1. S A L T L A K E C I T Y | L A S V E G A S | R E N O | P A R S O N S B E H L E L A W. C O M Update on Western Climate Initiative Options for Reducing GHG Compliance Costs April 24, 2009 TerraLex Environmental Committee Meeting Atlanta, Georgia Hal J. Pos Michael A. Zody

2. 2 Western Climate Initiative (WCI)  WCI Created February, 2007  Now Includes seven Western States, four Canadian Provinces –Thirteen Observer Jurisdictions in the U.S., Canada and Mexico  Utah Joined May, 2007

3. 3 Western Climate Initiative (WCI)  Governors’ Agreement –Some Legislatures Supportive –Others Remain Uncommitted or Skeptical –Utah House Recommended Withdrawal –Governor Huntsman Reaffirmed Utah’s “Place at the Table”

4. 4 WCI Plans A Comprehensive Cap and Trade Program Beginning 1/1/2012  Overall Goal – 15% Reduction by 2020 from 2005 GHG Emissions  Broad GHG Coverage – Carbon Dioxide, Methane, Nitrous Oxide, Hydrofluorocarbons, Perfluorocarbons, Sulfur Hexafluoride  Broad Industry Coverage within WCI Partner Jurisdictions –Electricity generators –Major industrial fuel users –Large commercial fuel users –Industrial process sources

5. 5 WCI Plans A Comprehensive Cap and Trade Program Beginning 1/1/2012  Small residential, commercial, industrial (RCI) fuel combustors controlled at an upstream “Point of Regulation” –where (RCI) fuels enter commerce in the WCI Partner Jurisdiction  Transportation fuels regulated where fuels enter commerce — fuel distributor or refiner

6. 6 WCI Plans A Comprehensive Cap and Trade Program Beginning 1/1/2012  Electricity sources controlled at “First Jurisdictional Deliverer (FJD)” –Within WCI, FJD is generator –Outside WCI, FJD is first regulated power deliverer  Thresholds –25,000 metric tons CO 2 e for regulation –10,000 metric tons CO 2 e for GHG reporting  WCI estimates 90% GHG coverage  Pledged to integrate with U.S. and Canadian climate legislation

7. 7 WCI Plans An Ambitious Schedule Over 2009-2010  2009-10 Work Plan Issued 2/19/09  GHG Reporting Rules This Year –Being developed on similar schedule as EPA reporting rules  GHG Caps to be Set 2010 –Annual caps for states/provinces –Caps based on “best estimates” of 2012 source emissions, updated every 3 years –3-year compliance periods, 2012-2020 –Emissions allowances ratchet down on straight line

8. 8 Ambitious Schedule (cont.)  Rules for Trading, Offsets, Auctions – 2009-2010 –Verification and enforcement –Market oversight and tracking –Emissions auctions –Offsets and trading –Revenue allocation left to partner jurisdictions  Electricity Sector –Set FJD boundaries –Rules for imported electricity –Possible set-asides for renewable energy credits (RECs)

9. 9 What If There Is No WCI?  Proposed EPA Reporting Rule Released 3/10/09  What if Clean Air Act regulation? –Recent EPA Endangerment Finding under Clean Air Act –Possible NSPS, PSD, NESHAPs, etc. regulation: climate analysis in permitting and SIPs –Current GHG litigation –U.S. Climate Action Partnership, API, EEI favor new bill

10. 10 What If There Is No WCI?  Congressional Bills –Waxman-Markey: Discussion draft released 3/31/09 (648 pages) Contains 4 titles – (clean energy sources, energy efficiency, federal GHG cap and trade program and consumer and industry transition protection) Markup by Memorial Day recess –Boxer: Action before Copenhagen climate conference in December

11. 11 Key Policies to Reduce Compliance Costs  Free GHG Emissions Allowances—WCI proposes up to 90% –Reduce WCI v. non-WCI compliance costs –Reduce consumer costs overall –Higher auction fraction will increase economic impacts –WCI proposal: lower up-front costs than RGGI and Obama

12. 12 Key Policies to Reduce Compliance Costs  Broad and Flexible Offsets –National and international sources/offsets allowed if not otherwise regulated –Recommended categories: forests, agriculture, waste management

13. 13 Key Policies to Reduce Compliance Costs  Early Reduction Allowances (ERAs) –Encourage capped entities to reduce GHG emissions before start of program –Possible credits for GHG reduction measures such as energy efficiency and fuel switching –Capped entities need to know ERA rules as soon as possible

14. 14 Other Climate Programs Favor ERAs  California –CARB policy statement favoring ERAs, 2/08 –CARB in process of developing ERA rules  RGGI –Model Rule § XX-5.3(C) (12/31/08) –Allows ERAs achieved 2006-2008 –Plant shutdowns not eligible –Applications due 5/1/09 –ERA awards 12/31/09

15. 15 Other Climate Programs Favor ERAs  Germany – National Allocation Plan –Plant shutdowns don’t count  Bottom line – ERAs are for extra effort, not for economic downturns

16. 16 Federal ERA Proposals  Bills in 110 th Congress typically included ERA provisions –Ranged from general statement of support to “specific” rules for granting ERAs –Lieberman-Warner example 5% of allowances, declining to 1%, reserved for early reduction credits Credits possible as far back as 1994 Verified and registered under: Climate Leaders Program; EIA program; State or regional GHG reduction programs; or voluntary entity programs that resulted in entity-wide GHG reductions (i.e., The Climate Registry)

17. 17 WCI ERA Program  Two types potentially available for Partner Jurisdictions to award –Extra to their allowance budget –Within their allowance budget  Extra to allowance budget –Short window—1/1/2008 to 12/31/2011 –By end of 2009, partners will establish rules to ensure ERAs are: voluntary, permanent, verifiable, additional and enforceable –Will be awarded by the end of 2012

18. 18 WCI ERA Program  ERAs from within Allowance budget –No recommended rules or limitations in WCI design document, up to each Partner  Washington State draft legislation –Defines ERA as “allowance for reductions in greenhouse gas emissions that occur after January 1, 1990, and before January 1, 2012, and that are approved by the [Department of Ecology]

19. 19 Conclusions  WCI is a genuine force –Eleven jurisdictions/thirteen observers –Established bureaucracy/committed people  WCI is moving quickly in 2009-2010 –Reporting rules this year –Broad industrial and transportation coverage – 90% –State/provincial GHG caps next year –Trading and enforcement rules  WCI lobbying EPA and Congress