Obama Just Created a Carbon Cap-and-Trade Program

As the Obama Administration honed its historic new climate rules affecting power plants, it began thinking about electricity more broadly.  It was a shift in perspective that in the end may  produce the nation’s newest system for trading pollution.

Instead of looking solely at how each state could reduce pollution from its electricity sector, the U.S. Environmental Protection Agency’s new carbon dioxide limits emphasize interstate cooperation.

That cooperation will be possible, the EPA realized as it reviewed millions of public comments on the plan’s draft, partly through the regional nature of the nation’s electrical grids.  The EPA’s Clean Power Plan, finalized Monday, envisions a nation in which interstate electrical grids serve as backbones for renewable energy and pollution trading and a carbon cap-and-trade program.


States where more clean energy is being produced than is required by the Clean Power Plan could, in the coming years, sell their surplus achievements to more laggardly states.  The new rules create a system in which those trades can be made without any need for special interstate agreements.

“That's great news, to put it mildly,” Environmental Defense Fund economist Gernot Wagner said.  “Putting a price on carbon emissions via cap and trade is among the best possible ways to get emissions down quickly and cheaply."

Europe uses a cap-and-trade program to keep its carbon dioxide pollution within levels required by international agreements.  Two cap-and trade programs also operate in the U.S., and states are considering creating more.  Obama was elected to his first term vowing to introduce a cap-and-trade program to fight climate change, but he couldn’t get enough support for it from Congress.

The draft of the new rules, published a year ago, listed interstate collaboration as a possible tool for achieving compliance — an option that has interested most states.  The final version promotes it. It encourages states to join an existing cap-and-trade program, or develop their own trading-based approach to pollution reductions.

“The most striking change, from what I’ve seen, is the degree to which state-level and multi-state cap-and-trade systems are now explicitly encouraged,” Harvard University environmental economics professor Robert Stavins said.

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