Three years ago New Jersey's governor peremptorily walked out on the Regional Greenhouse Gas Initiative, saying the novel cap-and-trade scheme for Northeast power plants wasn't right for his state.

Now Gov. Chris Christie finds himself under pressure from several forces—including the Obama administration and local grassroots groups—to return to RGGI's embrace.

"It's the obvious thing for New Jersey to do," said Seth Kaplan of the Conservation Law Foundation. "All you need to do is pick up the phone and say, 'Whoops, sorry!'"

When the Environmental Protection Agency proposed new rules on June 2cracking down on carbon dioxide emissions from existing fossil fuel plants, the agency suggested that one of the smartest ways for states to meet its targets would be to form multistate emissions markets –or to join existing ones, like RGGI. The flexibility to trade carbon allowances would lower compliance costs, the agency said.

But ever since a federal cap-and-trade bill passed the House during President Obama's first year in office, only to die in the Senate, any use of markets to regulate carbon dioxide has become anathema to conservative Republicans. Christie's spurning of RGGI's version was widely seen as a matter of presidential primary positioning, and he's shown no sign of reversing course.

But that could change—especially if he decides his presidential prospects are waning.

"I predict that New Jersey will rejoin RGGI when and if Gov. Christie accepts that he is not a viable candidate for the Republican presidential nomination," said Robert Stavins, a prominent environmental economist at Harvard University.

The pressure was already on even before the EPA issued its proposed rule, aimed at reducing emissions from the power sector by 30 percent below 2005 levels by 2030.

Last March, environmentalists won a New Jersey court case finding that Christie's cut-and-run withdrawal from RGGI was illegal because he did it by fiat, without any due process such as hearings or public comment. In July, the state will commence just that kind of formal process, as Christie's environmental agency tries to codify its separation from RGGI into an official divorce.

RGGI advocates plan to use the agency's public hearings to argue that it would be wiser for New Jersey to reverse course and rejoin the regional arrangement than to go it alone. To stay aloof would be to forfeit the financial benefits of the cap-and-trade approach, while the state attempts to cut its carbon pollution by 48 percent by 2030, the target set for New Jersey under EPA's proposal.

"Our argument for the state to rejoin RGGI got a big shot in the arm from the EPA," said Doug O'Malley, director of Environment New Jersey, one of the groups involved in the tug of war. "The EPA proposal and our victory really put the screws into the Christie administration. The administration is in an uncomfortable place right now. They'd hoped they could pull us out of RGGI and be done with it."

State agency spokesmen have said it's too early to comment on anything to do with the EPA's proposal, or how the state might comply. Christie did not sign a letter from governors who excoriated the draft rule as an unjustified expansion of federal powers. The rule offers states extraordinary leeway.

RGGI has considerable support in the state legislature, although not enough to override Christie, who has twice vetoed legislation that would have revived the state's participation.

"They [the administration] have to do something now, so what is most cost effective?" said Peter Shattuck, director of market initiatives at ENE, a northeastern environmental advocacy group. "They will either have to rejoin or come up with some alternative proposal. The simplest solution for New Jersey will be to rejoin RGGI."

RGGI as Fiscal Candy

With the two sides at loggerheads, the question is whether the argument for RGGI becomes overwhelming in light of EPA's regulations—and with the maturing of RGGI itself.

Now often described as a model for emergent cap-and-trade systems, RGGI got off to a rocky start in its early years, mainly because its carbon emission caps were too loose to have much impact on pollution levels, which were falling anyway. Cheap natural gas was already undercutting dirtier coal as a fuel for many power producers. The deep recession cut into demand for power, helping hold down emissions. Few RGGI participants needed extra pollution credits to stay under their caps, so market prices of the credits fell to the floor.

Most governors, though, liked RGGI enough to want to patch it up. That's because when pollution allowances are auctioned off to the regulated power companies, the revenues flow to the states— fiscal candy that is then doled out to electricity consumers in the form of subsidies for conservation and efficiency. That in turn cuts user demand—and electric bills. And it creates jobs.

To preserve the scheme, the participating nine Northeast and Mid-Atlantic states decided last year to tighten it up, sharply lowering the emissions cap and continuing to push the limit gently downward for years into the future. Prices of pollution credits perked up, and so did the stream of revenues to the states.

Pollution in the participating states keeps dropping, the goal of EPA's new rules. Hence their benign view of the EPA proposal, which does not seem onerous to them.

None of this has swayed Christie. He viewed RGGI's allowance auctions as a tax on the state's utilities that served only to drive power production out of state—mainly to Pennsylvania, not part of RGGI, where there's much more coal used.

He has a point. Some experts say that "leakage" of pollution across the boundaries of regional cap-and-trade schemes limits their effectiveness and needs to be carefully controlled when designing them.

One way to plug this kind of leak might be if Pennsylvania were to enter the RGGI system, said Pete Maniloff, who studies carbon markets at the Colorado School of Mines.

"Joining a regional cap-and-trade system is almost certainly going to be the most cost-effective way to comply with the EPA," he said. "And of the bigger the system the better."

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