With the recent ratification of the Kyoto Protocol on global warming, all eyes have focused on the United States -- the most prominent holdout in the global effort to reduce greenhouse gas (GHG) emissions. While U.S. proposals for federal regulatory or market-based action continue to languish, a collaborative effort by U.S. state governments to cut air pollution may point to a new front in the crucial battle to stop global warming.
In 1999, nine U.S. states and the District of Columbia banded together to create a regional market for permits to emit nitrogen oxides (NOx), a pernicious air pollutant that contributes to smog and acid rain. Through a regional Ozone Transport Commission (OTC), the states launched the "OTC NOx Budget Program," which proved to be remarkably successful at reducing regional emissions of NOx.
In similar fashion, a number of U.S. states are now shifting focus and leading the way on climate change by considering market-based policies to reduce GHG emissions. We believe that the success achieved with the state-led NOx trading program increases the likelihood of states demonstrating to the federal government the potential for application of GHG controls, as explained in our new report released by the World Resources Institute,
Greenhouse Gas Emissions Trading in U.S. States: Observations and Lessons from the OTC NOx Budget Program.
The pattern of regional cooperation demonstrated in both the OTC market and the new, emerging GHG market continues a historical trend in which states serve as the dominant source of innovation and leadership. The federal government then picks up successful programs and extends them at a national scale.
In the case of NOx emissions, a "cap-and-trade" system was used to define the total amount of NOx pollution that regulated sources could emit over time, with a long-term goal of decreasing emissions. Under the scheme, regulated firms had the option of reducing emissions or buying permits, called "allowances," from other firms.
Companies with higher costs saved money by buying allowances from firms with lower costs, and the firms with lower costs made money by reducing NOx emissions and selling their excess allowances. The overall cap on emissions ensured the environmental credibility of the regime.
Under the OTC NOx Budget Program, annual emissions from 1999-2002 were significantly reduced and consistently fell below the emissions cap. Compliance with the program was nearly perfect, and it appears that there was little if any leakage - the displacement of emissions or economic activity - from the OTC region to neighboring areas.
The cost of reducing NOx emissions was also considerably lower than the initial forecasts. Despite short periods of price volatility, regulators did not intervene with a price cap, nor did participating sources seek regulatory relief in court, and the market routinely stabilized. In spite of skeptics' expectations of economic demise, the program had no discernable effect on the region's economic vitality.
In addition to the program's regional accomplishments, the effort facilitated the adoption of broader, national level NOx emissions controls. In 2003, the OTC NOx Budget Program was incorporated into a larger federal system with similar features. The leadership and innovation of the states provided the nascent national system with valuable information and a set of committed stakeholders.
This model of state and regional design leading to federal action may well be the model that moves the U.S. federal government to successfully focus on climate change and GHG emissions.
Working and living in a world with GHG constraints is imminent; no one can deny the "mega trend" towards low-carbon economies. The Kyoto Protocol, ratified by 147 countries including our major trading partners in the both the developed and developing world, is just one step on this path.
Prudent U.S. states and companies have recognized both this reality and the importance of tackling global warming and are looking for methods to effectively reduce GHG emissions. By starting with GHG emission controls on a state level, we can gain experience and produce innovative technologies and strategies which will facilitate broader control on a national scale.
U.S. states can contribute much to national efforts to reduce GHG emissions. Experience by states thus far represents a clear encouragement to proceed.
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Andrew Aulisi is a senior associate in the Sustainable Enterprise Program at the World Resources Institute. Jonathan Pershing is the director of the Climate and Energy Program at the World Resources Institute.
This column has been reprinted courtesy of WRI Features. It was first published in February 2005.
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