Website:

http://www.raponline.org

The Regulatory Assistance Project177 Water St.

Gardiner, Maine USA 04345Tel: 207.582.1135

Fax: 207.582.1176

50 State Street, Suite 3Montpelier, Vermont USA 05602Tel: 802.223.8199Fax: 802.223.8172

Moving Forward on Carbon Caps:The Regional Greenhouse Gas Initiative

Oregon Carbon Allocation Task Force

March 2006

Richard Cowart

The Northeast Regional Greenhouse Gas Initiative (RGGI)

7 states engaged 4 other states (MA and RI

out for now) (PA, MD) are observing

Begun 2003 MOU signed by 7

Governors 12/05 Model Rule -- coming

soon State-by-state adoption

2006 Launch 2009

Identify Sources

to be Covered

Determine Total

Emissions from

Covered Sources &

Set Cap

Issue Allowances (1 per ton)

& Distribute

Trade

Sources Cover

Emissions with

Allowances and/or Offsets

Offsets

Designing the RGGI Cap-and-Trade Program

RGGI Program Elements

Coverage: Power Plants of 25 Megawatts+ Cap levels: Stabilize Emissions 2009 through 2015;

Reduce 10% by 2019. Allocation: Each state has a budget, and allocates

credits 3-Year compliance periods Offsets: Generators can earn offsets from off-sector

reductions “Safety valve” program if prices rise too much Leakage: problem still to be addressed Review of Program in 2012.

RGGI innovation: Consumer Allocation

Allocate 50% --100% of initial credits to consumer representatives (eg, distribution utilities, Efficiency Utility)RGGI MOU - state minimum commitment is 25% Most states will be higher – Vermont can be 100%

Generators need to purchase allowances, recycling the windfall revenue BACK to consumers

PUCs supervise use of the $$ for benefit of consumers Best result: focus on investments that lower carbon (EE

&RE) Result: lower program cost, greater efficiency

Consumer allocation – State-by-state decisions

H 860 (passed by Vermont House) :

“In order to provide the maximum long-term benefit to Vermont electric consumers, particularly benefits that will result from accelerated and sustained investments in energy efficiency and other low-cost, low-carbon power system investments, the public service board …shall establish a process to allocate 100 percent of (Vermont’s) tradable power sector carbon credits and the proceeds from the sale of those credits through allocation to one or more trustees acting on behalf of consumers”

Regionwide, a 50% consumer allocation could raise ~$250 million per year.

Strong support for large CAs in New Jersey, CT, NY Less likely in NH, DE (at this point)

RGGI Flexibility Devices

3-Year Compliance PeriodBanking AllowedOffsets permitted“Safety Valve” provisions(Leakage is NOT an acceptable

safety valve and must be dealt with)

Flexibility -- Offsets Offsets—project-based reductions:

Types: Natural Gas, Propane, Heating Oil Efficiency Land to Forest Landfill Gas Capture & Combustion Methane Capture from Animal Operations SF6 Leak Prevention Leak Detection in Natural Gas Distribution

Geographic Extent: Anywhere in the United States Offsets from Outside RGGI States 2:1 Discount

Limit on Use: Each Source may “cover” up to 3.3% of its total reported

emissions

RGGI Flexibility-- Safety Valve

Allowance Price Safety Valves $7.00 Trigger

Limit on offset use increased to 5% of a source’s reported emissions

Anywhere in North AmericaOffsets from Outside RGGI States 1:1

RGGI –Safety Valve (2)

Allowance Price Safety Valves (Cont’d) $10.00 Trigger

Compliance Period extended for 1 year for up to 3 years (Maximum 6-year compliance period).

$10.00 Trigger—2 Consecutive Years

Limit on use of offsets increased to 20% of a source’s reported emissions

Offsets may come from anywhere in North America, or from recognized international trading regimes.

Modest Projected Impacts

• Using natural gas price projections widely accepted by industry analysts, regional average retail price increases range from 0.3% to 0.6% in 2015, across all rate classes.

• Even under a “high gas price” scenario using gas prices that are higher than mainstream analysts expect, projected retail electricity price impacts range from 1.7% to 3.2% in 2015, across all rate classes.

• Improved energy efficiency over time, due to both RGGI and other state energy policies, is projected to produce average household bill savings that exceed the price impact of the RGGI program.

Efficiency in New England can reverse demand growth

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

140,000

145,000

150,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GW

h

ISO GWh Forecast (w/out DSM) 1.2% Avg. Annual Increase at

Marginal Avoided Energy Supply Cost of 9.4¢/kWh

Actual Energy Requirement (2003)

Existing EE Programs at

3.1¢/kWh

Building Codes at 2.9¢/kWh

Standards at 1.0 ¢/kWh

Addt'l EE Can Offset Growth (at 3.1¢/kWh)

Total Achievable Energy Savings Potential -1.38% Avg. Annual Reduction

Addt'l Savings Opport. Beyond

Offsetting Growth (at 3.1¢/kWh)

Total EE Potential in 2013 Can Reduce

Energy Req. to 1993 Level

Source: NEEP, 2004

…and would lower the cost of carbon management

Next Steps Model Rule Draft now out for comment –

60-day Public and Stakeholder ReviewJuly—model rule will be final

Leakage Working Group appointed Offsets Working Group continues States will initiate state-specific legislative

and/or rulemaking processes.

Three Lessons from RGGI

1.The Acid Rain program design – smokestack-based, free allocations based on historic emissions – is not the best design for a carbon cap/trade system for the power sector.

2. An effective power sector carbon program requires focus on the load side of the power system, not just the generation side.

3. Energy efficiency is not a “collateral energy policy,” it is the key to success of the carbon program.

For more information…

“Another Option for Power Sector Carbon Cap and Trade Systems – Allocating to Load”

“Addressing Leakage in a Cap-and-Trade System: Treating Imports as a Source”

“Why Carbon Allocation Matters – Issues for Energy Regulators”

Richard Cowart, Regulatory Assistance Project – Memos for the Regional Greenhouse Gas Initiative (RGGI)

--Posted at www.raponline.org

Email questions to RAPCowart@aol.com