Navigant Research Blog

World’s Largest Cap and Trade Program in Development

— October 7, 2015

Chinese President Xi Jinping has announced an ambitious vision to implement a market-based cap and trade system to limit China’s emissions from its largest sectors. The announcement was made jointly with U.S. President Barack Obama as both countries prepare for the Global Climate Agreement in December. The cap and trade system will initially encourage emissions reductions in the following industries: power generation, iron and steel, chemicals, and building materials (such as cement, papermaking, and non-ferrous metals).

While specifics to China’s program have not been released, a typical cap and trade system operates as follows:

  • An annual nationwide limit is set for maximum allowable emissions. This is typically capped with the intent to reduce overall emissions from 5% to 15% compared to the previous year.
  • Individual emitters will be allowed an annual allowance of emissions totaling the nation’s cap.
  • Emitters are penalized if they exceed their allowances.
  • If an emitter has excess allowances at the end of the year, it can sell extra allowances to over polluters that want to avoid penalties.

Generally, the system allows companies to plan ahead for annual reduction targets. Companies are incentivized to sell excess allowances and are punished for excessive emissions. China also intends to generate 20% of its electricity from renewable sources by 2030. The carbon tax will help promote investment in renewable technologies and incentivize industries to help achieve this target.

Emissions Reduction Potential

China is currently the world’s largest emitter of CO2. In 2013, China emitted 10.3 billion tons of CO2, which accounted for 29% of global CO2 emissions. If China can reduce its annual CO2 emissions by 15%, the reduction would total more than the annual CO2 emissions from all of South and Central America.

Current Status of Global Emissions Trading Programs

The cap and trade system has been applied in many locations around the world with mixed results. The European Union implemented the first phase of its Emissions Trading Scheme (EU ETS) among 27 countries in 2005. The ultimate target of this program is a 20% reduction in emissions from 1990 levels by 2020 and 50% reduction by 2050. However, initial phases of the program did not achieve significant reductions and lacked control in distributing carbon allowances. Modifications for phase 2 and 3 aim to further reduce emissions and to manage auctioning of carbon allowances.

In the United States, emissions trading was utilized in the late 1980s to reduce impacts of acid rain. Emissions trading became law as part of the Clean Air Act of 1990. The Acid Rain Program has been effective in reducing the total amount of sulfur dioxide emissions to a 50% of 1980 levels by 2010. The current Regional Greenhouse Gas Initiative cap and trade program is effective in 10 states and allows some states to auction all of their emissions allowances. In the first 2 years with the auction program, six states raised $38.5 million and $106.5 million dollars. The states and electricity utilities intend to invest funds for energy efficiency and renewable energy technologies to further reduce fossil fuel-based emissions.

How China decides to structure its cap and distribute emissions allowances will be critical to achieve significant cuts in emissions and to promote investments in efficiency and renewable technologies. Regardless, China’s emissions trading system should be an important step toward reducing global carbon emissions and increasing investment in renewable technologies.


EPA Heads to Court with CPP

— August 28, 2015

The Clean Power Plan (CPP) has been a hot topic in recent months. It is about to get even hotter as 15 states band together in opposition to take the final ruling to court (details of the CPP can be found in the following links: link 1 and link 2).

Early Resistance

The CPP has met resistance since day 1, with federal court challenges filed well before the final rule was released by the Environmental Protection Agency (EPA) on August 3, 2015. Portions of the CPP were even shed in anticipation of a legal fight. The draft CPP rule included four Building Blocks (BBs):

  • BB1: Heat rate reductions
  • BB2: Switching from coal to gas
  • BB3: Renewables
  • BB4: Focused on energy efficiency (EE)

The EPA removed BB4 in order to strengthen the CPP’s legal position since EE is a demand-reducing resource, not a supply resource covered by the Clean Air Act (CAA, the CPP’s core federal law). Dropping BB4 removed a key legal concern cited by many who commented on the proposed CPP rule. However, a large block of states still oppose the CPP and plan to file in federal court to block implementation of the rule. Arguments against the rule range from its potential to substantially alter the power industry and the economic drivers of that business to unemployment and the threat of weakened power reliability.

CAA Battle

The CPP is not the only EPA rule being challenged in the courts. Florida is leading a group of 17 states over EPA startup, shutdown, and malfunction (SSM) rules. These states argue that the CAA gives the federal government the authority to set standards involving harmful pollutants, but it is up to the states to determine how they want to implement those standards.

The CAA is often upheld by the Supreme Court despite vigorously fought cases against the EPA. In the case of Coalition for Responsible Regulation v. EPA (2012), various state and industry group petitioners challenged all four EPA greenhouse gas (GHG) actions, alleging that they are based on improper constructions of the CAA. The Court upheld the GHG actions, supporting the EPA’s interpretation of the CAA in those cases. The Court also upheld provisions of the CAA in the Chamber of Commerce v. EPA (2011) case that permit the EPA to allow California to set its own automobile emissions standards. In this case, the U.S. Chamber of Commerce and National Automobile Dealers Association could not prove that these standards would cause any economic harm.

Primed for an Ongoing Battle

If the CAA’s previous Court success is any indication of the future, states need to prepare now for how they will meet the EPA’s CPP requirements. While numerous states fight the CPP (most recent state count was more than 15), many more are already preparing plans to reduce carbon emissions. In fact, a study conducted by the Union of Concerned Scientists shows that the 31 states that have already made commitments to the CPP will be more than halfway toward meeting their 2022 benchmarks, and 21 of these states will actually surpass it. Georgia, North Carolina, and South Carolina, all of which are suing the EPA, are also on track to exceed their 2022 benchmarks. The ongoing battle between states’ rights and the implementation of federal EPA rules will be on full display once the final CPP is published in the Federal Register (on or about November 3, 2015) and the opposing states file their federal court cases. The outcome of those joint cases will have a great impact on the future of the U.S. power industry.


Carbon-Saving Innovation in the Airline Industry

— July 7, 2015

Relative to the rapidly changing automotive industry, which pumps out new models every year, the airplane industry has evolved at a considerably slower pace. This is not surprising, given that around 1,000 aircraft are made by Airbus and Boeing, the leading manufacturers. Unlike cars, changes in design and function take longer to incorporate into planes. For some time, the airline industry has been under pressure to increase its fuel efficiency and lower its greenhouse gas (GHG) impact. While airplanes contribute to 2%–3% of global GHG emissions annually, some posit that the high altitude of those emissions has a greater impact on climate change.  This past month, the U.S. airline industry has been put on notice to reduce the amount of GHG from air travel.

Citing the right to regulate emissions as part of the Clean Air Act, the U.S. Environmental Protection Agency (EPA) reported that almost one-third of global aircraft emissions originated from U.S. aircraft. To address this, President Obama has charged the EPA to begin crafting rules similar to the draft Clean Power Plan (111(d)) that addresses power plants and utility energy use.  European carriers have been under similar pressure from the European Commission.

The Path toward Change

There are two fundamental ways that airplanes can reduce fuel use: they can use a lower GHG fuel source and they can make more efficient planes.

For airplanes, the lower GHG fuel source has been biofuel, either from biological sources or waste products. As discussed in Navigant Research’s Aviation and Marine Biofuels report, choosing biofuels also helps hedge against increases and variability in fuel costs. The volatility of aviation fuel cost over the last 5 years can be seen in the figure below.

Monthly Cost and Consumption: 2000-2015

carbon airlines

(Source: U.S. Department of Transportation)

It is interesting to note, however, how relatively flat U.S. and international fuel consumption has been over the past 15 years. The United Nations’ International Civil Aviation Organization (ICAO) projections have cited the rapid growth of European plane travel in forecasting that fuel demand for air travel could result in a 300% to 700% growth in emissions by 2050.

U.S.-based United Airlines just announced an unusual step in securing biofuels for its planes. In late June, it was announced that the company is investing $30 million in Fulcrum BioEnergy. Once production of the waste-to-jet fuel has matured, United will be able to purchase up to 90 million gallons of jet biofuel.  Fulcrum already has a deal with Cathay Pacific and has received funding from the U.S. Department of Defense with the aim of becoming another military jet fuel provider.  Yet, United is not putting all of its eggs in one basket; it already had a deal with AltAir Fuel, which began in 2009.


States’ Roles in the Clean Power Plan

— June 25, 2015

Cross_Gatel_webThe U.S. Environmental Protection Agency (EPA) plans to finalize the Clean Power Plan (CPP) this summer. As part of the plan, states will have 1 to 3 years to submit State Implementation Plans (SIPs) to the EPA for review. Some states are already starting the planning process to develop an SIP, and most are beginning with stakeholder meetings that include utilities and other major players in their state. Other states are waiting to see the final regulation before they begin.

States face a complicated web of decisions when crafting SIPs. The figure below shows a simplified hierarchy of the paths that they may take. States are unlikely to go through the decision process in a linear fashion; instead, they will need to consider all options and narrow them down based on their existing policies, resources, and stakeholder goals, among other factors.

SIP Example Decision Process


CPP Decision Tree - Recreated

(Source: Navigant Consulting)


The first decision a state needs to make is whether to submit an SIP. If a state does not submit an SIP, the EPA will impose a Federal Implementation Plan (FIP). The EPA has indicated that it may include insights on what an FIP will look like when it releases the final rule this summer. Some states have passed legislation limiting their state agencies from submitting an SIP without legislative approval, which could impede those states from submitting an SIP at all.

A decision that will need to be made early in the process is whether or not a state wants to work with other states to submit a regional plan. There have been proposals, for instance, from Duke Nicholas Institute, that individual plans could be crafted to be standalone and still allow trading of credits with other states, similar to the way that renewable energy credits (RECs) can be traded among states even though Renewable Portfolio Standard (RPS) policies were not coordinated prior to implementation. However, many states are already in discussions about coordination efforts—for example, 14 Midcontinent states submitted comments to the EPA on its proposal and held a stakeholder event on June 5.

If states do work together on regional implementation plans, under the proposed rule they would have an additional year before their plan is due to the EPA. This allows additional time to coordinate among the many players involved across all coordinating states, but narrows the amount of time between when the implementation plan is approved by the EPA and compliance begins—potentially as little as 1 year.

Targets and Policies

Another decision that states must weigh in on is whether or not to use the rate-based target laid out by the EPA or to convert it to a mass-based target. This decision is interrelated with the kind of policy regime a state chooses to include in its SIP. A rate-based target may be more appealing to states that impose individual unit obligations on fossil units in their state, as it eliminates the uncertainty surrounding future load growth. Conversely, a mass-based target may be easier to implement in the northeast, where a mass-based cap-and-trade system already exists.

States will also need to determine how to integrate existing renewable and energy efficiency policies into their SIPs and decide if new policies are needed. These include RPSs, energy efficiency standards, and updates to building codes and can be combined with cap-and-trade, as in California, or standalone.

There are many additional considerations for states to take into account as they craft implementation plans. For the best overall outcome, it is recommended that states start early, have meaningful stakeholder involvement throughout the process, and leverage modeling and analytical tools where possible.


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