1. Clean Air Interstate Rule (CAIR) CAIR Model Cap and Trade Rules: Unique Elements and Flexibilities Office of Air and Radiation March 2005

2. 2 What elements of the trading programs differ from program-to- program or allow State flexibility? CAIR SO2 Program –Acid Rain Program Changes –Retirement Ratios and Compliance CAIR Ozone-season NOx Program –Applicability and Non-EGUs –Early Reduction Mechanism CAIR Annual NOx Program –Early Reduction Mechanism CAIR NOx Allowance Allocations Overview of Presentation

3. 3 EPA has designed 3 model rules that States may choose to use to implement the mandated CAIR reductions. –The model rules parallel the existing NOx SIP Call structure. States must use the CAIR model rules if they wish to participate in the regionwide, EPA-administered cap and trade programs. –Regionwide consistency promotes simplicity and efficiency. Some flexibility for specified elements of the programs. –Ozone-season units. –Inclusion of opt-in mechanism. –Unit-level allocation of NOx allowances. Model Rules Consistency and Flexibility

4. 4 Structure of Model Rules ProvisionsNOx SIP CallCAIR Annual NOxCAIR Annual SO2 CAIR Ozone- season NOx General ProvisionsAAAAAAAAAA Designated Representative BBBBBBBBBB PermitsCCCCCCCCCC Compliance Certification DDD (reserved) DDD (reserved) DDDD (reserved) AllocationsE*E*EE*EEE (reserved)EEEE* Allowance Tracking System FFFFFFFFFF Allowance TransferGGGGGGGGGG Monitoring and Reporting HHHHHHHHHH Unit Opt-insI**II**III**IIII** * Contains some required elements and optional regulatory language that implements the example approach. ** States are not required to include unit opt-in mechanisms but, if they do, they must use the model rule language. Unique elements Flexibilities may result in some variation

5. 5 Achieve CAIR SO2 reductions and Preserve integrity of Acid Rain program. Use Acid Rain program allowances for CAIR SO2 trading program and retire allowances at a ratio greater than 1 to 1 in CAIR states –This necessitates coordination/alignment of Acid Rain and CAIR SO2 trading rules Design Goal Solution CAIR SO2 Program: Design

6. 6 Effective 7/1/2006 Many changes throughout rule to allow source-level compliance and eliminate unit accounts Certification language (for submissions) aligned with CAIR Eliminates requirement for compliance certification report Eliminates newspaper notice requirements for DR/ADR selection CAIR SO2 Program and the Acid Rain Program Rule Changes

7. 7 CAIR annual SO2 emission reductions achieved by requiring CAIR sources to retire title IV SO2 allowances at a ratio greater than one. –A “vintage year” is the first year in which an allowance can be used -- it is not the year in which a source uses it. –“CAIR SO2 Allowance” definition specifies different values based upon vintage years: A compliance requirement, not a restriction on trading. Retirement ratios do not apply to title IV sources outside the CAIR region. CAIR SO2 Program: Retirement Ratios and Compliance Vintage year… Authorizes… Implementing a ratio of… Pre-2010 SO2 allowance 1.00 tons of SO2 emissions 2010 – 2014 SO2 allowance 0.50 tons of SO2 emissions 2.00 - to - 1 2015 and Beyond SO2 allowance 0.35 tons of SO2 emissions 2.86 - to - 1

8. 8 Compliance is determined in 2 steps to meet the continuing requirements of title IV and new requirements of CAIR. –Step 1: all Acid Rain deductions are made –Step 2: any additional deductions to complete CAIR compliance are done If there are CAIR excess emissions, then the “tonnage equivalent” in CAIR allowances is deducted from the next year’s allocation, equal to 3 times the tons of excess emissions. CAIR SO2 Program: Compliance Procedure

9. 9 Unit W has 100 tons of SO2 emissions in 2012 –It is holding 70 vintage 2009 allowances and 50 vintage 2012 allowances. For Acid Rain, 70 vintage 2009 allowances and 30 vintage 2012 allowances are deducted. For CAIR, the tonnage equivalent of the above deductions is 85 tons (i.e. 70 1-to-1 and 30 2-to-1= 70+15=85). –The 20 vintage 2012 allowances remaining in the account are deducted at 2-to-1 (i.e., a tonnage equivalent 10 tons). –The total tonnage equivalent is 95 tons. –Unit W has 5 tons of excess emissions. –3 times 5 tons is 15 tons –Penalty is tonnage equivalent (in vintage 2013 allowances) of 15 tons = 30 vintage 2013 allowances CAIR SO2 Program: Compliance Deduction Example Excess Emissions…

10. 10 Title IV SO2 allowances may be used for compliance with the CAIR SO2 program. –Pre-2010 vintage years at 1 – to – 1 ratio. CAIR SO2 Program: Early Emission Reduction Mechanism

11. 11 Applicability of model rules still used in CAIR ozone-season program. –Large EGUs NOx SIP Call States may transition all their NOx SIP Call trading sources into the CAIR ozone-season NOx program. NOx SIP Call trading program ends in 2009. –NOx SIP Call requirement for States to make emission reductions remains in place. States are not required to bring their NOx SIP Call non-EGUs into the CAIR ozone-season NOx program. –States not transitioning their non-EGUs into the CAIR ozone-season NOx program would need to achieve these reductions using another approach. Existing and new non-EGUs meeting the States existing applicability definition. Non-EGUs brought into CAIR ozone-season program at their NOx SIP Call allowance allocation levels Full participants in CAIR ozone-season cap and trade program. CAIR Ozone-season NOx Program: Applicability and Non-EGUs

12. 12 Pre-2009 NOx SIP Call allowances may be used for compliance with the CAIR ozone-season NOx program. CAIR Ozone-season NOx Program: Early Emission Reduction Mechanism Can sources use NOx SIP Call allowances for compliance? CAIR ozone-season NOx program Yes CAIR annual NOx program No

13. 13 Compliance Supplement Pool (CSP) –Patterned after the NOx SIP Call CSP. –200,000* CAIR annual NOx allowances of vintage 2009 –State’s share of the CSP pool is based upon their share of the projected emission reductions. –States can distribute CSP allowances based upon early emission reductions beyond existing requirements or need. Distribution would be on a pro-rata basis should requests for CSP allowances exceed the State’s share of the CSP. –Qualifying early reductions take place in 2007 and 2008. –No restrictions on use of CSP allowances. * 200,000 total allowances includes the 1,503 Allowances that are the NJ and DE share of the CSP CAIR Annual NOx Program: Early Emission Reduction Mechanism

14. 14 Allocation of CAIR NOx Allowances States are free to allocate as they see fit within NOx Budget limits and deadlines set by EPA. –EPA has included an example allocation approach as part of the Rule –EPA has also developed guidance on developing output-based allocation methodologies which is available on web. –While the example approach would not provide allowances for non- emitting or renewable sources (because the increased complexity) EPA is willing to work with States interested in including such sources in their allocations.

15. 15 Allocation of CAIR NOx Allowances Rule includes an example allocation approach: –For Existing Units: Input-based allocations for existing units (adjusted by fuel factors of 1.0 for coal, 0.6 for oil and 0.4 for natural gas). The factors recognize that most of the required reductions would be achieved by controlling coal-fired units. –For New Units: Updating approach takes into account new generation on a “modified output” basis. “Modified output” approach used to provide new sources with allowances from the pool of allowances shared with existing sources.

16. 16 Allocation of CAIR NOx Allowances To avoid a generation subsidy, existing units would not update their heat input numbers and new units would update their data only once (for the period when they begin generating). New unit “modified output” added to the total heat input for all existing units. Allocations made to units in proportion to their share of updated and adjusted heat input. “Modified Output” calculations for new units: output multiplied by appropriate conversion factor. –7,900 btu/kWh for coal units, 6,675 btu/kWh for oil and gas units. (cogen units would also take into account steam output) –This approach creates level output-based benefits for new units and provides incentives for efficiency. –Would require new sources to report output data. Beginning in the 6 th year of the program: –Allocations reflect updating –Existing plants’ allocations slowly decline with their share of total heat input. Overview of “Modified Output” Approach

17. 17 Allocation of CAIR NOx Allowances A New Unit set-aside would be established for units that have entered service but have not yet been allocated allowances through the updating mechanism. (i.e. during their initial years of operation) New units would be allocated allowances from this set-aside until they have established a baseline of output data and have been included in the updating mechanism. –Units would receive allowances from the set-aside on the basis of their previous year’s emissions. –Example in preamble and rule has a 5% set-aside from 2009-2013, and 3% afterwards –States can adjust to reflect their own growth conditions Overview of New Unit Set-aside

18. 18 Summary Unique aspects –For CAIR SO2 program, Title IV SO2 allowance retirement ratios. –For All programs, Early Emission Reduction Incentives are provided by unique mechanisms. Flexibility –For CAIR Ozone-season NOx Program, States may include NOx SIP Call trading sources. –For both CAIR NOx programs, States may develop their own approach to allocate NOx emission allowances or use the example approach of the model rule.