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Climate Change Blog

EPA Proposes Credit Trading Schemes as Part of the Federal Plan for the Clean Power Plan

In addition to issuing the finalized Clean Power Plan rule, EPA simultaneously released a proposal for a carbon credit trading scheme to use in regions of the country where EPA has not approved a state plan. This proposed federal plan (FP) includes a proposal for either a rate- or mass-based federal trading scheme, as well as rate- and mass-based model trading programs that states can adopt as part of their own state plans. The public may submit comments on the proposed FP during the 90 days following its publication, and EPA intends to finalize the FP next summer.

Who will be impacted by the FP?

The FP will directly apply to EGUs in federal and Indian lands, as well as in states where EPA has not approved a state plan as directed by the Clean Power Plan rules. This might be the case either because a state chose not to submit a plan, or because EPA determined that the state plan does not meet the CPP’s requirements. States have until September 6, 2016 (or upon making an initial submittal, until September 6, 2018) to submit state plans. Even after a FP is put in place, a state can still submit its own plan for EPA approval at a later time. EPA is also proposing changes to its state plan approval process, which would allow it to partially or conditionally approve a state plan.

This proposed FP could also impact the way that states decide to design their own plans under the CPP. The FP includes two model trading schemes, and explains that any state that submits a plan adopting EPA’s model plan will be “presumptively approvable” by EPA. Rather than take on the onerous task of attempting to develop an entire trading scheme or other compliance mechanism which EPA might reject, states may be tempted to simply adopt EPA’s model trade plan into their own state plan. Alternatively, states may decide not to submit a plan at all, and simply have EPA develop and administer its own state-specific trading scheme through a FP for the regulated EGUs within a state’s borders. EPA has created this decision tree outlining the states’ choices.

What kind of trading scheme is EPA proposing?

EPA has proposed both a mass- and a rate-based carbon credit trading scheme, although in the final rule it will only adopt one of these schemes. The proposed FP also provides a mechanism for state trading plans to “link” to the federal trading plan, so long as the state scheme meets certain requirements and is compatible with the FP. EGUs in any state covered by a federal plan could trade with EGUs in any other state covered by a FP or a state plan linked to the FP.

How does the proposed rate-based plan work?

Under the rate-based plan, emissions are expressed as a rate of emissions of CO2 per unit of energy output for two sub-categories of sources: natural gas-fired stationary combustion turbines and fossil fuel-fired SGUs. EGUs will either need to emit at or below their emission rate standard, or they will need to purchase credits, called ERCs, to achieve compliance. An ERC is a tradable compliance unit equal to one MWh of electric generation (or reduced electricity use) with zero associated CO2 emissions. For each ERC, one MWh is added to the denominator of the reported CO2 emission rate, resulting in a lower adjusted CO2 emission rate. Only designated categories of EGUs, renewable energy (RE) resources, and nuclear generation can create ERCs, although EPA is considering adding other sources.

EPA proposes using the agency’s already-existing automated allowance tracking and compliance system (ATCS) to monitor the scheme. ATCS would track the generation of ERCs, holdings of ERCs accounts, deductions for compliance, and transfers between accounts. Entities could put ERCs in one of two types of accounts: compliance accounts to meet emissions requirements, or general accounts for holding or trading.

How does the mass-based plan work?

Under the mass-based approach, the trading credits are called “allowances” rather than ERCs. EPA would create an emissions budget for each state equal to the total tons of CO2 allowed to be emitted by the affected EGUs in each state per the CPP. Each allowance would authorize the emission of one short ton of CO2 during the compliance period.

EPA would initially determine the number of allowances for each state budget based on the historical generation of the state’s regulated EGUs. States covered by the FP also have the option of creating their own method for determining how to distribute allowances to EGUs within their jurisdiction, rather than relying on EPA’s approach. Allowances could then be transferred, bought, and sold on the open market, or banked for future use. Allowances do not expire, and may be banked for use in any future compliance period. Regulated EGUs would then have to surrender the number of allowances sufficient to cover their emissions at the end of a given compliance period. EPA has proposed using multi-year compliance periods to ease its own administrative burden, and allow for greater flexibility for the EGUs.

EPA is also proposing to hold back certain allowance “set asides” which could be used in case of an electric reliability emergency: (1) For a Clean Energy Incentive Program; (2) to support RE projects; and (3) to allocate allowances based on an updating measurement of affected-EGU generation. EPA has included state-specific set-asides within the proposed FP.

According to EPA, the Clean Energy Incentive Program (CEIP) is designed to “reward early investments in renewable energy (RE) generation and demand-side energy efficiency (EE) measures that generate carbon-free MWh or reduce end-use energy demand during 2020 and/or 2021. State participation in the program is optional.”

Check back in the upcoming weeks for further analysis of these plans.

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