States May Defer to Obama on Energy, Environment

After being in the forefront of energy and environmental policymaking for nearly a decade, states may be thrust into a more subordinate role in 2009.

Barack Obama’s election is the game-changer. Achieving energy self-sufficiency and combating climate change are among the president’s top priorities.

Obama wants to end U.S. dependence on foreign oil within a decade; imports currently account for 58 percent of annual U.S. oil consumption. He also is committed to reducing greenhouse gases, which are blamed for global warming, and to developing technology that would allow coal to be burned without damaging the atmosphere. The coal-burning technology is one that could later be sold to other countries. Obama is counting on green initiatives like that to both improve the environment and help jump-start the nation’s economy.

“Barack Obama has a comprehensive domestic energy plan,” said Montana Gov. Brian Schweitzer (D). “I think that is the largest issue facing our country. We don’t have money to finance education or health care or infrastructure as long as we are sending a trillion dollars to those dictators” to buy foreign oil.

Obama wants energy conservation to be part of state and local planning efforts as a condition of receiving federal transportation money; current law asks governors to “consider” conservation measures. He also has proposed giving grants to state and local governments for prioritizing energy efficiency in building codes for new structures and providing federal matching funds for states that make energy upgrades in older buildings.

Obama’s ambitious plans, particularly on oil independence and greenhouse gases, seem likely to make federal policy the center of action. How much power states retain could pose federalism issues on such matters as offshore drilling, alternative-energy incentives and greenhouse- gas reductions.

One conflict that could arise between state and federal policy is over how to reduce pollution caused by carbon dioxide. The common pollutant, released by the burning of coal, oil and other fossil fuels, is thought to be one of the major contributors to global warming. Already, 23 states have joined regional agreements to lower carbon dioxide pollution. Six states – Connecticut, California, Hawaii, Minnesota, New Jersey and Washington – have imposed caps for carbon dioxide released within their own borders.

The Northeast is the farthest along in taking a regional approach – its first phase, aimed at reducing the amount of carbon dioxide generated by utilities, went into effect on New Year’s Day. Ten states are part of the compact, which will penalize polluters for releasing more than their limit of carbon dioxide.

A more aggressive effort, which would cover 23 percent of the U.S. economy and 73 percent of Canada’s, is planned on the West Coast. Anchored by California, the Western Climate Initiative would start limiting emissions from utilities in 2012 and expand to cover other pollution sources, including cars and trucks, three years later. Meanwhile, Midwestern governors are designing a way to curb greenhouse emissions in the nation’s heartland.

All three initiatives use the “cap-and-trade” system Obama touted on the campaign trail. This kind of system sets a limit on the amount of carbon dioxide that can be released into the atmosphere, and the limit is gradually reduced. Polluters buy credits allowing them to spew a given amount of carbon dioxide. They can sell leftover credits to other polluters, creating a monetary incentive to reduce emissions. If the federal government tries its own cap-and-trade system for carbon dioxide, it could halt the state initiatives in their tracks. According to experts, that’s not necessarily a bad thing.

“It’s been an absence of leadership that has forced the states and these regional cooperatives to take the first steps. But anyone who looks at them realizes that this is a patchwork that ultimately should be knitted together to make a cohesive policy,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office who was a top policy adviser to Republican John McCain’s presidential campaign.

Virginia Gov. Tim Kaine (D) said he and his fellow governors pushed environmental and energy initiatives in an effort to prod the federal government to act. “We feel like the more we do at the state level, the more pressure we put on Congress to come up with a national policy,” he said.

Several states are pushing methods other than cap-and-trade to limit carbon-dioxide emissions as well, and the transfer of power in Washington could give these initiatives a boost.

For example, Obama has said he will let California set auto emission rules to curb greenhouse gases, a move blocked by the Bush administration. California is the only state with the power to regulate vehicle pollution, but other states can adopt its rules. Thirteen already have, and Florida could soon join their ranks.

When the U.S. Environmental Protection Agency (EPA) vetoed the California plan, the state and 15 others sued the agency to let the regulations take effect. The case is pending. A separate state challenge over EPA enforcement of the federal Clean Air Act was decided by the U.S. Supreme Court in 2007. In a 5-4 decision, the court ruled that the EPA must, indeed, regulate carbon dioxide as a pollutant. But the Bush administration concluded it wouldn’t have time to write those rules before the president left office.

Offshore Drilling

The prospect of a new national energy policy raises questions for states regarding offshore drilling. States have two major concerns. Some want veto power over new exploration off their shores; others want a bigger share of royalties the federal government collects from offshore oil and gas production.

Congress let a 26-year-old ban on offshore drilling off most of the Atlantic and Pacific coasts expire in October 2008. (The Gulf Coast between Texas and Alabama, as well as certain areas of the California and Alaska coasts, were exempt from the moratorium.)

But U.S. House Speaker Nancy Pelosi (D-Calif.) plans to bring up the matter again this year, a Pelosi spokesman said. Obama has said he’s willing to allow some offshore drilling as part of a larger energy policy.

California and New Jersey officials want the authority to stop offshore oil and gas developments. States already have considerable power to slow down exploration under the federal Coastal Zone Management Act. But they might seek even greater authority for a more straightforward veto power. Last year, Pelosi proposed veto power for states, as did McCain during his presidential campaign.  North Carolina Gov. Mike Easley (D) went one step further, saying states should own the leases themselves.

Meanwhile, states that favor offshore drilling are likely to seek greater revenue.

Currently, states control and tax any activity in their own territorial waters, which usually extend three miles from the shore. They also collect roughly 27 percent of the royalties oil and gas companies pay on wells located in a three-mile strip beyond state territorial waters. Officials in Gulf Coast states believe they are being shortchanged, noting that landlocked states collect 50 percent of the royalties from mining on federal property.

Renewable Alternative Energy

During the campaign, Obama said he would require 10 percent of the nation’s electricity to originate from alternative sources by 2012 and increase to 25 percent by 2025. More than half the states have established similar goals, although the target percentages and dates vary widely. For example, Minnesota specifies that a quarter of its energy must come from renewable sources by 2025; neighboring Iowa’s goal was set in 1983 and has been met for years.

Understandably, nearly all state efforts promote energy sources available locally. Iowa is touting ethanol and wind farms; Pennsylvania and Wyoming back “clean coal” technology that reduces pollution; Delaware and New Jersey are competing to build the country’s first offshore wind farm.

The federal government won’t require one technology over another, but it could skew the markets by favoring certain technologies, said Kenneth Medlock, an energy fellow at the James A. Baker Institute for Public Policy at Rice University. For example, he said, Congress could continue to promote corn-based ethanol, even if it turns out that hybrid cars are a more efficient way of reducing auto pollution.

Nearly all of Obama’s energy goals require funding. He conceded in a campaign debate with McCain that the financial crisis might force him to proceed more slowly than he originally planned.

The crisis already is having a major impact on the private sector. Tighter credit makes it harder for companies to finance new wind farms and solar power plants. Fluctuating oil prices make it difficult for investors to know whether alternative fuels will be cost-competitive. In such an environment, Obama, Congress and the states will be under pressure to sort out winners and losers. Medlock of Rice University said the economic slowdown- and limited federal funding resulting from it-could be a blessing in disguise by forcing policymakers to focus on only the most promising new energy sources.