In our last post on the Poland COP, we argued that international negotiations will continue to go nowhere and at a snails base.   The barrier to reach a solution is that it is in no countries interest to give up its claim to the atmospheric commons for CO2 emissions unless there are economic incentives to do so.  The current “incentive” is loose pledges to provide economic assistance and technology transfer, pledges that few believe given the drive for austerity in most industrial countries.

 Also international negotiations such as in the COP and WTO are founded on consensus, where any one country can hold a veto.  To drag in the last country into an agreement requires watering-down any commitments to the margin of just bringing in the last, resistant party.  So even if an agreement is reached it is both weak and ambiguous with lots of room for interpretation – and with few sanctions.

 So what is the path forward?  Can the snail grow legs?  The answer is yes and more so, it is likely.

 Here is the scenario and how it will play out with the United States being the key.

 The Obama Administration has given up on passing national legislation to limit greenhouse gases and has instead turned to executive action, lead by the Environmental Protection Agency.

 The EPA has already applied GHG standards to new source installations, meaning that to build or add substantially to an old plant requires emissions meet best available technological standards, now defined as the emissions from gas fired power plants.  It is now in the process of applying similar standards to existing sources – that is power plants currently operating. It is unlikely that these standards will be met without carbon capture and storage, a costly and technically difficult and risky solution.  The existing source standards are likely to be devastating to current  coal generation and will make it difficult to economically justify any new coal fire generation—that is, unless there is found a flexible mechanism to permit existing and new plants to meet the standard.

 In the United States, there are two operating cap and trade markets – the recent California ETS and the RGGI operating in the Northeast states.  While both are operating near their floor price, both offer the potential for providing that flexible mechanism, which ironically could mean that coal fire generation could survive, even if operating at higher costs.

 On December 2, 2013, RGGI submitted to the EPA the request to accept emissions trading as a mechanism for meeting power plant standards: “the RGGI success story as a benchmark for national action... and are recommending that EPA's new rules empower states to develop market-based GHG emission reduction programs designed to work for their region(s)"

 Also EPA Administrator, Gina McCarthy, noted today that her agency would "give states great flexibility in meeting new (EPA) requirements for carbon emissions from power plans"

 If this takes place (eg permitting flexible mechanism such as cap and trade to meet EPA standards), it could precipitate global action.  If states are allowed flexible mechanisms to meet EPA standards, then California and RGGI type ETSs could spread to other states eventually leading to Federal cap and trade legislation thereby reconciling state systems and setting a meaningful national target for GHG emission reductions. Previous attempts at Federal legislation (Waxman-Markey) have had the option of a carbon tariff -- that is a border tax aimed at  countries that have not adopted a meaningful cap on GHG emissions and hence have an internal carbon tax.  Just the threat of such border taxes based on carbon content and national efforts to reduce GHG, could be the economic incentive for a global system, likely monitored and adjudicated by the WTO.  This is a much more likely path to a global agreement than UN COP type negotiations with 180 nations trying to avoid failure at each meeting.  It is not an easy path forward but without meaningful economic incentives/sanctions, it is hard to see how voluntary actions will lead to significant reductions in global GHG emissions.