Market Trading Forum Update WRAP Board Meeting July 24-25, 2002

Overview Information needed to help states and tribes make the 308/309 decision Overview of studies completed this year Communication – Annex provisions Material needed for 2003 SIPs Future work for 2008 SIP updates and 308 SIPs

Critical Mass Study

Critical Mass Study Is there a minimum number of states and tribes needed for the market to be effective? Are there any other effects if not all states and tribes in the GCVTC region participate? ICF hired to conduct evaluation Based on economic analysis of the Annex conducted by ICF in 2000 Only assesses cost of compliance to sources

ICF estimated potential annual cost savings of $90 million with participation of all GCVTC states and tribes

Design of Study Full participation of states and tribes in §309 is unlikely CA, ID & NV were assumed to opt-out CA & NV already have expressed intentions ID has few SO2 emissions MTF participants selected scenarios for modeling

Alternative Trading Scenarios CA, ID & NV were treated as opting out in all scenarios Remainder of States and Tribes vary in particip- ation. AZ, UT & Uinta-Ouray Were treated as opting in for all scenarios

Scenario 1 Command & Control: Source- Specific BART Opt-in to §309: Cap & Trade

Scenario 2 Command & Control: Source- Specific BART Opt-in to §309: Cap & Trade

Scenario 3 Command & Control: Source- Specific BART Opt-in to §309: Cap & Trade

Scenario 4 Command & Control: Source- Specific BART Opt-in to §309: Cap & Trade

Scenario 5 Command & Control: Source- Specific BART Opt-in to §309: Cap & Trade

Scenario 6 Command & Control: Source- Specific BART Opt-in to §309: Cap & Trade

Alternative Scenarios T = Trading; Opt-in to §309 CC = Command & Control; Source-specific BART

Summary of Key Results Program with all states and tribes participating results in the highest gains from trading ($90 million in 2018) Though opt out decision of states/tribes can reduce the gains from trading, no single state/tribe can fully erase the gains from trading by opting out WY and CO are likely to have the largest impact on regional compliance cost if they opt out Impact of NM, OR and Tribal areas on regional compliance cost is likely to be small if they opt out Allowance trading will be important Sources in WY, CO, AZ and OR will likely be the buyers of allowances Tribal areas, NM and UT will likely be the sellers of allowances

Estimated Command-and-Control Reductions by State/Tribe 17,006 37,855 7,192 35,222 51,629 10,357 8,655 Estimated Command-and-Control Reductions by State/Tribe (in tons of SO2)

Gains from trading range from $15 million - $90 million in 2018

CO and WY are important to the trading program 2% -1% 0% -3% 51% 21% 19% 6% Since WY and CO account for 72% of the regional compliance cost under full command-and-control, it has the greatest potential for savings from trading Trading allows these states to avoid the expensive investment in pollution control required under command-and-control Tribal Areas 1%

OR, NM, UT and Tribal Areas NM, UT, OR and Tribal areas are unlikely to significantly affect the regional compliance cost Because compliance cost of these states/tribes represent a small fraction of the regional compliance cost Role as suppliers of allowances is important to the trading program

Participation affects CA, regardless Changes in this slide are described relative to Alternative Trading Scenario I (and not the BAU scenario which is used a the reference case for comparison in other parts of the analysis. Alternative Trading Scenario I was selected as the reference case in this slide for clarity in exposition.

Compliance cost in 2018 under the alternative trading scenarios Million 1997 $

Allowance trading will be important to the trading program These states will be buyers of allowances 8 5 19 11 Representative levels of allowance trading if only CA, ID and NV opt-out (thousand tons) 2 3 23 These states and tribal areas will be sellers of allowances Tribal Areas

Net Flow of Allowances Does not describe in-state allowance transactions but provides an estimate of out-of-state allowance transactions needed

Key Conclusions Trading program with all states/tribes participating is the most efficient program States with high compliance cost for command-and-control will be most important to keeping the regional compliance cost low (WY, CO, AZ) These states also likely to be primary buyers of allowances from sources outside the state Tribal areas, NM and UT likely to be more important as suppliers of allowances Impact on any state/tribe will depend on what everyone else does Cannot fully insulate against regional impacts

Other Considerations Analysis did not examine importance of market forces (e.g. market power, transaction barriers, etc) to realizing the gains from trading No assessment of uncertainty in Gas prices Demand Cost and performance of abatement technologies Implications of AZ or UT opt-out No assessment of secondary impacts All costs recovered in electricity sales

Allocations Annex establishes a formula to determine allocations for individual sources Estimate is needed to help understand how individual sources will be affected Allocations will be finalized through the SIP process

Allocations Regional Allocation Source-Specific Allocation Tribal Set-aside New source set-aside Source-Specific Allocation Renewable energy sources Floor allocation Reducible allocation

Allocations Draft report – Estimate of non-utility floor allocations Currently under review Policy issues have been highlighted that need to be addressed by the MTF Intended to provide estimates, not final determinations for sources

Allocations Next steps Review allocation methodology Finalize utility floor allocation Estimate reducible allocations through 2018 Develop examples that show how different circumstances will affect allocations Review allocation methodology May need up-front state and tribal budgets for existing sources

Reasonably Attributable Visibility Impairment (RAVI) Remains as a remedy for source-specific impairment under §309 Issues: Interface with milestones and backstop program Uniform procedures and certainty Primacy of states and tribes in attribution & BART analyses

Reasonably Attributable Visibility Impairment (RAVI) WESTAR case study of source attribution and retrofit processes and outcomes Each case was unique Actual or planned retrofits resulted, but none were “BART” WESTAR draft report, “Recommendations for Making Attribution Determinations in the Context of RA BART”

Reasonably Attributable Visibility Impairment (RAVI) Recommendations on Making Attribution Determinations General Procedures and Approaches Technical Criteria Examples Not “Guidance”; Does not suggest standards or thresholds

Reasonably Attributable Visibility Impairment (RAVI) Recommendations on Making Attribution Determinations Currently under review by MTF and stakeholders Discussions continue regarding outstanding issues

Other Class I Areas Modeling RH Rule requires a demonstration that the backstop trading program provides greater reasonable progress that RH BART Annex made this demonstration for the 16 Class I areas Need to expand the demonstration to cover all Class I areas Don’t want to revisit SO2 control strategy in 308 SIPs/TIPs

Other Class I Areas Modeling Annex Demonstration Trading is not expected to concentrate emissions reductions or increases in one area of the region Visibility modeling using GCVTC model showed equal or better improvement with Annex compared to Command & Control Other factors are important such as the limits of future growth, and inclusion of all SO2 sources

Other Class I Areas Modeling New modeling results show equal or better improvement throughout 13 state WRAP region (excludes AK)

Communication – Annex Provisions Review of EPA’s proposed approval of the Annex Comments submitted on July 3, 2002 Requests from states that are involved in stakeholder processes and the development of SIPs Tribal outreach 4 tribes that have major sources

Material Needed for 309 SIPs/TIPs Model Rule and MOU Air Managers Committee contracted with WESTAR to review and recommend changes Focus is on implementation and enforceability issues related to the model rule and MOU Draft will go back to AMC and MTF for review Approve changes Address any new policy issues

Material Needed for 309 SIPs/TIPs Report on NOx and PM Evaluate need to develop a trading program to address growth in these pollutants Evaluate control options Evaluate potential impact on visibility impairment Monitoring Protocols – Trading program Needed for all non-utility source categories