(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON, June 26 (Reuters) - President Barack Obama's climate plan, unveiled this week, may boost regional schemes to cut greenhouse gas emissions, known as cap and trade, four years after the United States failed to pass legislation for a nationwide programme.
Unlike Europe, the United States has no national cap and trade scheme to combat carbon emissions. The U.S. Congress considered but ultimately failed to bring in a national scheme in a climate bill which stalled in the Senate in 2009.
After this failure, there is no hope of a repeated attempt any time soon. But Obama's new climate plan could enhance the regional cap and trade markets and cement their future.
Such schemes allocate a fixed quota of carbon emissions permits to industry and these can be traded between the participants.
The present U.S. schemes are the Regional Greenhouse Gas Initiative (RGGI) of nine northeast states, which caps power sector carbon emissions, and California's economy-wide programme.
Obama, facing Republican opposition, is by-passing Congress and turning instead to the Environmental Protection Agency (EPA) to bring in carbon curbs on existing power plants.
He has directed the agency to finalise such emissions standards by June 2015 under the existing Clean Air Act (CAA).
If the agency can fend off litigation, a new EPA proposal could link and boost existing regional cap and trade schemes and possibly even expand these to neighbouring states.
But such a by-passing of Congress will face legal challenges, on the basis that the Clean Air Act was not originally intended to combat climate change.
There is little precedent, for example, to implement emissions trading through the Act.
It is too early to judge the cost or ambition of Obama's climate plan, given its low level of detail.
"What follows is a blueprint for steady, responsible national and international action to slow the effects of climate change so we leave a cleaner, more stable environment for future generations," Obama's "Climate Action Plan" stated.
The plan did include goals to cut cumulative carbon emissions from running appliances and government buildings and a target for federal agencies to source their energy from renewable sources.
But its most interesting aspect is the plan to curb carbon dioxide emissions from existing power plants, where it is clear that emissions markets will be one model for implementation.
Obama entitled the new carbon emissions standards, "Flexible Carbon Pollution Standards for Power Plants", in a memo directing the EPA administrator.
"You shall ensure, to the greatest extent possible, that you develop approaches that allow the use of market-based instruments, performance standards, and other regulatory flexibilities; (and) ensure that the standards enable continued reliance on a range of energy sources and technologies," he said in the memo.
In international climate policy, "flexible" and "market-based" are jargon for emissions trading.
The Clean Air Act has few precedents for enacting emissions trading. One is the sulphur dioxide (SO2) allowance trading system, intended to address the threat of acid rain.
That market was introduced through amendments to the Act in 1990, which passed both the House of Representatives (401-21) and the Senate (89-11) by wide margins.
No such political consensus exists now, ruling out new amendments to accommodate carbon.
Instead Obama is using direct action through existing clauses in the Act, in sections 111(b) and 111(d).
These make no direct mention of carbon or emissions trading.
Section 111(d) sets guidelines for state regulation of existing sources of pollutants, such as power plants, where in the past EPA has issued model plans for adoption by the states.
EPA has made one ill-fated attempt to interpret section 111(d) as allowing an emissions trading program, according to the Washington-based think-tank "Resources for the Future". ("Greenhouse gas regulation under the Clean Air Act", April 2010)
That unsuccessful regulation in 2005 would have established a trading program for mercury emissions from power plants.
"Although the D.C. Circuit rejected EPA's mercury rule, it did so on other grounds - the court gave no indication that emissions trading under the New Source Performance Standards program was itself problematic (though it is of course possible that the court simply did not reach the issue)," the report said.
CAP AND TRADE
Despite such legal hurdles, emissions trading and other market approaches may offer the most flexibility for states to interpret an emissions standard, and so minimise costs.
The U.S. environmental group the Natural Resources Defense Council gave an example of how it could work at the end of last year. ("Closing the Power Plant Carbon Pollution Loophole", December 2012)
EPA would set state-specific performance standards for power plants, based on the energy mix in each state.
"NRDC's proposal is designed to give power plant owners freedom to choose how they would achieve the required emission reductions, giving credit for increases in energy efficiency and electricity generation using renewable sources and allowing emission-rate averaging among fossil fuelfired power plants," it said.
The plan sounds much like Obama's memo to the EPA.
States could meet the emissions standards either through their own crediting schemes, which give utilities flexibility in how they reached a target across a number of power plants, or they could tap into existing cap and trade schemes.
If EPA introduced an average limit on carbon emissions in the power sector, utilities already operating within a regional cap and trade scheme could meet such limits by buying carbon allowances.
The effect would be to push up carbon prices and probably trading volumes and liquidity in such regional cap and trade schemes by increasing demand.
(Reporting by Gerard Wynn. Editing by Jane Merriman)