Some States Embrace CO2 Cap-and-Trade Schemes, Others Reject Them

Opponents say it’s a regressive tax that doesn’t deliver anything, while proponents say it’s not a tax, but it puts a price on greenhouse gas emissions.

Illustration by The Epoch Times, Shutterstock

The United States is following Europe’s lead in instituting cap-and-trade systems to reduce CO2 emissions, but the country is split between Democrat-run states that have passed cap-and-trade mandates and Republican-run states that appear to have no intention of doing so.

In the middle are several swing states that have entered, then exited, cap-and-trade pacts, depending on which party gains the upper hand.

As global demand for oil, gas, and coal hits record levels and shows no signs of slowing, cap-and-trade has been hailed as an alternative way to reduce the use of fossil fuels by setting caps on how much CO2 companies can emit, and then allowing those that exceed the cap to purchase credits from companies that emit less, or to invest in projects, such as preserving forests, that purport to offset emissions.

The financial currency of the cap-and-trade market is called an “allowance,” which gives companies the right to emit greenhouse gasses. Each allowance is valued in terms of tons of emitted CO2, currently priced at less than $10 per ton on average, although organizations such as the World Bank have said that pricing in the range of $50 to $100 per ton is needed to meet the net-zero goals of the Paris Climate Accords.

Advocates of cap-and-trade hail it as a “market-based” solution.

“Cap and trade harnesses the power of the market to fight global warming,” a report by the Environmental Defense Fund states.

“The cap on emissions guarantees the environmental results we need. Trading gets it done in the cheapest way possible.”

But some critics are skeptical, arguing that it is essentially a tax on energy that gets passed on to consumers and commuters and that insiders may benefit more than the environment from the enormous sums of cash paid into the system.

“Cap-and-trade is a very interesting theoretical model to try to solve a policy problem, but it’s one that ultimately ends up just moving the costs around,” Ryan Yonk, an energy economist at the American Institute for Economic Research, told The Epoch Times.

“Ultimately, the people that pay are the end consumers. The people that benefit are the market creators, and that’s really one of the major concerns.

“If you’re going to have a cap-and-trade system, those that are facilitating the transactions, the middlemen that are involved, will ultimately be those that benefit most directly.”

Indeed, an industry has sprung up around carbon pricing systems, with stock exchanges vying to become financial centers for carbon trading and financial firms looking to profit from making markets in this new currency.

In addition, accountants and consultants earn fees to develop investable carbon-offset projects and to quantify the environmental benefits. Companies that develop wind and solar production or carbon-capture technology are also often recipients of carbon-offset payments under these systems.

European deputies take part in a meeting on EU emissions at the European Union Parliament in Brussels on June 22, 2022. John Thys/AFP via Getty Images

Following Europe’s Lead

Europe led the way in mandating a cap-and-trade system, establishing the European Union Emissions Trading System in 2005, which regulates about 10,000 manufacturing and energy facilities and air and maritime transport. According to the EU, this system has reduced industrial emissions by 37 percent since its founding.

The Obama administration attempted to implement a nationwide cap-and-trade system but noted that Americans would end up paying more.

President Barack Obama stated in 2008: “Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket.”

He said coal-powered plants or the natural gas industry, for example, “would have to retrofit their operations—that will cost money [and] they will pass that money on to consumers.”

According to a report by the Heritage Foundation, enabling legislation in Congress “failed to reach President Barack Obama’s desk because constituents gave their members an earful that cap and trade would amount to a massive energy tax.”

Since then, Democrats have been successful in implementing these mandates only at the state level.

According to the Center for Climate and Energy Solutions, more than one-fourth of Americans now reside in one of the states with cap-and-trade programs, which together make up one-third of U.S. gross domestic product.

In 2009, Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, Vermont, Massachusetts, Rhode Island, and Maryland officially started the Regional Greenhouse Gas Initiative, a cap-and-trade pact that ultimately expanded to include a dozen states throughout the Northeast and Mid-Atlantic regions.

California enacted its own cap-and-trade regime in 2012, and advocates say it has generated significant results.

According to a May report by California’s Air Resources Board, the state’s cap-and-trade program has funded $28 billion in climate-related investments over the past decade. Of the money spent, $11 billion financed various projects to “fight climate change and cut pollution.”

The remaining $17 billion was designated for projects such as putting affordable housing near job centers, building high-speed rail, and “adding zero-emission transportation options in underserved communities.”

In 2021, Washington state established a similar program, calling it “cap-and-invest,” through its Climate Commitment Act (CCA). The state now conducts quarterly auctions of CO2 allowances that emitters must purchase if they exceed emissions caps. The caps will be progressively reduced so that the state can get to net-zero emissions by 2050.

“These 2030, 2040, and 2050 limits were set into state law before the CCA was passed, and they’re based on the latest climate science,” Caroline Halter, spokeswoman for the Washington State Department of Ecology’s Climate Pollution Reduction Program, told The Epoch Times.

“In other words, they’re what scientists have said all governments need to do in order to avoid the worst impacts of climate change.”

Smoke rises from the coal-fired Morgantown Generating Station in Newburg, Md., on Oct. 10, 2017. More than one-fourth of Americans now reside in a state with a cap-and-trade program, according to the Center for Climate and Energy Solutions. Mark Wilson/Getty Images

The revenue raised from the sale of allowances must be invested in projects that “help to achieve state climate change mitigation and resilience goals,” the Washington State Department of Ecology, which runs the program, stated.

Across the United States, the billions of dollars raised under cap-and-trade programs can go to a variety of causes, many with a social justice component, depending on individual state laws.

In some cases, the funds are returned to electricity customers to subsidize energy costs. In other cases, the money goes to fund programs such as flood resilience and housing improvements for low-income residents.

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Virginia and Pennsylvania joined the Regional Greenhouse Gas Initiative (RGGI) in 2021 and 2022, respectively, but conservatives in those states have been fighting ever since to withdraw from it. Virginia withdrew in 2023 by executive order of Gov. Glenn Youngkin.

“Simply stated, the benefits of RGGI have not materialized, while the costs have skyrocketed,” Youngkin stated.

“In a filing before the State Corporation Commission, Dominion Energy [the state’s largest electric utility] stated that RGGI will cost ratepayers between $1 billion and $1.2 billion over the next four years.”

The RGGI program, according to a report attached to Youngkin’s executive order, is a direct carbon tax on Virginians because electric utilities have an effective monopoly and will pass any costs they incur on to customers. In addition, the report noted that Virginia’s emissions were already reduced by 50 percent over the decade before the state joined the RGGI.

While many factors besides carbon taxes play a role in electricity prices, the average cost of residential electricity as of April across the states that have a cap-and-trade regime is 23 cents per kilowatt hour, more than a third higher than the national average of 16.88 cents per kilowatt hour, according to the U.S. Energy Information Administration.

This not only creates hardships for residents in terms of higher energy bills, but also incentivizes companies in manufacturing and tech sectors that use material amounts of electricity to consider lower-cost states.

Utilities in California, for example, currently charge businesses on average 22.86 cents per kilowatt hour. The five states where electricity is least expensive—North Dakota, Oklahoma, Utah, Texas, and Wyoming—all charge less than 10 cents per kilowatt hour.

A wind farm operates in the Coachella Valley in Palm Springs, Calif., on May 7, 2019. The average cost of residential electricity as of April across the states that have a cap-and-trade regime is more than one-third higher than the national average, according to the U.S. Energy Information Administration. Mario Tama/Getty Images

There is an ongoing fight between Virginia’s governor and the Democrat-controlled Legislature to return the state to the RGGI. State lawmakers attempted to include in this year’s budget legislation a provision that Virginia must reenter the RGGI, but Youngkin vetoed the provision.

Conservatives in Pennsylvania fought RGGI membership in court, and the state has been enjoined from taking part in it pending a ruling by the state’s Supreme Court.

New Jersey withdrew from the pact in 2012 but reentered in 2020.

In Washington state, an effort sponsored by a resident asset manager and beekeeper Brian Heywood and his organization Let’s Go Washington is seeking to end that state’s cap-and-trade program through a public referendum.

“It’s a regressive tax that builds on the fears of people but then doesn’t deliver anything,” Heywood told The Epoch Times.

The state’s carbon offset regime “takes money from commuters and shoppers and people who are so brash as to want to heat their homes in the wintertime,” he said.

However, according to Halter, “the CCA is not a tax, though it does put a price on greenhouse gas emissions.”

“Unlike a tax, the price on emissions is set by the market, not the state,” she said. “It’s also worth noting that climate change disproportionately impacts communities that are already disadvantaged due to factors like income and race.”

Washington state residents will be able to decide for themselves whether they want to keep their cap-and-invest program, as the question will appear at the top of this November’s ballot.

After spending millions of his own money, Heywood was able to collect the 400,000 signatures necessary under state law to put a referendum to a public vote.

Despite the fact that Washington state is a “trifecta” state, in which the Democratic Party controls the governorship and both houses of the Legislature, Heywood said he believes he has a good chance of gaining enough support for his referendum to pass.

“There’s a split on the left here ... and the progressives have overreached,” he said. “Liberals are not going to vote Republican any time soon, but they’re sick and tired of the stupid [things] that the super-progressives have done.”