With federal policy makers largely neglecting their environmental stewardship responsibilities, state governments are coming up with efficient, market-friendly approaches to environmental problems.
Despite widespread support for federal action to limit global warming pollution,1 Congress and the White House continue to sit on their hands, swayed by the Washington naysayers who claim that a safe, sustainable energy system is too expensive, especially now when fuel prices are at record highs. But as is so frequently the case in the environmental arena, the states are demonstrating that just the opposite is true. In August, California adopted the first economy-wide cap on global warming pollution that will reduce emissions to 1990 levels by 2020, after concluding that doing so would increase state revenues by $4 billion and bring 80,000 new jobs to the Golden State.2 The Northeast Governors3 came to a similar conclusion last year, adopting a cap on carbon dioxide emissions from power plants – the Regional Greenhouse Gas Initiative (RGGI) – after economic modeling showed they could reduce pollution by 10% from current levels while reducing energy bills for the average homeowner by over $100 per year.4 With this cap in place, the electric sector is on track to achieve the 80% reductions in emissions necessary to stabilize the climate within fifty years.5 And it’s not just the tree-huggers on the coasts who are gearing up to tackle the most pressing environmental problem of our time: Governors in Arizona, New Mexico, Montana, Utah, North Carolina and Illinois6 and over 300 mayors nationwide7 are rolling up their sleeves to tackle global warming.
How have these leaders convinced themselves that they can reduce global warming pollution in a smart way that will both benefit the local economy and bring new clean energy businesses and jobs to their states? By focusing on clean energy technologies, and recognizing that well-designed policies are essential if we are to bring them to market in the timeframe needed to avert potentially catastrophic warming that could result from current federal policy. The Bush administration, content to stay the course on energy policy, espouses voluntary initiatives that have clearly failed to stem the increase in emissions. Although the Senate Energy and Natural Resources Committee launched a broad stakeholder discussion of policy options last April, Congress has not put forth a legislative strategy that would put the country on a path towards stabilizing atmospheric levels of carbon. But a close look at the activity underway in the states should give the House and the Senate confidence that they too can successfully tackle global warming pollution. States are taking a fresh look at cap-and-trade design, developing innovative features and avoiding some of the flaws that have plagued precursor programs. And they are approaching global warming in the context of a comprehensive review of energy policy, targeting the perverse incentives of current regulation and as well as the market barriers that hinder investment in the cheapest zero-emission resource, energy efficiency. These solutions are equally available in Washington, and states are garnering widespread political support that their counterparts in the federal government could also enjoy.
With respect to cap-and-trade design, the most exciting innovation is the agreement among RGGI states to use at least 25% of the value of the allowances (pollution permits) to benefit consumers and promote clean energy, most likely by auctioning allowances to the owners of regulated power plants. Cap-and-trade refers to policies that set overall targets for emissions designed to achieve specified reductions in emissions over time. Once the caps are set for a pollutant, permits for emissions are allocated to each producer within the system, and producers are allowed to trade between themselves. This is a huge shift from existing practice. In the Acid Rain Program, the NOx Budget Program and the European Emissions Allowance Trading Scheme for greenhouse gases, governments established mandatory caps and allowed trading, but they gave almost all of the allowances to the polluting sources free of charge. In the electric sector this makes absolutely no sense. Since allowances are tradable, they carry an opportunity cost, and therefore power plant owners will pass the cost of allowances onto customers regardless of whether or not they pay for them.8 In Europe, free distribution of allowances has already resulted in hundreds of millions of dollars in windfall profits to owners of polluting plants,9 dollars that could have been used to reduce the cost of the program for energy consumers by promoting investment in energy efficiency or sustainable power generation technologies. Granted, the northeastern states have only committed to use twenty-five percent of the allowances in a wise fashion, but if one follows the logic behind this commitment (as several states are beginning to do), there is no public policy justification to use less than 100% of the allowances for public benefit purposes. As the states head into their individual rulemakings, they have the opportunity to do just that.10
The RGGI states conducted extensive modeling of the emissions cap under different scenarios and determined that by increasing end-use efficiency for customers they could actually reduce energy bills while implementing the cap.11 Despite the fact that the Northeast states are among the most efficient in the nation, their analyses showed that they could triple investment in efforts to speed the adoption of high-efficiency heating and cooling systems, more efficient lighting, and energy-saving “green” building design without running out of opportunities to reduce energy bills for their customers.
Proceeds from the sale of allowances will enable the states to increase the number and size of the programs they are implementing to transform markets for energy intensive products, but they are not sufficient to promote investment in all cost-effective energy efficiency. To do that, the states must also adopt more rigorous building energy codes, which effectively require developers to consider the occupant’s energy bills when they design buildings and choose materials. And states must adopt increasingly stringent efficiency standards for energy-using appliances and equipment. The reduced demand for energy from such efforts translates into sizable cuts in energy prices – for example, a five percent reduction in demand for natural gas would reduce the price of gas by a whopping twenty percent.12 This is a simple application of the law of supply and demand, yet our nation’s myopic focus on supply-side solutions has prevented us from taking advantage of it.
One of the main reasons for the lack of demand-side investment is that few utilities have any incentive to aggressively promote energy efficiency, since their profits are entirely dependent on how much power they sell and not on how well they meet their customers’ energy service needs.13 From the utilities’ perspective, even the most cost-effective investments in high-efficiency heating systems, advanced industrial motors or newly-developed fuel cells produce the same effect: a reduction in sales and, as a result, lost revenues and profits, making it extremely difficult for these clean energy technologies to play a central role in efforts to reduce global warming pollution. If we change the way we regulate the industry, allowing utilities to profit from energy-saving as well as energy-making investments regardless of how much power they sell, utilities would quickly adopt many more ways to cut waste and, in turn, lower customer bills. These kinds of reforms would benefit customers, shareholders and the environment. And they are just the sort of innovative answers that will allow states to deliver global warming pollution cuts at minimal, or even no cost to consumers.
California is already leading the way on this front. In the aftermath of the state’s 2001 energy crisis, utilities, regulators and environmental advocates collaborated to reform a regulatory framework that had utterly failed to deliver least-cost, environmentally sound energy services to customers. The state’s Public Utility Commission adopted a regulatory structure and procurement rules that require the utilities to act as “portfolio managers” for their customers by investing in cost-effective energy efficiency, promoting rational, economically efficient consumption decisions by customers, and assembling a diverse portfolio of supply resources through a combination of short- and long-term contracts designed to minimize electric bills, volatility in electric prices and environmental impact. During this period, the state also enacted the most ambitious appliance efficiency standards in the nation, ridding the local marketplace of the worst performing products. By the time the California legislature passed its global warming bill this year, the state was already well on its way to meeting the law’s pollution reduction requirements in the cheapest, fastest way possible.
We have quite a way to go before we realize a truly sustainable energy future, particularly as federal policymakers continue to lag behind, but the states are moving us in the right direction. They are demonstrating how to reduce pollution in much smarter ways by adopting policies that foster long-term investment in least-cost, sustainable energy resources, promote technological innovation and economic development, and avoid subsidies for mature, polluting industries. It’s a pretty good start.
* Dale Bryk is a Senior Attorney at the Natural Resources Defense Council and the Director of the Yale Environmental Law Clinic.
 See, e.g., April 4, 2006 Climate Conf. of the S. Comm. On Energy & Natural Resources, 109th Cong. (2006) (statements of Duke Energy, Exelon, GE, Shell, PNM, and Wal-Mart),available at http://energy.senate.gov/public/index.cfm?FuseAction=
Conferences.Detail&Event_id=4&Month=4&Year=2006. See also REGIONAL GREENHOUSE GAS INITIATIVE, STAKEHOLDER PROCESS: COMMENTS SUBMITTED TO RGGI (2003-06) (comments of Dominion, KeySpan, and NRG Energy), http://www.rggi.org/stakeholder_comments.htm.
 See Assem. B. 32, the California Global Warming Solutions Act of 2006, available athttp://www.arb.ca.gov/cc/cc.htm.
 See Memorandum of Understanding Concerning the Regional Greenhouse Gas Initiative (Dec. 30, 2005), available at http://www.rggi.org/agreement.htm (signed by the governors of Maine, Vermont, New Hampshire, Connecticut, New York, New Jersey, and Delaware). Governors Mitt Romney of Massachusetts and Donald Carcieri of Rhode Island dropped out at the eleventh hour, apparently finding the foray into 21st century energy policy too daunting. SeeAnthony DePalma, Seven States Agree on a Regional Program to Reduce Emissions From Power Plants, N.Y. TIMES, Dec. 21, 2005 at B3.
 ICF CONSULTING, RGGI ELECTRICITY SECTOR MODELING RESULTS, RPS SENSITIVITY AND VERY HIGH EMISSIONS REFERENCE AND PACKAGE CASE (Oct. 26, 2005) available at http://www.rggi.org/docs/rps_hi_emis_10_26_05.ppt; ECONOMIC DEVELOPMENT RESEARCH GROUP, REMI IMPACTS FOR RGGI POLICIES BASED ON THE STD REF & HI-EMISSION REF, (Nov. 17, 2005) http://www.rggi.org/docs/remi_stakeholder_presentation_11_17_05-final.ppt#492,1.
 CLIMATE CHANGE 1995: THE SCIENCE OF CLIMATE CHANGE, CONTRIBUTION OF WORKING GROUP I TO THE SECOND ASSESSMENT OF THE INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE (J.T. Houghton et al. eds., 1996).
 Each of these governors has launched a statewide stakeholder process to develop recommendations for specific policies to reduce global warming pollution. See, e.g., Ariz. Exec. Order No. 2005-02 (Feb. 2, 2005) (establishing a Climate Change Advisory Group in Arizona to “represent the scope and diversity that the issue [of global warming] holds for Arizona”),available at http://azgovernor.gov/dms/upload/2005_02.pdf (establishing a Climate Change Advisory Group in Arizona to “represent the scope and diversity that the issue [of global warming] holds for Arizona”); Ill. Exec. Order. No. 2006-11 (Oct. 5, 2006), available at http://www.illinois.gov/gov/execorder.cfm?eorder=54 (establishing a Climate Change Advisory Group in Illinois comprised of “representatives from business, labor unions, environmental groups, agriculture, the energy sector, as well as scientists and economists from throughout Illinois”).
 The mayors have pledged to reduce global warming pollution in their cities to at least 5 percent below 1990 levels by 2012, in line with the target set by the 1997 Kyoto Protocol. SeeMayors’ Climate Protection Agreement Home Page, http://www.seattle.gov/mayor/climate/.
 See April 4, 2006 Climate Conf. of the S. Comm. On Energy & Natural Resources, National Resources Defense Council Reply to Bingaman-Domenici White Paper on Cap-and-Trade Design Choices, 109th Cong. (June 22, 2006), available at http://energy.senate.gov/public/index.cfm?FuseAction=IssueItems.View&IssueItem_ID=38.
 Jos Sijm, Karsten Neuhoff, & Yihsu Chen, CO2 Cost Pass through and Windfall Profits in the Power Sector (Cambridge Working Papers in Econ. No. 0639, 2006) available athttp://www.electricitypolicy.org.uk/pubs/wp/eprg0617.pdf; Gaming Gases, ECONOMIST, June 10, 2006 at 69.
 As a practical matter, a state would likely do this by giving allowances to a trustee on behalf of customers; the trustee would auction the allowances to power plant owners and use the sale proceeds to promote efficiency or for other public purposes as directed by a state agency.
 ICF CONSULTING, RGGI ELECTRICITY SECTOR MODELING RESULTS, UPDATED REFERENCE, RGGI PACKAGE AND SENSITIVITIES (Sept. 21, 2005), available athttp://www.rggi.org/docs/ipm_modeling_results_9_21_05.ppt; Economic Development Research Group, supra note 4.
 NEAL R. ELLIOTT, ANNA MONIS SHIPLEY, STEVEN NADEL, ELIZABETH BROWN, KEVIN R. PETAK & JOEL BLUESTEIN, AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY, IMPACTS OF ENERGY EFFICIENCY AND RENEWABLE ENERGY ON NATURAL GAS MARKETS (2003).
 See MARTIN KUSHLER ET AL., AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY, ALIGNING UTILITY INTERESTS WITH ENERGY EFFICIENT OBJECTIVES: A REVIEW OF RECENT EFFORTS AT DECOUPLING AND PERFORMANCE INCENTIVES (2006).