1. Recent Cap and Trade Programs: EU ETS and RGGI
Joe Kruger
Resources for the Future

2. Overview Key features of the EU ETS Key features of the RGGI proposal
Conclusions

3. Summary of the EU Trading System
Participants: 25 Member States (MS)
Timing: Periods are and
Coverage:
Sectors: Energy activities (including electric power), iron & steel, minerals, pulp and paper
~12,000 installations covering 46% of CO2 emissions

4. Summary of the EU Trading System (cont.)
Allowance Distribution
European Commission provides general guidelines on allocation
MS submit National Allocation Plans (NAPs) to Commission
Commission reviews 25 plans and can request changes
NAPs set both the cap level and allocation methodologies for each Member State

5. NAPs: Multiple Decisions
Decision #1: How much of Kyoto target will be in trading program?
Decision #2: What will be the allocations for each sector?
Decision #3: How will allowances be allocated to each installation?
Kyoto Target
Allocation to ETS
Allocation to Trading Sectors
Allocation to Installations

6. National Allocation Plans (NAPs) Criteria for EU ETS
Consistent with overall Kyoto target
Take into account
Proportion of emissions in capped sector
Other policies
Technical potential of activities within sector
Early action
Competition from non-EU countries
New entrants
May auction 5% in Phase I, 10% in Phase II

7. Results of Phase I Allocation Process
For Phase I, most Member States have
chosen 100% free allocation
allocated allowances using historical data from most recent years available
In general, electricity sector required to take most reductions
Commission reduced the caps of some Member States
Phase II NAPs due June 2006

8. Summary of the EU Trading System (cont.)
Other Provisions
Banking: Restrictions in Phase I; but Member States must allow in Phase II
Project-level offsets: JI/CDM credits
Monitoring guidelines: Standardized but some discretion given to Member States
Registries: MS registries are linked
Excess emissions penalties:
€ 40/ton CO2e in 1st Phase ( )
€100/ton CO2e in 2nd Phase ( )

9. Regional GHG Initiative (RGGI)
Regional cap and trade program proposed by Governor Pataki
Nine states in New England and Mid-Atlantic have joined
Status: Draft proposal released last week

10. Summary of the RGGI Proposal
Coverage: Electric power sector, units over 25 MW (~ units)
Cap and Timing:
Phase I ( ) stabilize emissions at current levels
Phase II ( ) 10% reduction from current levels
Apportionment to States:
Based on historic emissions, but also considers electricity consumption, population, expected new sources and other factors

11. Summary of the RGGI Proposal (continued)
Allocation to Firms
Generally, decisions left to States (similar to NOx Budget Trading Program)
However,
States must propose that 20% of allowances be used for a “public benefits” purpose
States set aside 5% for a Strategic Carbon Fund to achieve additional emissions reduction outside the cap

12. Summary of the RGGI Proposal (continued)
Other Provisions
Unlimited banking
Compliance and enforcement provisions similar to SO2 and NOX programs
Offsets allowed, with some restrictions
Use of CDM and EU allowances if prices hit a certain level
Comprehensive review in 2015

13. Conclusions
Both programs largely follow the SO2/NOx downstream model, but add some new twists
Transport sector not covered
Allocation processes are decentralized to meet political considerations of multiple jurisdictions