Midwestern Greenhouse Gas Reduction Accord

ADDENDUM, September 13, 2012:
The web site, the Center for Climate and Energy Solutions (CCES), is the successor to the Pew Center on Global Climate Change.  CCES reports that The Midwest Greenhouse Gas Reduction Accord, while not having been formally disbanded, is not being actively implemented by the signing States.

Summary.  The United States now has three regional interstate agreements operating with the objective of reducing emissions of greenhouse gases (GHGs), the Western Climate Initiative, the Midwestern Greenhouse Gas Reduction Accord and the (Northeast states) Regional Greenhouse Gas Initiative.  This post discusses the Midwestern Greenhouse Gas Reduction Accord.  It was established in November 2007, and uses a cap-and-trade mechanism, with successively lower annual caps, to achieve reduction in GHGs emissions.  The Midwestern Accord covers most sectors of the energy economy that emit GHGs.  Its models predict significant reductions in GHG emissions over the coming decades.

Introduction. The governors of Illinois, Iowa, Kansas, Michigan, Minnesota and Wisconsin, and the premier of Manitoba agreed to participate in a new regional agreement to curb emissions of greenhouse gases, the Midwestern Greenhouse Gas Reduction Accord (the Accord, or MGGRA), on November 15, 2007.

The Accord joins the Western Climate Initiative (see the earlier post and the (Northeast states) Regional Greenhouse Gas Initiative that have recently been put in place around the U. S. in the absence of a single comprehensive program at the U. S. federal level to combat global warming.  In addition to their American member states, the Accord and the Western Climate Initiative between them include many Canadian provinces, but not Alberta and Saskatchewan.  Alberta is home to the emissions-intensive extraction of an oil product from tar sands; indeed, Alberta is responsible for the most GHG emissions of all the Canadian provinces.

The American states participating in these three agreements, and their greenhouse gas emissions, are shown in the following map:

Map displaying the three regional greenhouse gas emission reduction programs in the U. S. (omitting Canadian provinces in WCI and the Midwest Group as well as their contributions to emissions).  WCI: Western Climate Initiative; Midwest Group: the Accord; RGGI: Regional Greenhouse Gas Initiative.  MtCO₂e: Millions of metric tonnes of greenhouse gas emissions expressed in terms of carbon dioxide-equivalent greenhouse activity.  Percents are the portions of total U. S. emissions.  

Source: World Resources Institute (http://www.wri.org/stories/2007/11/midwest-greenhouse-gas-accord-numbers)

According to the World Resources Institute, the Midwest generates much of its electricity from coal.  Coal is the fuel that produces the most CO2 emissions per unit of derived energy of all the fossil fuels used for energy production.  This region also generates a large amount of GHG emissions from agriculture.  As a result, per capita emissions are 50-70 percent higher here than they are from coastal regions of the country.

Goals of the Accord.  The Accord includes the objectives of

1.     Establishing GHG reduction targets, and schedules for achieving them;

2.     Establishing a monitoring system for accurately recording GHG emissions from the various sources covered, and ensuring credit for reductions in emissions; and

3.     Developing a market-based cap-and-trade system covering most classes of GHG sources as a principal mechanism for achieving reductions.

Cap-and-Trade Model. The Accord specifies that the mechanism for reducing emissions should be a cap-and-trade program.  Generally, cap-and-trade relies on accurate emissions reporting from all sources, and the granting of “emission allowances” to each industrial and commercial source.  The number of allowances issued establishes the cap, or upper limit, of emissions across the program.  Each allowance permits the owner to emit 1000 metric tons of CO2-equivalent GHGs in a year.   The allowances can be bought or sold (traded) in a regional allowance market.  This market system establishes a price for emitting GHGs, which in essence creates a penalty for emitting.  This provides an incentive for each source to innovate in order to reduce emissions, thus lowering its costs each year.  The cap is lowered each year.

In order to develop policies that would guide putting the Accord into practice, the participants appointed an Advisory Group that included representatives from the respective governments, environmental groups, industry and agriculture.  Its subgroup responsible for drafting the detailed program included stakeholders across a broad range of affected interests, such as the Union of Concerned Scientists, the Natural Resources Defense Council, the Wisconsin Energy Conservation Corp., The Public Service Commission of Wisconsin, and Duke Energy.  It also employed energy and economic consultants in this project.  This group devoted considerable effort to develop emissions and economic models based on a cap-and-trade emissions reduction model resulting from scenarios under consideration.  Its report to the Advisory Group was issued May 11, 2009. 

Timeline.  The Advisory Group report (Note 1) establishes that compliance with cap-and-trade program will begin January 1, 2012.  With this date in mind, participants in the Accord must have begun reporting their emissions of the six classes of greenhouse gas (see below) on January 1, 2011, based on data that have been collected starting January 1, 2010.

Emissions Targets.  The Advisory Group recommended reducing GHG emissions by 20 percent below 2005 levels by 2020, and by 80 percent below 2005 levels by 2050.  These are to be achieved by having the program cover most aspects of the energy economy, including electric generation and electric power imports into the Accord region from outside the region, transportation fuels, industrial sources of combustion and process sources, fuels used for commercial, industrial and residential buildings.  Sources emitting more than 25,000 tonnes CO2-equivalents/year, and electric generating facilities having a capacity of 25 MW or greater are included.  As biomass, biofuels and emissions originating from life forms are renewable, these sources are excluded from the caps. 

The covered GHGs include carbon dioxide, methane, nitrous oxide, hydro-fluorocarbons, perfluorocarbons, and sulfur hexafluoride.  Many of these substances have as much as several thousand times the greenhouse effect, molecule-for-molecule, than does carbon dioxide.  This fact is the reason for expressing emissions reductions in terms of CO2-equivalents.

Allowances.  Allowances are the permits for emitting GHG gases, and are limited by the cap for a given year.  The Advisory report emphasizes the need to price them appropriately to achieve the objectives while minimizing economic harm to end consumers.  Revenues are to be devoted to development of new technologies that promote the goals of the program, and for job retraining that promotes employment in the many new industries that are related to achieving emissions reduction.

Complementary Reductions.  The program also envisions that other measures directed to energy conservation will complement the cap-and-trade regime.  In the Advisory report, for example, complementary reductions based on energy efficiency reductions of 1%/yr and 2%/yr are included.

Offsets. Offsets refer to activities not otherwise regulated by the program that contribute to overall lowering of GHG emissions, i.e., they are not directly subject to reductions of emissions occurring at GHG sources.  In the Advisory report offsets are limited to 15% of the capped GHG emission allowances that a particular source  was awarded.  Yet they are “purchased” using allowances issued by the program.  Examples of offset activities include agricultural practices that reduce emissions, forest management that leads to reforestation or promoting growth of existing forests, and waste management such as capturing GHGs (primarily methane) emitted from landfills.  To qualify, offsets must a) represent actual emissions reduction that can be accounted for, b) be in addition to reductions that would have taken place under the program without offsets, c) be easily monitored and verified, and d) be permanent.  Initially emissions offsets are to be contracted only among the participants in the Accord, and other states and provinces that agree to accept offsets.  Subsequently additional international offset agreements may be set in place.  The Advisory report envisions that by far the largest fraction of offsets purchased will be from CO2 sequestration activities (Note 1).  It is to be noted however, CO2 sequestration remains an experimental technique at this time whose feasibility remains to be shown.

Predicted Results from Cap-and-Trade.  The Advisory Group prepared elaborate modeled predictions of the expected lowering of GHG emissions using alternative input assumptions (Note 1).  The models include a reference case based on “Business-As-Usual”, i.e., continuation of pre-Accord activities; complementary activities only, including the predicted effects of a 1%/yr and a 2%/yr reduction in emissions arising from implementing  energy efficiency programs; and the effects of the cap-and-trade program.  Selecting one example from the report’s slides, the graphic below shows the results that are predicted, in the various GHG-emitting economic sectors up to 2030.

Predicted GHG emissions under various scenarios.  TgCO₂e: teragrams (trillions of grams, or megatonnes (metric)) of CO2-equivalent emissions.  CAGR: compound annual growth rate, referring to the percent figures to the right of each color-coded economic sector’s band.  RefCase: Reference Case arising from Business-As-Usual (modeled by the uppermost heavy red line). Comp. Policies (1%EE): Results predicted for only 1%/yr energy efficiency (modeled by the orange dashed line). Comp. Policies (2%EE): Results predicted for only 2%/yr energy efficiency (modeled by the green dashed line).  The black bracket at the upper right gives the total results including capped emissions reductions.

Source: Cap-and-Trade Modeling: Policy Run Results, Presentation to the GHG Accord Advisory Group, 11 May 2009, Minneapolis, MN.  Midwestern Greenhouse Gas Reduction Accord.

The graphic shows that from 2005 to 2030, business-as-usual (the heavy red line) leads to an increase from about 840 TgCO₂e to about 920 TgCO₂e predicted, or about 0.36%/yr.  Starting at 2012, the effects of only energy efficiency programs of 1%/yr and 2%/yr lead to modest but measurable reductions in emission on their own.  The additional effect of putting a cap-and-trade program in place is predicted to yield an important reduction in emissions, practically all of which originates in the electric power sector.  Relative to business-as-usual, emissions from this sector are predicted to drop by 69% by 2030, as a result of efficiency gains of 2%/yr and cap-and-trade (Note 1.)  This corresponds to the 4.0%/yr shown in the graphic.  The models explicitly rely on sequestration of CO2 in coal-fired power plants for a major portion of this emissions reduction, even though this technology remains experimental at this time.  In contrast to electricity generation, the transportation and industrial sectors apparently would respond only minimally to a cap-and-trade program.

The Advisory report (Note 1) presents several alternative models of allowance pricing over time.  An example is presented in the following graphic:

Modeled pricing for one GHG emission allowance under cap-and-trade, in dollars valued in 2006 per tonne of CO₂e emitted.  Platform case: full effect of cap-and-trade and energy efficiency programs, showing 1%/yr (blue) and 2%/yr (red) efficiency assumptions. 

Source: Cap-and-Trade Modeling: Policy Run Results, Presentation to the GHG Accord Advisory Group, 11 May 2009, Minneapolis, MN.  Midwestern Greenhouse Gas Reduction Accord.

 

According to the graphic, the effect of greater efficiency is to lower significantly the premium needed to purchase an emission allowance.  The price rises with passing years because the cap is progressively lowered, so that fewer allowances are available for purchase.  An effect of pricing allowances in this way is modestly to increase the cost of energy, yet the program envisions recycling the revenue from the sale of allowances into research and development directed toward renewable energy sources, thereby ultimately leading to lower costs at retail.  It also funds worker training programs.  The report notes that in 2007 the U. S. member states had a regional gross domestic product of $1,700 billion, yet by 2030 the incremental cost of allowances is only about $1 billion for electric power, and much less for the other affected economic sectors.  The report predicts that for an average household, in 2030 the full cost of allowances might add $60-$400/yr to vehicle fuel purchases, and about $40-$200/yr in natural gas purchases (Note 1).

Opposition to MGGRA.  Russ Harding, writing on the Mackinac Center for Public Policy website, reports that a Michigan legislator has introduced a bill that would remove Michigan from the Accord.  In this post, he argues that efforts to reduce emissions will lead to higher energy costs, and will lead to loss of jobs in the state.  According to Mr. Harding, similar bills are to be introduced in Wisconsin, Iowa and Minnesota.

The Advisory report, on the other hand, identifies new or expanded industries arising as a result of the cap-and-trade program, such as biofuels, renewable energy and innovative research, development and commercialization ventures.  These should provide many new job opportunities for the work force.

Conclusion.  The MGGRA was established in recognition that the U. S. federal government has failed to implement a single nation-wide program for reducing the consumption of fossil fuels, lowering greenhouse gas emissions, and developing new industries based on renewable energy (Note 2).  The Accord recognizes that climate change presents increasing risks in the economic, social and environmental realms.  It acknowledges that we now have sufficient scientific knowledge concerning the certainty of the sources of climate change that we must act now to reduce its effects. Importantly, it signals the failure of the U. S. federal government to enact a national response to climate change whereas many states and other nations around the world have done so.  These are among the foundations cited by the Accord to justify creating the MRGGA.  Together with the WCI and the RGGI, MRGGA covers a significant portion of the U. S. both in terms of population and GHG emissions.  These pioneering agreements offer a way forward for the U. S. to begin to address global warming.

Notes.

1. Cap-and-Trade Modeling: Policy Run Results, Presentation to the GHG Accord Advisory Group, 11 May 2009, Minneapolis, MN.  Midwestern Greenhouse Gas Reduction Accord.

2. Midwestern Greenhouse Gas Reduction Accord, November 15, 2007

© 2011 Henry Auer