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Wednesday, March 4, 2009 02:14 pm

Illinois gets ready for carbon limits

Cap-and-trade worked for acid rain, but will it work again?

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New carbon dioxide limits will require huge investments in pollution control equipment, like this turbine for a power plant in Pennsylvania.
PHOTO BY MICHAEL BRYANT/MCT

Notice that nobody talks about acid rain anymore? That’s because in 1990 Congress implemented a “cap-and-trade” program for emissions of nitrogen oxide and sulfur dioxide (SO2), two of the primary contributors of acid rain.

Today, according to the U.S. Environmental Protection Agency, the acid rain program is ahead of schedule in terms of capping emissions, cutting SO2 nearly in half since cap-and-trade was put in place.

“There was some skepticism and it worked much better than a lot of people thought,” says James Monk, the executive director of the Illinois Energy Association, the trade group for the state’s utility companies.

Elements of that debate will likely play out again as Congress prepares to consider President Barack Obama’s first budget bill, which tackles global warming through a cap-and-trade program on carbon emissions from industrial facilities.

Unveiled last week, the president’s plan aims to reduce carbon output 14 percent below 2005 levels in 11 years and 83 percent below 2005 levels by 2050. In addition, the program will fund $150 billion in clean energy investments over 10 years beginning in fiscal year 2012 and, according to the proposed budget, “revenues will be returned to the people, especially vulnerable families, communities and businesses to help the transition to a clean energy economy.”

Critics, primarily congressional Republicans, believe the program will cause energy prices to skyrocket, as well as lead to manipulation and speculation in energy markets. Illinois, home to more existing and proposed coal-fired power plants than any other Midwestern state, would be especially vulnerable.

Monk believes those concerns “are not well-placed” if CO2 cap-and-trade is based on the acid rain program. “That program worked out great in providing the kind of flexibility that the industry needed to stay viable financially and in terms of providing reliable and affordable power, yet at the same time make progress on emissions reduction,” Monk says.

Obama’s action didn’t come as a surprise. During the 2008 presidential campaign, it was believed that Obama would seek to reduce CO2, a leading greenhouse gas that has been linked to asthma and other respiratory illnesses, either through a carbon tax or a cap-and-trade program. Still, the plan is expected to meet resistance in Congress, particularly from lawmakers from the industrial regions.

The plan sets limits on facilities’ emissions, then tightens those limits each year to meet an overall goal. The federal government would then sell permits, or allowances, to companies based on their anticipated emissions output. Facilities would initially buy the permits at a government auction. They could then purchase, sell, or trade their unused allowances on the open market.

But Illinois utility companies have other concerns. “The thing that our industry will be dealing with is the impact on rates. We’re going to be proposing there be some type of safety valve mechanism if rates skyrocket out of control. There are people who will be concerned that taking very severe steps environmentally will have a negative impact on an already crisis-born economy,” Monk.

The extent of that impact depends on how much companies have to pay for the permits and whether the permits are auctioned off, as proposed, or handed out for free. For that reason, City Water Light and Power regulator-affairs manager Bill Murray can’t say what the impact would be on Springfield ratepayers although he says, “an allowance auction would be more costly than an allowance allocation.”

While some lawmakers may be gearing up for a fight, firms that could be affected are open to the idea.

“It could work potentially if they get all the details right,” says Greg Kunkel, vice-president of environmental affairs for Tenaska Inc., which has plans for a 630-megawatt coal gasification facility near Taylorville.

Even if cap-and-trade eventually leads to higher utility rates, Kunkel says, that could create an incentive for more companies to pursue projects like the Taylorville Energy Center, which proposes to inject about 60 percent of the carbon it produces into the ground.

Both Kunkel and the IEA’s Monk agree that a federal cap-and-trade system is preferable to a state program, such as those that California and several other states are developing. A state program could put Illinois companies at a disadvantage.

“Our industry anticipated that with Obama winning the election there would be some type of comprehensive greenhouse gas/CO2 legislation come out of the Congress in the next year or two,” Monk says.

“The situation is such that there is going to be legislation. Our industry realizes that. We’re not going to be fighting about the concept so much as about how the concept is implemented.”

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