1. The Regulatory Assistance Project 177 Water St. Gardiner, Maine USA 04345 Tel: 207.582.1135 Fax: 207.582.1176 50 State Street, Suite 3 Montpelier, Vermont USA 05602 Tel: 802.223.8199 Fax: 802.223.8172 Website: http://www.raponline.org Moving Forward on Carbon Caps: The Regional Greenhouse Gas Initiative Oregon Carbon Allocation Task Force March 2006 Richard Cowart

2. The Northeast Regional Greenhouse Gas Initiative (RGGI)  7 states engaged  4 other states (MA and RI out for now) (PA, MD) are observing  Begun 2003  MOU signed by 7 Governors 12/05  Model Rule -- coming soon  State-by-state adoption 2006  Launch 2009

3. Identify Sources to be Covered Determine Total Emissions from Covered Sources & Set Cap Issue Allowances (1 per ton) & Distribute Trade Sources Cover Emissions with Allowances and/or Offsets Offsets Designing the RGGI Cap-and-Trade Program

4. RGGI Program Elements  Coverage: Power Plants of 25 Megawatts+  Cap levels: Stabilize Emissions 2009 through 2015; Reduce 10% by 2019.  Allocation: Each state has a budget, and allocates credits  3-Year compliance periods  Offsets: Generators can earn offsets from off-sector reductions  “Safety valve” program if prices rise too much  Leakage: problem still to be addressed  Review of Program in 2012.

5. RGGI innovation: Consumer Allocation  Allocate 50% --100% of initial credits to consumer representatives (eg, distribution utilities, Efficiency Utility)  RGGI MOU - state minimum commitment is 25%  Most states will be higher – Vermont can be 100%  Generators need to purchase allowances, recycling the windfall revenue BACK to consumers  PUCs supervise use of the $$ for benefit of consumers  Best result: focus on investments that lower carbon (EE &RE)  Result: lower program cost, greater efficiency

6. Consumer allocation – State-by-state decisions  H 860 (passed by Vermont House) : “In order to provide the maximum long-term benefit to Vermont electric consumers, particularly benefits that will result from accelerated and sustained investments in energy efficiency and other low-cost, low-carbon power system investments, the public service board …shall establish a process to allocate 100 percent of (Vermont’s) tradable power sector carbon credits and the proceeds from the sale of those credits through allocation to one or more trustees acting on behalf of consumers”  Regionwide, a 50% consumer allocation could raise ~$250 million per year.  Strong support for large CAs in New Jersey, CT, NY  Less likely in NH, DE (at this point)

7. RGGI Flexibility Devices  3-Year Compliance Period  Banking Allowed  Offsets permitted  “Safety Valve” provisions  (Leakage is NOT an acceptable safety valve and must be dealt with)

8. Flexibility -- Offsets  Offsets—project-based reductions:  Types:  Natural Gas, Propane, Heating Oil Efficiency  Land to Forest  Landfill Gas Capture & Combustion  Methane Capture from Animal Operations  SF 6 Leak Prevention  Leak Detection in Natural Gas Distribution  Geographic Extent:  Anywhere in the United States  Offsets from Outside RGGI States 2:1 Discount  Limit on Use:  Each Source may “cover” up to 3.3% of its total reported emissions

9. RGGI Flexibility-- Safety Valve  Allowance Price Safety Valves  $7.00 Trigger  Limit on offset use increased to 5% of a source’s reported emissions  Anywhere in North America  Offsets from Outside RGGI States 1:1

10. RGGI –Safety Valve (2)  Allowance Price Safety Valves (Cont’d)  $10.00 Trigger  Compliance Period extended for 1 year for up to 3 years (Maximum 6-year compliance period).  $10.00 Trigger—2 Consecutive Years  Limit on use of offsets increased to 20% of a source’s reported emissions  Offsets may come from anywhere in North America, or from recognized international trading regimes.

11. Modest Projected Impacts Using natural gas price projections widely accepted by industry analysts, regional average retail price increases range from 0.3% to 0.6% in 2015, across all rate classes. Even under a “high gas price” scenario using gas prices that are higher than mainstream analysts expect, projected retail electricity price impacts range from 1.7% to 3.2% in 2015, across all rate classes. Improved energy efficiency over time, due to both RGGI and other state energy policies, is projected to produce average household bill savings that exceed the price impact of the RGGI program.

12. Efficiency in New England can reverse demand growth Source: NEEP, 2004

13. …and would lower the cost of carbon management

14. Next Steps  Model Rule Draft now out for comment –  60-day Public and Stakeholder Review  July—model rule will be final  Leakage Working Group appointed  Offsets Working Group continues  States will initiate state-specific legislative and/or rulemaking processes.

15. Three Lessons from RGGI  1.The Acid Rain program design – smokestack- based, free allocations based on historic emissions – is not the best design for a carbon cap/trade system for the power sector.  2. An effective power sector carbon program requires focus on the load side of the power system, not just the generation side.  3. Energy efficiency is not a “collateral energy policy,” it is the key to success of the carbon program.

16. For more information… “Another Option for Power Sector Carbon Cap and Trade Systems – Allocating to Load” “Addressing Leakage in a Cap-and-Trade System: Treating Imports as a Source” “Why Carbon Allocation Matters – Issues for Energy Regulators” Richard Cowart, Regulatory Assistance Project – Memos for the Regional Greenhouse Gas Initiative (RGGI) -- Posted at www.raponline.org Email questions to RAPCowart@aol.com