In a little noticed initiative, Maryland joined governments across the planet tackling global warming by adopting a ‘mandatory’ carbon dioxide emission reduction program.

There will be winners and losers among different sectors in the economy as this program begins implementation on January 1, 2009 and the real estate sector is poised to be a winner as green building projects may qualify as ‘offsets’ to meet obligations under the program.

Maryland Joins RGGI

On April 20, 2007, Governor Martin O’Malley signed a memorandum of understanding implementing legislation passed in 2006 (under the prior Administration of Governor Robert Ehrlich), making Maryland the 10th state to join the Regional Greenhouse Gas Initiative (RGGI). RGGI is the first ‘mandatory’ cap-and-trade program to control carbon dioxide emissions in the United States. The program (similar to those implementing the Kyoto Protocol) is aimed primarily at reducing carbon dioxide emissions by 10 percent through a mandatory emissions cap on the electric generating sector, coupled with a market-based trading program to achieve low compliance costs through energy efficiency.

Emissions footprints can be reduced by the use of offsets. Accepting that the program expressly targets the electricity generating sector, green building may receive a real boost from this program because offset credits may only be issued in one of six categories, one of which is creating “natural gas, heating oil and propane energy efficiency” (think green building).

What is RGGI?

Reasoning that the federal government has declined to participate in the Kyoto Protocols or otherwise establish a program to control greenhouse gas emissions, RGGI is a cooperative effort by 10 Northeast and Mid-Atlantic states to create a regional cap-and-trade program initially covering carbon dioxide emissions from power plants in the region. In the future, RGGI may be extended to include other sources of greenhouse gas emissions and other greenhouse gases.

In April 2003, Connecticut, Delaware, Maine, New Hampshire, Massachusetts, New Jersey, New York, Rhode Island, and Vermont joined together to form RGGI. It was not until April 2006 that Maryland enacted legislation requiring the State to join by 2007. While Maryland did have a role as an observer during the intervening years, it did not have an opportunity to fully participate in the December 20, 2005, memorandum of understanding implementing RGGI or the August 15, 2006 model rule for the RGGI program, including importantly the model regulations detailing the proposed program.

As evidence of how ‘cutting edge’ RGGI is, in October 2006, Arnold Schwarzenegger issued an executive order, as part of AB32 which will lower greenhouse gas emissions in California to 1990 levels by the year 2020, that has the effect of making California a carbon trading partner with the European Union and with RGGI!

What is a cap-and-trade program?

A cap-and-trade program is a market-based approach to achieving emissions reductions.

The design of RGGI, like most other cap-and-trade programs (including the European Union’s implementation of the Kyoto Protocol), includes the following basic components: First, the states determine the emissions sources to be covered by the cap; Second, the states establish the total amount of emissions to be allowed from all of the sources, commonly referred to as the “emissions cap”; Third, each state issues one allowance for each ton of emissions, up to the amount of the cap, and those allowances are distributed to the generators and the market; Lastly, every covered source is required to have enough allowances to cover its emissions at the end of each compliance period.

What emission sources are covered by the program?

In general, RGGI will cover electric generating units that have a nameplate capacity equal to or greater than 25 megawatts and burn more than 50% fossil fuel. Some specific source exemptions may apply, such as for units that burn biomass as a majority fuel, or sources that sell less than 10% of the electricity they generate to the grid.

The emissions cap

The memorandum of understanding establishes a regional emissions cap or annual CO2 emissions budget for the region of approximately 121 million short tons. Within the regional cap, each state is assigned an initial base annual CO2 trading program budget. Maryland’s cap will be 37,503,983 short tons and the regional emissions budget will be increased (to reflect Maryland’s recent participation) to include that amount.

What emissions reductions will the program achieve?

RGGI will stabilize emissions from the power sector at approximately 2005 levels from the start of the program in 2009 through the beginning of 2015. From 2015 through 2018 emissions will decline, achieving a 10% reduction by 2019. Significantly, some of the pollution reductions will be achieved outside the electricity sector through emissions offset credits.

What are offset credits?

Offset credits are certified emissions reductions or carbon sequestration that take place outside the electric generating sector in specified project areas.

Initially, a utility will be permitted to cover up to 3.3% of its emissions with offsets – an amount that is approximately 50% of a source’s average compliance obligation under the program. This means that a significant portion of the reductions under the program must occur at the power plants.

But the program is designed to allow sources to use more offset allowances if the cost of the carbon allowances exceeds prescribed benchmarks (which by design will all but certainly be exceeded). If the cost of allowances reaches $7 on a sustained basis, for example, sources will be permitted to cover up to 5% of their emissions with offset allowances. If the cost per ton exceeds $10, then sources may cover up to 20% of their emissions with offset allowances.

What kinds of offsets may be used to meet obligations under the program?

Initially, offset allowances may be issued to verified reduction projects anywhere in the United States in the following areas: Natural gas, heating oil & propane energy efficiency; Landfill gas capture and combustion; Methane capture from animal operations; Forestation of non-forested land; Reductions of sulfur hexafluoride (SF6) emissions from electricity transmission & distribution equipment; and, Reductions in fugitive emissions from natural gas transmission and distribution systems.

Offsets from non-participating states may be awarded a one ton credit for each two tons of verified reductions.

Natural gas, heating oil & propane energy efficiency

Green building is uniquely positioned to take advantage of offsets. The EPA Green Building Workgroup has concluded buildings in the United States contribute 38.1% of the nation’s total carbon dioxide emissions. (Cars and light trucks together produce only 20.5% of U.S. carbon dioxide pollution.) 20.6% of all carbon dioxide emitted in the U.S. comes from housing and 17.5% from commercial buildings.

Buildings account for 67.9% of total U.S. electricity consumption. 51.2% of that total is attributed to residential building use, while 48.8% is attributed to commercial building usage. U.S. buildings account for 39.4% of the country’s total energy consumption. Residential buildings account for 54.6% of that total and commercial buildings accounted for the other 45.4%.

Green building or “natural gas, heating oil & propane energy efficiency” will provide cost effective offsets. But the efficacy of green building as an offset will depend heavily on yet to be issued state regulations.

How will the emissions allowances be distributed?

Emissions allowances under RGGI will be distributed to utility sources, or otherwise into the open emissions market, by each participating state, as the state deems appropriate. The states have agreed that at least 25% of the emissions allowances will be allocated to a “consumer benefit or strategic energy purpose”, which means that 25% of the allowances may be auctioned and the revenues used to support energy efficiency, renewable energy, innovative energy technologies or consumer rebates; yet another opportunity for green building.

RGGI is mandatory

The power plants covered by RGGI must comply with program requirements beginning January 1, 2009. Failure to comply subjects a plant to mandatory enforcement by state environmental enforcement authorities under yet to be promulgated state regulations.

The real estate industry must ensure it is ‘at the table’ with other stakeholders when the implementing regulations are drafted and legislation is proposed that would alter the regulatory scheme (something that is a real possibility give the magnitude of RGGI and the new source of revenue that the cap and trade program will generate).

And individual real estate owners can no longer wait and see how the public debate on global warming and the world economy’s increasing thirst for oil plays out, they must educate themselves, now, about the coming economic shifts being imposed by government efforts to respond the global warming.