1. Design & Implementation of the U.S. Cap and Trade Programs Avanzando hacia un Diseño Integral de un sistema de Compensaciones Atmosféricas para la Región Metropolitana de Santiago Jeremy Schreifels, US EPA May 28, 2009

2. Acid deposition (rain, sleet, & snow) (1989 – 1990)

4. 10,000 tonnes 7,000 tonnes 3,000 tonnes Emissions Cap = 12,000 tons Emissions Standard = 500 grams/gigajoule

5. 10,000 tonnes 4,000 allowances 1,000 allowances3,000 allowances 1,000 tonnes Emissions Cap = 12,000 tons

6. 1,000 tonnes 3,000 allowances BUY! SELL! 3,000 tonnes 1,000 allowances Government Authority Collect data Quality assure data Audit data Inspect facility Publish data 3,000 allowances

7. Cap and trade: The U.S. Acid Rain Program Environmental results Design elements Program operation Revisions to address health impacts of PM 2.5 Lessons learned ResultsDesignOperationRevisionLessons

8. Generation is up, electricity prices are down, and pollution is down significantly ResultsDesignOperationRevisionLessons

9. States with the highest SO 2 emissions in 1990 saw the largest reductions by 2007 DesignOperationRevisionLessonsResults

10. States with the highest NO X emissions in 1990 saw the largest reductions by 2007 DesignOperationRevisionLessonsResults

11. 1989-19912005-2007 Average wet sulfate deposition (rain & snow) decreased significantly between 1990 and 2007 DesignOperationRevisionLessonsResults

12. 1989-19912005-2007 Average wet nitrogen deposition (rain & snow) decreased significantly between 1990 and 2007 DesignOperationRevisionLessonsResults

13. 1989-19912005-2007 Average ambient sulfate (SO 4 ) decreased significantly between 1990 and 2007 DesignOperationRevisionLessonsResults

14. Compliance is near perfect and costs are lower than other policy approaches Compliance rates are100 % every year Compliance costs are significantly lower than technology mandates (command- and-control) or emission-rate standards Source: Burtraw, Palmer, Cropper, and Carlson DesignOperationRevisionLessonsResults

15. The programs are effective, efficient, and credible Much has been written about the (SO 2 ) program... Suffice it to say that it has succeeded spectacularly. Between 1995 and 2010, the SO 2 trading program will result in greater reductions on a much faster schedule than likely would have been the case under more traditional technology-based standards, and will save more than $20 billion dollars cumulatively over that period of time. Even the most vocal ex-ante critics of emissions trading now agree that the program has been a raging success. Paul Portney, President, Resources for the Future Environmental Finance, October 2004 ResultsDesignOperationRevisionLessons

16. Designing and operating the US SO 2 cap and trade program Setting the emission cap and distributing allowances Assigning responsibility for meeting the emission cap Developing rules for allowances, emission measurement, and compliance Operating the infrastructure Providing compliance assistance ResultsDesignOperationRevisionLessons

17. Distributing allowances Majority of allocation approaches lead to the same level and distribution of emission reductions; the emission caps and banking drive reductions Many options for allocation, but none are perfect –Direct allocation to sources facilities on historical and/or current energy use (input), production/generation (output), or emissions –Auction with option to distribute revenues ResultsOperationRevisionLessonsDesign

18. Assigning responsibility: Coal-fired power plants are the dominant source of emissions About 530 coal-fired power plants (305 GW) with about 1,300 boilers generate the vast majority of power sector emissions: -95% SO 2 -90% of NO x -83% of CO 2 ResultsOperationRevisionLessonsDesign

19. Developing rules: Allowance use One allowance offsets one ton of SO 2 Allowances can be freely transferred/traded with no restrictions Official transfers/trades must be recorded in EPAs Allowance Tracking System Allowances issued for a specific compliance year; each allowance has a vintage (the first year in which it can be used for compliance) Surplus allowances not used for compliance can be saved and used in the future ResultsOperationRevisionLessonsDesign

20. Developing rules: Emission measurement, reporting, and verification Consideration: Accurate, consistent measurement methods are essential to ensure environmental integrity, equity, and credibility Coal-fired units install, operate, maintain, and quality assure CEMS for SO 2, NO X, and CO 2 –Daily calibration –Semi-annual or annual testing EPA specifies –Equipment and data quality assurance procedures –Data substitution procedures for missing or invalid data EPA verifies CEMS operation and each hour of reported emission data EPA provides a process for addressing unique or unusual monitoring situations ResultsOperationRevisionLessonsDesign

21. Developing rules: Compliance Automatic penalties for excess emissions (i.e., non- compliance) –Financial penalties –Allowance offsets ResultsOperationRevisionLessonsDesign

22. Operating the infrastructure: Data collection, management, and publication Emission and allowance data management –Collect and quality assure emission data from sources –Track allowance allocation, trades, and ownership –Deduct allowances for compliance –Publish information in an easy-to-understand and easy-to-use format ResultsDesignOperationRevisionLessons

23. Providing compliance assistance Each EPA region has a dedicated analyst –Analyst answers questions from power plants, state- level EPAs, and the public –Analyst provides guidance on monitoring and data issues EPA informs power plants of their compliance obligations, including allowance requirements ResultsDesignRevisionLessonsOperation

24. Operating the program: Resources Personnel –8 monitoring experts with assistance from regional and state inspectors –1 market operations expert with assistance during auctions and compliance assessment –Additional staff dedicated to environmental assessment, design of new programs, developing and operating IT systems, and administration Budget –Approximately 1% of air pollution control budget –Funding is from the general operating budget ResultsDesignRevisionLessonsOperation

25. SO 2 and NO X have decreased, but more needs to be done Nonattainment areas for both 8-hour ozone and fine particle pollution Nonattainment areas for fine particle pollution only Nonattainment areas for 8-hour ozone pollution only 126 ozone nonattainment areas with 474 counties 39 PM 2.5 nonattainment areas with 208 counties Source: EPA, April 2005 Nonattainment Areas for Ozone and PM2.5 ResultsDesignOperationRevisionLessons

26. The Clean Air Interstate Rule (CAIR) would reduce SO 2 and NO X emissions further Emission Caps* (million metric tons) 20102015 Annual SO 2 3.4 2.4 (2010) Annual NO X 1.4 1.2 (2009) Seasonal NO X 0.50.4 (2009) States controlled for fine particles (annual SO 2 and NOx) States not covered by CAIR States controlled for ozone (ozone season NOx) States controlled for both fine particles (annual SO 2 and NOx) and ozone (ozone season NOx) ResultsDesignOperationLessonsRevision

27. CAIR would result in major retrofits of coal-fired power plants in the US ResultsDesignOperationLessonsRevision

28. CAIR will provide significant air quality improvements Ozone and Fine Particle Nonattainment Areas* (April 2005) Projected Nonattainment Areas* in 2015 after Reductions from CAIR and Existing Clean Air Act Programs Nonattainment areas for both 8-hour ozone and fine particle pollution Nonattainment areas for fine particle pollution only Nonattainment areas for 8-hour ozone pollution only 108 ozone nonattainment or early action areas 36 PM2.5 nonattainment areas 6 ozone nonattainment areas 14 PM2.5 nonattainment areas ResultsDesignOperationLessonsRevision

29. Complexity and ambiguity increase costs and create uncertainty Simple, clear goals and rules save time and money, reduce confusion, and enhance compliance Clear legal authority for government agency to implement and enforce the emission trading program ResultsDesignOperationRevisionLessons

30. A well-designed program can address differences in seasonal and geographic impacts of emissions, if necessary Different compliance rates for geographic regions or zones affect the cost of emissions in sensitive or high- impact areas Different compliance rates based on when emissions occur affect the cost of emissions during critical seasons The most efficient approach for reducing PM 2.5 in the US is to control the precursors (SO 2, NO X ) ResultsDesignOperationRevisionLessons

31. Adaptability to new circumstances is essential The framework of the program should allow for changes based on new information, practices, or standards Most changes to the US Acid Rain Program were intended to : –Streamline the program –Improve the quality of emission data –Take advantage of advances in information technology and the Internet –Reduce burden and costs for power plants, market participants, and EPA –Improve the environmental accountability and results of the program ResultsDesignOperationRevisionLessons

32. Flexibility streamlines decision making and reduces costs Flexibility to develop control strategies and make decisions (technology, fuel, operations, and investment) reduces costs to industry –Strategies can be designed to complement, rather than conflict with, business planning processes eliminating sub-optimal investments Flexibility provides continuous incentive to customize strategy and innovate to reduce costs Emission cap provides environmental certainty about total emissions, therefore, no need for EPA to review compliance strategies or trades Lower compliance costs makes it feasible to require greater overall reductions ResultsDesignOperationRevisionLessons

33. Flexibility streamlines decision making and reduces costs (continued) Banking provides temporal flexibility –Creates incentive to reduce emissions earlier than required –Provides a buffer for price volatility –Provides a pool of allowances for phased cap reduction and unforeseen events Flexibility does not create hotspots –Largest reductions were in places with the highest emissions –Broad, regional reductions occurred where improvements were most needed ResultsDesignOperationRevisionLessons

34. Accountability is the prerequisite for flexibility Accountability requires accurate emission data to ensure all facilities are in compliance and achieving the emission cap; it also establishes integrity of allowances and confidence in the allowance market –Standards for measurement, quality assurance, and reporting Strict and automatic penalties for non-compliance –Provide predictable consequences for non-compliance –Limit the discretion of regulators –Ensures all facilities are treated equally Complete coverage of all sources within the sector minimizes shifting of production and emissions (leakage) ResultsDesignOperationRevisionLessons

35. Allocation methodologies are important, but do not affect environmental outcome of a properly enforced program Choice of an allocation approach has financial impact on facilities, but does not affect the environmental goal Majority of allocation approaches lead to the same level and distribution of emission reductions; the emission caps and banking drive reductions Different allocation approaches reward different types of facilties –Input (fuel use) rewards facilities with low sulfur emissions per unit of fuel (e.g., facilities with emission controls) –Output (generation) rewards facilities with low sulfur emissions per unit of fuel and efficient facilities (e.g., low fuel use per unit of output) –Historical emissions rewards facilities with high sulfur emissions per unit of fuel (e.g., facilities with no investment in control technologies Allowance allocations can be recalculated on a predictable schedule to reflect changes at the facilities (e.g., shutdown, changes to generation) and new facilities Allowance allocation should balance need for certainty and allow for changing circumstances ResultsDesignOperationRevisionLessons

36. Information technology streamlines program operation and reduces administrative costs The use of information technology and the Internet makes it possible to collect, evaluate, manage, and publish large amounts of data on emissions, allowances, compliance, and environmental results –Reduces administrative requirements –Improves speed and accuracy –Makes computerized data audits feasible ResultsDesignOperationRevisionLessons

37. The governments role should be focused on the programs achievement of the environmental goal EPA focuses on performance of the program, not compliance strategy –Enforcing emission measurement and quality assurance protocols –Verifying emission data –Tracking allowance ownership –Assessing compliance (allowance holdings vs. emissions) EPA provides compliance assistance to facilities –Improves compliance rate –Reduces errors –Creates collaborative problem-solving relationship between facilities and EPA ResultsDesignOperationRevisionLessons

38. The cap and trade program should create incentives for facilities to do the right thing Performance-based approach creates strong incentives –Emission measurement requirements set progressively punitive measures for incomplete or invalid measurements –Higher relative accuracy of emission measurement equipment results in fewer quality assurance tests –Non-compliance penalties are greater than the cost savings from non-compliance –Banking provisions encourage early reductions –Long-term emission reduction goals (and allowance allocations) facility planning and investment decisions ResultsDesignOperationRevisionLessons

39. Cap and trade policies complement programs intended to protect local air quality Cap and trade provides broad, regional emission reductions Cap and trade, if designed properly, can complement programs designed to protect local air quality (e.g., technology mandates, emission standards) –Compliance with one program does not substitute nor guarantee compliance with other programs ResultsDesignOperationRevisionLessons

40. Recommendations for the Santiago MR trading program (1 / 2) Reduce complexity; keep the program design simple –Implement the program in phases, starting with large stationary combustion sources and, if appropriate, expand to include other source categories –Simplify procedures for processing transactions Focus on the pollutants with the greatest health impacts –SO2 and NOX are precursors responsible for a large portion of PM2.5 in Santiago MR (they are also easy to measure)

41. Recommendations for the Santiago MR trading program (2 / 2) Enhance the emission monitoring program to provide accurate data on actual emissions –Include QA/QC procedures to enhance data quality Assess the options for addressing differences in seasonal and geographic impacts of emissions Consider more than one policy instrument; develop complementary policies –Consider control requirements for pollutants or source categories for which cap and trade does not seem appropriate –Implement emission standards as a backstop on emissions

42. For More Information Visit the clean air markets web site to view –Emission data and allowance information –Information on cap and trade programs –Program rules and guidelines –Studies and reports –Information about international cooperation http://www.epa.gov/airmarkets/