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Carbon Claustrophobia - Significant Changes Coming to the Regional Greenhouse Gas Initiative's Cap and Trade Program




by:
Steven C. Russo
Greenberg Traurig, LLP - New York Office

Adam B. Silverman
Greenberg Traurig, LLP - Philadelphia Office

 
April 17, 2013

Previously published on April 16, 2013

New York State Department of Environmental Conservation (DEC), in conjunction with the New York State Energy Research and Development Authority (NYSERDA), is currently accepting public comments on several proposed changes to the DEC’s regulations governing New York’s participation in the Regional Greenhouse Gas Initiative (RGGI). New York, along with Connecticut, Delaware, Maine, Maryland, Massachusetts, Rhode Island and Vermont, participate in the RGGI,1  which seeks to reduce greenhouse gas emissions from power plants through a cap-and-trade program. DEC’s proposed changes, which are based on updates to the RGGI model rule, are designed to reduce the RGGI emissions “cap” to increase the costs of CO2 emissions credits to encourage further reduction in CO2 emissions. Other participating states are expected to make similar changes to their RGGI-implementing regulations. The DEC also announced plans to prepare an environmental study of these regulatory revisions, a relatively rare move for the agency when it revises regulations.

Under RGGI, participating states receive a base budget of CO2 emissions. The state then auctions off those emissions to emitting sources as emissions allowances. Each allowance represents one ton of CO2 emissions. An emissions source may purchase additional carbon emission allowances via quarterly allowance auctions. A source may also purchase certain carbon offsets, outside of the RGGI program, on the open market in order to comply with the RGGI emissions cap.

The current base budget of 165 million tons of CO2 far exceeds current emissions levels of about 91 million tons of CO2. This has depressed the value of the allowances and rendered the trading program ineffective. Among the changes, DEC proposes reducing the emissions cap in 2014 by approximately 45 percent, from about 165 million tons of CO2 to 91 million tons. The reduced emissions cap of 91 million tons is consistent with current emissions levels and would theoretically reinvigorate the trading program since emissions from regulated power sources would collectively reach the cap. The amendments leave in place a provision that would reduce the cap by 2.5 percent annually for 2015 through 2020 to further encourage emissions reductions.

The amendments also create a cost containment reserve (CCR) that serves as a mechanism to contain the cost of allowances. The CCR establishes a pool of additional CCR allowances and price triggers for the release of these allowances; once the market price of an allowance meets the trigger amount, the pool releases these additional allowances to provide price relief. The CCR allowances must be sold at or above the trigger prices. The CCR trigger prices will be $4 in 2014, $6 in 2015, $8 in 2016, $10 in 2017, and will increase by 2.5 percent each year thereafter. The withdrawal limit would be 5 million starting in 2014, and 10 million in subsequent years. Replenishments will be made on an as-needed basis.

In a relatively rare move, DEC has decided to prepare a Supplemental Generic Environmental Impact Statement (SGEIS) for these revisions to the RGGI program. In most cases, DEC does not prepare EISs for revisions to its regulations, finding that regulatory revisions result in positive rather than adverse impacts to the environment. However, in this case DEC issued a positive declaration for the revisions to address the potential adverse effects caused by “emissions leakage”. The “emissions leakage” theory posits that the amendments have the potential to shift electricity generation from capped sources subject to the RGGI program to uncapped, higher-emitting sources both within the RGGI region—the RGGI excludes fossil fuel-fired units smaller than 25 megawatts—and outside of the region. The SGEIS will analyze whether the proposed revisions would lead to greater “emissions leakage” that will increase CO2 emissions and undo the emissions reductions of the RGGI. It will also consider mitigation options should leakage occur. The mitigations options include directly reducing electricity demand through increased efficiency and expanding the cap-and-trade program to all electricity procured by a utility, including electricity produced in areas outside the RGGI region. Finally, the SGEIS will examine whether the amendments may result in the increased emission of certain other pollutants, such as nitrogen oxides, sulfur dioxide and mercury. The public comment period closes on May 6, 2013.


1 New Jersey participated until 2011, when Governor Chris Christie withdrew New Jersey from participation in the RGGI.  Several environmental groups, including the Natural Resources Defense Council, challenged New Jersey’s withdrawal from the program and that lawsuit is pending.  See In re RGGI, No. 11-4878 (N.J. Super. Ct. App. Div. filed 6/6/12).

 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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