide (CO2) emissions. The partnership initially included Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont, but New Jersey Governor Chris Christie removed his state from RGGI in November 2011. Starting in 2009, RGGI became the first market-based regulatory program in the United States to reduce carbon dioxide emissions from the power sector, focusing specifically on fossil fuel–based electric power generators with a capacity of 25 megawatts (MW) or greater. In the program, a cap is set representing the regional CO2 limit. Participating states sell emission allowances through quarterly regional auctions, and the proceeds are directed towards energy efficiency, renewable energy, and other programs that benefit consumers. Each state has the flexibility to develop its own allowance proceeds plan. In the first two years of the program, the 10 states allocated 52 percent of proceeds to improve energy efficiency, 11 percent to accelerate the deployment of renewable energy technologies, 14 percent to provide bill payment assistance, and 1 percent for a variety of greenhouse gas reduction programs (RGGI, 2011, 4). Under the RGGI program, states unanimously chose to distribute more than 90 percent of allowances through an auctioning process (Union of Concerned Scientists, 2007). Some policy analysts and industry experts advocate giving away some allowances for free (often as a method to get industry to support the program), but establishing and maintaining a market for the allowances is key to a program’s long-term success. To ensure prices are in line with what buyers can pay, the RGGI program established a cost containment reserve, a fixed additional supply of allowances available only if prices exceed certain levels, which increase each year. To ensure program effectiveness, a tracking system is used to record data on both CO2 emissions and allowance transactions. For transparency, reports and program data are available on the RGGI website. Each RGGI state is allocated a percentage of the total allowances. In 2014, New York had the highest allocation (39 percent of allowances), and Vermont had the lowest (only 1 percent). The individual state budgets for allowances are based upon their own regulatory schemes. One of the benefits of a multistate partnership is that power plants can ensure compliance by meeting the CO2 allowance established by any RGGI state. Another benefit is that several state programs comprise a single regional compliance market, which creates a greater level of efficiency in operations and flexibility for participants. The program has been successful at both auctioning its allowances and meeting its cap. The cap is designed to decrease over time, lowering regional emissions. From 2009 through 2011, the cap was 188 million tons of CO2 per year; this was lowered to 165 million tons per year for 2012 and 2013. In 2011, emissions were 44 million tons below the cap (Burtraw and Woerman, 2012, 9). In 2012, the states conducted a review of the trading program, which resulted in a new 2014 RGGI cap of 91 million tons, a 45 percent reduction. The revised program is designed so that the CO2 cap declines 2.5 percent each year from 2015 to 2020. In addition, states have agreed to work to address emissions from electricity imports, which is significant considering that imports make up between 10 and 52 percent of electricity consumption in these states (Welton, 2013). An economic assessment by the Analysis Group concluded that this market-based carbon control mechanism has delivered positive economic benefits, helped states reach other environmental policy goals, and reduced payments for out-of-state fossil fuels (Hibbard et al., 2011, 6). Through June 2013, allowances generated $1.4 billion in revenue that, through reinvestment in energy efficiency programs, will generate $2.4 billion in the states’ economies over the next decade, leading to an additional 23,000 job years of employment (ENE, 2013, 1). Over the next decade, RGGI’s efficiency measures will save customers $1.3 billion in reduced energy costs. There are economic and job losses in some industries, especially those most affected by the carbon reduction regulations in fossil fuel–related industries. For example, powerplant owners could experience a $1.6 billion reduction in net revenue over time because of reduced demand, but, overall, regulation can bring substantial benefits. One study showed that more than $765 million remained in the local economy defined by the RGGI states because of reduced fossil fuel consumption (Hibbard et al., 2011, 4, 6). By investing proceeds locally in efficient and renewable energy programs, states are generating jobs in these industries and encouraging innovations in technology and processes to reduce emissions. They are also saving people money on their energy bills, which can be spent elsewhere in the economy. Establishing a regional system of cap and trade signals to small businesses and clean-tech entrepreneurs that the Northeast is serious about the green economy, and its member states represent good opportunities for growth. A regional partnership, like RGGI, and strong incentives within the participating states establish a positive investment landscape, encouraging businesses to establish operations in the region. Not every regional effort has proven so successful. Another regional cap and trade-based initiative, the Midwest Greenhouse Gas Reduction Accord (MGGRA), was signed in November 2007 by the governors of six Midwestern states and one Canadian province, with the goal of reducing greenhouse gas emissions between 60 and 80 percent below 2007 levels through a multisector cap and trade program. However, after 2010, states were no longer collectively pursuing the goals under the accord (although some have their own plans for reducing GHG emissions). Another regional effort, the Western Climate Initiative (WCI), began in February 2007 with a non-binding agreement between the governors of five western states: Arizona, California, New Mexico, Oregon, and Washington. These states developed a regional target for reducing greenhouse gas emissions based on existing efforts (specifically, the West Coast Global Warming Initiative and the Southwest Climate Change Initiative). The plan eventually expanded to include Utah, Montana, and four Canadian provinces, in addition to other state “observers” (WCI, 2014). First in 2008 and again in 2010, WCI released program designs that states could use to develop their own reduction strategies, and called for the program to be implemented by 2012 with a second compliance period to begin in 2015. However by 2011, only California and Quebec had adopted any regulations based on the recommendations. Why was RGGI successful when the Western and Midwestern initiatives failed? In a survey of stakeholders involved in developing these three regional programs, interviewees said the main reason for starting a cap and trade program was political. States saw a need for response to climate change due to federal inaction. Katia Biendenkopf, an assistant professor at the University of Amsterdam, who studied the impact of the European Union’s GHG emissions trading scheme on the development of the U.S. regional systems, found that “demonstrating that GHG emissions trading was feasible and successful as well as building pressure on the federal government to act were dominant drivers, both in RGGI and WCI” (Biedenkopf, 2012, 15). The failed MGGRA agreement was slightly different because it was developed at a time when federal policy was seen as likely to happen, and the program was shaped to specifically reflect the concerns of the Midwestern states so they could stay ahead of the curve (Biedenkopf, 2012, 16). The Midwestern states eventually lost the political will for their own trading program. And even though the Western Climate Initiative failed, California continued its aggressive pursuit of climate mitigation through its own statewide system. In 2006, California passed the Global Warming Solutions Act, which required a 25 percent GHG reduction statewide by 2020, which is the equivalent of taking 3.5 million cars off the roads (EDF, 2014). The law spelled out a range of measures to expand energy efficiency programs, achieve a renewable energy mix, and develop a cap and trade program. The California cap and trade program went into effect on January 1, 2013, with a cap on the largest polluters in the electricity and industrial sectors, applying to plants emitting 25,000 metric tons of CO2 equivalent or more annually. At the program’s start, this applied to approximately 300 plants throughout the state. The plan will gradually cover ground transportation and heating fuels, and come to include 85 percent of the state’s GHG emissions (Burtraw and Woerman, 2012, 8). When fully implemented, California’s program will be twice as large as the RGGI program, as measured by the size of the state’s economy and the number of sectors covered (Bifera, 2013). The cap itself decreases by 2 percent annually before 2015, and will decrease 3 percent annually between 2015 and 2020. Based on the amount of emissions covered, the program is currently second in size only to the European Union Emissions Trading System (EU ETS) (C2ES, 2014a, 2). All rules and market mechanisms are implemented and enforced by the California Air Resources Board (CARB). According to the cap and trade scheme, regulated companies must hold enough allowances to cover their total emissions, and can buy and sell allowances on the open market. Allowances are both given for free and sold at auctions. In contrast to RGGI, CARB gave a significant number of free allowances to electrical utilities in order to ensure that businesses remained competitive, facilitate a smooth transition, and prevent emissions leakage (Hsia-Kiung et al., 2014, 5). Leakages refer to increases in GHG emissions outside the state to compensate for reductions within the state. The remaining allowances are auctioned off. Each auction has a floor price that increases every year; in 2012 it was set at $10 per metric ton. There are two types of allowances auctioned: (1) current-year vintage, which can be used in the year of their auction, and (2) future-year vintage, which can be banked by companies for later use. The first auction was held in November 2012 when close to 29 million allowances (including current and future vintages) were sold to more than 600 approved industrial facilities and electricity generators. The allowances were sold for $10.09, near the minimum price of $10, indicating initial demand was modest and that participants were confident they would meet the cap (EIA, 2012a). The first year generated $525 million in auction revenues (C2ES, 2014a, 8). Similar to RGGI, investment of the auction proceeds is vital for the program to achieve its climate change mitigation goals. Two laws establish guidelines for the dispersal of this revenue; the first requires that it be spent for environmental purposes, particularly concerning air quality, and the second requires that at least 25 percent be spent on programs to help disadvantaged communities. At the end of each compliance period, companies must return allowances to the California government to cover their compliance obligation. Those that do not meet the compliance requirement must pay a penalty through the purchase of four times the number of outstanding allowances (Bosworth, 2013). Regulated entities can also meet up to 8 percent of their obligations using offsets. Offsets are reductions of greenhouse gas emissions that compensate for an emission made elsewhere. This allows companies to reduce emissions by funding reduction activities that would otherwise not occur, such as improving forest management or capturing and destroying methane from livestock manure. The standards used for the California offsets were carefully developed with input from a number of stakeholders and experts. For example, for forestry-based offsets, the standards require that carbon must stay out of the atmosphere for 100 years, ensuring long-term sustainable forest management. The use of offsets is not without controversy. Two public interest groups—Citizens Climate Lobby and Our Children’s Earth Foundation—filed a lawsuit against CARB, arguing that the offset program violated the requirements under the Global Warming Solutions Act. In their suit, they claim that the offsets do not represent any additional greenhouse gas reductions as required by law, but are preexisting activities. They fear that offsets provide a mechanism for oil refineries to buy their way out of cleaning up pollution without providing any actual environmental benefit. In January 2013, a state trial ruled in favor of California’s Air Resources Board. Our Children’s Earth Foundation appealed the decision, but as of this writing a hearing date has yet to be scheduled (Hsia-Kiung et al., 2014, 18). It is important to remember that success with offsets (and many other features of environmental initiatives) depends on how a program is designed. In California’s case, it includes some of the strictest rules in the world, giving most participants confidence that offsets represent activities that would not have happened without the program. Beyond offsets, there are other criticisms of the California cap and trade program. The fossil fuel industry and its lobbyists criticize the complicated nature of the program and its vulnerability to fraud. However, according to an analysis by the University of California, Los Angeles, the program is unlikely to suffer from manipulation and fraud because California’s government uses third-party verifiers to check reported emissions and tracks allowances to prove authenticity (Cutter et al., 2011, 8). A number of environmental justice groups opposed the program early on, arguing that it focused on gases that are released high in the atmosphere, and overlooked the release of heavier pollutants, like fine particles from oil refineries, that are most likely to harm low-income communities (Barringer, 2011). While the groups were supportive of the Global Warming Solutions Act generally, they opposed the cap and trade program as the primary mechanism to achieve reductions. One critic stated “our communities are opposed to a trading scheme because of the inherent inequities for communities of color and low income communities, and the missed opportunities for real localized emission reduction” (Conant, 2012, 32). Despite these criticisms, the program continues to progress and expand. In January 2014, the California program linked with Quebec, Canada’s program so that allowances and offsets issued in one jurisdiction could be used for compliance purposes in the other—the first international carbon market in North America. California’s program also continues to evolve. In October 2013, CARB released a set of amendments to the program based on public meetings and comments, economic analysis, and administrative insight. According to Thomas Reuters’ Point Carbon, policymakers still need to address the state’s reliance on complementary measures, such as the Renewable Portfolio Standard and the Low Carbon Fuel Standard, so that the demand for allowances doesn’t drop to the floor price and stay there (2013). While cap and trade programs are growing, their application is still limited in the United States. Cap and trade programs work by directly limiting the amount of greenhouse gas emissions in a given region, but the remaining policies we discuss here limit emissions indirectly by encouraging the use of renewable energy, reducing reliance on fossil fuels, and enhancing efficient use of energy. Renewable portfolio standards (RPS) are one of the primary mechanisms to encourage the uptake of renewable energy in the United States. A renewable portfolio standard is a performance requirement for electric utilities that mandates a certain amount of electricity be generated from eligible renewable sources. As of 2013, 29 states plus Washington, DC, had some kind of enforceable renewable portfolio standard, and 8 other states have non-binding renewable portfolio goals (DSIRE, 2013c). Figure 4.1 provides a map of states that have RPS standards and goals as of 2012. Figure 4.1 States with Renewable Portfolio Standards or Goals, January 2012 Note: West Virginia is noted as a Renewable Portfolio Standard State; however, the Interstate Renewable Energy Council categorizes it as a goal State. Source: U.S. Energy Information Administration. “Most States Have Renewable Portfolio Standards.” February 3, 2012. http://www.eia.gov/todayinenergy/detail.cfm?id=4850 Some states also include carve outs, requirements that a portion of their electricity portfolio comes from a specific source, such as solar. The first renewable portfolio standard was established in 1983 when Iowa passed the Alternative Energy Production Law (requiring that 2 percent of the state’s energy be renewable), although most states passed their standards after 2000. Massachusetts and Connecticut were among the first states to enact mandatory renewable portfolio standards. After it was clear that many states in the Northeast were considering these standards, the region decided to establish a coordinated system to track both renewable energy and emissions (Cory and Swezey, 2007, 10). Most renewable portfolio standard programs also allow renewable energy generation outside a state to qualify, so that non-renewable portfolio states can benefit from renewable energy policy in a nearby state. For example, Wyoming contains wind farms that participate in the Oregon RPS, even though Wyoming itself does not require renewable energy in its energy mix (Leon, 2013, 4–5). The Clean Energy States Alliance points out some of the key strengths and weaknesses of the renewable portfolio policy as compared to other types of clean energy policies. Some of the strengths of a renewable portfolio standard include: Weaknesses include: Each state sets its own standard, so policies can vary considerably. States differ on the level of the requirement, what they define as a renewable source, how it is measured, and how the requirement is enforced (Heeter and Bird, 2012). For example, California’s renewable standard requires 33 percent from renewables by 2020, while Texas requires 5,880 MW of new renewable energy generation to be built by 2015 (Cory and Swezey, 2007, 1, 22). Minnesota requires 25 percent from renewable sources by 2025 plus 1.5 percent solar by 2020 (DSIRE, 2013a). Different states have different requirements depending on their capabilities and resources. While political support for renewable portfolio standards is growing, there are also influential opponents. The American Legislative Exchange Council (ALEC) drafted model legislation in 2012 pushing for a complete repeal of renewable portfolio standards (Goldenberg and Pilkington, 2013). In this case, state legislators introduced versions of the model legislation in a number of states, though most didn’t make it beyond an introductory stage. The Council’s perspective is that a renewable portfolio standard is a tax on consumers and that it mandates utilities use sources that are expensive and unreliable, increasing the cost of doing business (ALEC, 2012). In North Carolina, Ohio, and Kansas conservative groups sought unsuccessfully to reverse clean energy regulations. They argued that renewable portfolio policies have too great an impact on electricity rates, give an unfair advantage to certain energy technologies, and that a requirement for a type of energy source interferes with the free market (Leon, 2013, 20–21). The effectiveness of state renewable portfolio programs can depend on federal policies, and the lack of a national framework makes it harder for businesses to develop separate models for each state. The state-by-state approach also increases regulatory uncertainty, and creates jurisdictional inconsistencies (Gallagher, 2013, 60). These standards permit states to determine what should be included, and these definitions vary widely and can cause confusion. Increasingly, states are using alternative resources, such as energy efficiency, thermal, and even non-renewables, in their renewable portfolio policies (although non-renewables are typically capped). Michigan, Ohio, Pennsylvania, and West Virginia permit the use of non-renewable resources such as coal, natural gas, and nuclear. In fact, West Virginia’s standard does not require a minimum contribution from renewable energy sources at all (DSIRE, 2012). An energy efficiency resource standard (EERS) or energy efficiency target is a policy tool developed to encourage more efficient generation, transmission, and use of electricity. These are long-term, binding energy savings target for utilities, expressed as a percentage of energy sales or specific energy units over a certain period of time (ACEEE, 2014c, 1). These are similar to renewable portfolio standards in that they require utility providers to reduce energy use by a specified amount that increases each year or so. An energy efficiency resource standard is like a renewable portfolio standard for energy efficiency. In 1999, Texas was the first state to establish an energy efficiency resource standard, but the top five scoring states in energy efficiency are Massachusetts, California, New York, Oregon, and Vermont. A report by the American Council for an Energy Efficient Economy found that most states are on target to meet their goals (Sciortino et al., 2011). The policy advantages of this tool include simplicity, specificity, and economies of scale. States also often coordinate their renewable portfolio standards with energy efficiency standards to achieve higher energy savings. Eight states include energy efficiency as an eligible resource in their renewable portfolio policies. Authors of one publication found that states use the maximum amount of energy efficiency allowed when possible, making the specified level extremely important in policy design (Heeter and Bird, 2012, 10). As of February 2014, 26 states have adopted an energy efficiency standard. These states represent 62 percent of electricity sales in the nation (ACEEE, 2014c, 1). The strongest energy efficiency standards are in Massachusetts, Rhode Island, and Vermont, which require nearly 2.5 percent annual savings (ACEEE, 2014b). Not surprisingly, the success of these types of programs depends on the clarity of the regulatory framework, the time frame allotted, and the commitment of resources of those involved (Sciortino et al., 2011). States can help reduce energy consumption through requirements and incentives in their building codes. Buildings are a major source of greenhouse gas emissions (second only to the transportation sector). Nearly 5 million commercial buildings and 114 million residences in the United States account for approximately 40 percent of the nation’s total energy use (US DOE, 2008, 4). McKinsey & Company estimates that energy improvements in the building sector could reduce annual electricity consumption by 23 percent, thereby reducing consumer energy bills by $130 billion annually (Granade et al., 2009, 7–8). A major advantage of building codes is that they can be designed around local needs and climate—the most efficient and sustainable practices will vary from Wisconsin to Arizona. States can take full advantage of local distinctions that might be lost at the national level.
Policy Levers for Sustainability
The State Level
Introduction
Energy Policies
Regulatory Tools and Standards
Regional Cap and Trade Systems
Case Study: California’s Cap and Trade
Renewable Portfolio Standards
Energy Efficiency Resource Standards
Building Codes