United States: Governor Hochul Proposes Cap-and-Invest Program For The State Of New York

New York Governor Kathy Hochul has proposed a statewide "Cap-and-Invest" Program, aiming to reduce greenhouse gas emissions across all sectors of the economy. The authors of this article discuss the proposed Cap-and-Invest Program, which is intended to promote compliance with New York's Climate Leadership and Community Protection Act.

In her recent State of the State address, New York Governor Kathy Hochul proposed a statewide "Cap-and-Invest" Program, aiming to reduce greenhouse gas emissions across all sectors of the economy. The proposed Cap-and-Invest Program is intended to promote compliance with New York's Climate Leadership and Community Protection Act (CLCPA), which mandates a reduction in statewide greenhouse gas emissions of 85 percent from 1990 levels by 2050. Other goals include mitigating high energy costs, investing in disadvantaged communities, and preserving the competitiveness of New York industries.

While Governor Hochul's proposal provided the broad framework and goals for the Cap-and-Invest Program, it falls to regulatory agencies to develop the key details. Building on recommendations made by New York State's Climate Action Council (CAC), the Department of Environmental Conservation (DEC) and New York State Energy Research and Development Authority (NYSERDA) will design the Cap-and-Invest Program over the coming year.

THE MECHANICS OF CAP-AND-INVES

Cap-and-invest programs reduce greenhouse gas emissions by requiring regulated entities to purchase "allowances" for their emissions. In a statewide cap-and-invest program, proceeds from the sale of allowances may be used to support local communities and to fund state-run initiatives to further reduce emissions. The number of allowances available on the market is determined by a cap, or limit on the amount of carbon a group of regulated entities may emit. As the amount of carbon permitted by the cap decreases and allowances become more expensive, emitters may find it more cost-effective to reduce emissions than to keep purchasing allowances.

Likewise, Governor Hochul's proposed Cap-and-Invest Program would establish a gradually declining cap on greenhouse gas emissions in New York and require large-scale emitters and distributors of heating and transportation fuels to purchase allowances for each metric ton of carbon they emit. Annual cap reductions would allow the State to auction off allowances at progressively higher prices, creating a financial incentive for businesses and consumers to adopt lower-carbon alternatives. The revenue would support the State's investments in projects like climate mitigation, energy efficiency, and clean transportation.

Furthermore, Governor Hochul announced her intent to deliver more than $1 billion of the program's proceeds to New Yorkers by working with legislators to create a "Climate Action Rebate." The rebate is intended to help mitigate the anticipated increase in energy costs and would fund consumer-led decarbonization initiatives.

LESSONS FROM OTHER CAP-BASED PROGRAMS: CARBON OFFSETS AND ENVIRONMENTAL JUSTICE

Governor Hochul has directed DEC and NYSERDA to consider other jurisdictions' existing emissions reduction initiatives in their design of the Cap-and-Invest Program. Indeed, existing cap-based programs have yielded sizable emissions reductions and generated significant mitigation fees for decades. New York is already one of the twelve states that constitute the Regional Greenhouse Gas Initiative (RGGI) which, in 2005, was the first mandatory cap-and-invest program in the United States to limit carbon dioxide emissions from the power sector. Across participating states, RGGI is believed to have reduced emissions from power plants by more than 50 percent and raised nearly $6 billion to invest in clean energy.

Despite the presumed success of RGGI in the power sector, DEC and NYSERDA cannot rely on it as a comprehensive template for its own Cap-and-Invest Program, as the State must reduce emissions across all sectors of its economy to meet the goals set out in the CLCPA. The proposed Cap-and-Invest Program would make New York the fourth state to adopt an economy-wide approach to reducing emissions: California implemented the first multi-sector cap-and-trade program in the United States in 2013, Oregon instituted a cap-and-trade program via executive order in 2022, and Washington launched a cap-and-invest program on January 1, 2023.

Given Governor Hochul's instruction that DEC and NYSERDA evaluate other jurisdictions' cap-based programs, New York is clearly hoping that its final Cap-and-Invest Program will mimic the most effective and eschew the least successful aspects of the other states' programs.

Washington undertook a similar effort to mirror the successes and avoid the shortcomings of predecessor states' programs. Washington's cap-and-invest program took measures to avoid the pitfalls of California's cap-and-trade program, which recently faced criticism for failing to meet the benchmarks necessary to reduce greenhouse gas emissions to statutorily mandated levels. Some attribute California's shortcomings to the State's policy of permitting some entities to offset and compensate for emissions by participating in carbon removal activities rather than reducing their own direct emissions. Allowing emitters to substitute offsets for emissions reductions increased the total number of allowances available for purchase, which reduced the value of allowances and rendered some emissions reductions opportunities uneconomical.

In an attempt to avoid California's skewed incentive structure, Washington developed a cap-and-invest program that removes allowances from the pool when a regulated entity relies on an offset, therefore subtracting any associated emissions from the annual cap and keeping prices high. In doing so, however, Washington adopted a less flexible program that may disadvantage certain industries with fewer opportunities to decarbonize their operations. While these entities may pay fees to address their excess emissions, this state-based program engenders concern that higher costs on in-state industries will simply transfer production to higher-emitting facilities in other states or countries.

New York is also declining to adopt California's approach, but the proposed Cap-and-Invest Program is not a copy of Washington's as-yet untested program. Rather, New York's Program would forbid high-emitting sources to utilize offsets altogether, in line with its pledge to invest in disadvantaged communities. This targeted investment is based on showings that overburdened communities, especially communities of color, are less likely to see the benefits of reduced emissions and more likely to experience the negative results of offsets. In California, some communities even experienced an increase in emissions following the adoption of the cap-and-trade program. (California recently passed a bill allocating proceeds from cap-and-trade auctions for investment in disadvantaged communities; the amended rules went into effect on July 1, 2022).

Under New York's proposed Cap-and-Invest Program, and in alignment with the CLCPA, at least 35 percent of allowance auction proceeds would directly benefit disadvantaged communities across the state that have been disproportionately burdened by pollution and environmental injustice. The investments are intended to fund programs to improve air quality, reduce reliance on power plants, retrofit green schools, and promote low-carbon transportation systems.

QUESTIONS AND CONCERNS

Environmental advocates, community groups, labor federations, and representatives of the power industry have opined on the proposed Cap-and-Invest Program, but a majority of their questions have not yet been answered. For example, many are concerned that the Cap-and-Invest Program would render state industries less competitive. Recognizing but not fully responding to these concerns, Governor Hochul's proposal simply promises to jumpstart a clean energy economy and create tens of thousands of jobs in new industries; directs DEC and NYSERDA to ensure New York industries are not put at a competitive disadvantage; and help businesses achieve both decarbonization and economic growth.

However, the mechanisms for accomplishing those promises are not identified, and the details remain unclear. The CAC's 2022 Scoping Plan recommends incentive-based strategies for emissions reductions in the industry sector, such as allocating free allowances based on a benchmarking approach to minimize the risk of energy-intensive and trade-exposed industries moving out-of-state, but DEC and NYSERDA are not obligated to adopt the Scoping Plan as-written.

Another concern is the affordability of energy under the proposed Cap-andInvest Program. Governor Hochul indicated her intent to introduce legislation that would create a universal Climate Action Rebate that, subject to stakeholder and rulemaking processes, would distribute proceeds from allowance auctions directly to New Yorkers. The Climate Action Rebate would be designed to mitigate increased energy and transportation costs and potentially make future costs more predictable and manageable. Again, while promising on its face, the proposal remains vague and does not provide any substantial answers about how the program will operate.

Other open questions pertain to the price of allowances, whether any industries or facilities will be exempt from the Cap-and-Invest Program, and how the Program will sync with other current or future cap-based programs across multiple jurisdictions.

POTENTIAL LEGAL CHALLENGES

After New York implemented RGGI, the State was sued by Indeck Corinth, the operator of a gas-fired power plant.¹ Indeck was obligated to a long-term fixed-price contract with Consolidated Edison, which prevented it from passing the costs of complying with New York's RGGI regulations on to ratepayers. The parties ultimately settled in 2009, and DEC and NYSERDA set aside a limited number of allowances for power generators bound by long-term contracts.

Similar challenges could arise following the adoption of Governor Hochul's proposed Cap-and-Invest Program, which would apply to multiple sectors and hundreds of emitters, some of which have few viable decarbonization opportunities. Regulated entities that cannot afford to purchase allowances may cease operation, move production out-of-state, or remain in New York and pass costs on to consumers, thereby pushing tools like the Climate Action Rebate to their limits. When regulated entities are prohibited from raising costs, whether by contract or by another mechanism, they may seek legal recourse.

Governor Hochul has laid out an ambitious plan in the proposed cap-andinvest program. Its feasibility, however, remains to be seen.

Footnote

1. Indeck Corinth, L.P. v. David A. Paterson, et al., Supreme Court, Albany County (Index No. 5280-09).

Originally published by Pratt's Energy Law Report

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