Climate Change Mitigation: The New Energy Policy

The Administration's Clean Power Plan (the "Plan"), released on June 2 and published on June 18, confirms that climate change mitigation goals are now a key driver of both environmental and energy policy. By imposing total power sector CO2 emission reductions of 30 percent (from 2005 levels) by 2030, the Plan is likely to trigger both a wholesale shift of power production fuel usage from coal to natural gas and renewable energy, and a critical debate about energy resource priorities.

The Plan reflects the latest development in a multi-year conflict over climate change legislation and energy policy. Early in the Administration's first term, a "cap and trade" approach was proposed by Congressional Democrats and opposed by most Congressional Republicans. The opponents prevailed, effectively blocking the legislation.

The Plan substitutes a "command and control" approach for cap and trade legislation. Although less economically efficient than cap and trade, the Plan's compelling advantage is that it can be implemented under existing provisions of the Clean Air Act (in this case, Section 111(d)). In other words, EPA can enact the Plan without Congressional action or approval.

Key elements of the Plan include the following:

  • States must implement carbon dioxide limits that result in total power sector emission reductions of 30 percent (from 2005 levels) by 2030.
     
  • States can use any or all of four "building block" approaches to achieve the Plan's objectives, including (i) improved power plant efficiency, (ii) increased use of lower-emitting fossil fuel-fired power plants, (iii) increased use of non-emitting generation resources (e.g., solar and, wind), and (iv) increased end-user efficiency.
     
  • States may act on their own or "collaborate" on multi-state plans for achieving the targeted emission reductions.

Substitution of the Plan for cap and trade legislation highlights a recurring and daunting set of issues. In a sector full of government subsidies and other incentives, how can policy create a marketplace where all manner of energy resources compete on a level playing field? Equally important, how can policy reforms "internalize" the environmental costs of greenhouse gas emissions where an entire industry has been built on the assumption that carbon emissions from fuel combustion are cost-free?

When it becomes final, the Plan is certain to reduce emissions from coal-burning plants. However, the Plan's real success will turn on whether it facilitates sustainable choices between natural gas and renewable resources. Natural gas has advantages over coal - most notably lower carbon content - but is less than ideal from an environmental perspective. Methane, the primary component of natural gas, produces about 30 times the greenhouse gas effects of carbon, raising concerns that natural gas well and pipeline leaks could erode the sustainability of natural gas as a fuel.

Natural gas is also subject to price volatility. The so-called "gas bubble" of the 1980s illustrates the boom-to-bust cycle that results from a gas-focused power sector. By contrast, renewable resources have thus far proven to be more economically sustainable, with prices likely to remain stable-or even decrease-for years to come.

With fast-ramping generation and storage technologies that support reliable production, renewable resources are a viable alternative to a gas-centric economy. Moreover, policy reforms that address key regulatory issues (e.g., federal versus state authority to mandate demand response programs, rate incentives for "ancillary services" and new approaches for reducing fugitive emissions from natural gas wells and pipelines), and promote innovative technologies and know-how, will further enhance the Plan's effectiveness.

The United States cannot be competitive in a global economy if it is saddled with burdensome energy and environmental costs. However, prior experience with cap and trade regimes (e.g., EPA's "Acid Rain" Program) and other models demonstrate that mandated emission reductions stimulate technology innovations and spur economic growth.

The Plan complements market based approaches implemented by various states. Over 28 states have adopted renewable energy portfolio standards and at least 15 states have committed to some form of regional "cap and trade" regime. Even emerging markets in Latin America (eight of them to date) have enacted or announced programs to mitigate climate change, including (in at least one case) a carbon tax.

In short, the Plan is more than an air-emission regulation. It advances the dialogue regarding how best to evaluate the relative merits of natural gas versus renewable resources and creates incentives for innovation in all manner of power generation facilities. Finally, while it may not present a complete solution to the challenges of climate change, it sets the stage for developing sustainable energy resources through mutually reinforcing energy and environmental policies.

Tentative Ruling Issued in California Cap and Trade Auction Lawsuit

A tentative ruling was issued yesterday in the related cases California Chamber of Commerce v. California Air Resources Board (ARB)  and  Morning Star Packing Co. v. ARB, pending before the Sacramento County Superior Court.  The cases challenge the legality of ARB's cap and trade auctions under two theories:  (1) the cap and trade auctions exceed ARB's authority under AB 32, and (2) the auctions amount to an illegal tax adopted without the requisite two-thirds approval of the California Legislature.  The Court tentatively ruled in ARB's favor that the agency's implementation of a cap and trade auction system is within the scope of AB 32, which delegated ARB authority to design the distribution of emissions allowances.  The Court did not rule on whether the allowance auctions constitute an illegal tax.  The tentative ruling outlined questions on this topic for oral argument, which was heard yesterday.  A ruling on the tax challenge is expected in the next 90 days.

ARB held its most recent quarterly auction on August 4, 2013.  2013 vintage allowances sold for $12.22.  In the advance auction of 2016 vintage allowances, held concurrently, allowances sold for $11.10.

Results for Third California Cap and Trade Auction Released

The results are in for the third California cap and trade auction.  A metric ton of CO2e went for $14 in the third auction, which took place on May 16, 2013. The top bid at the auction was $50.01, with a mean bid of $16.67 submitted. All of the 14.5 million 2013 vintage allowances available at the auction were sold, with 1.78 bids submitted for each available allowance. Demand was down compared with the second auction, that took place in February 2013, where roughly 2.5 bids were received for every available 2013 vintage allowance. In the third auction, just over 90% of the allowances were purchased by entities that have compliance obligations under the cap and trade program. Allowance prices have continued to slowly rise, with a settlement price of $10.09 per metric ton CO2e in November 2012, $13.62 in February 2013, and $14 in this most recent auction. See my earlier blog post for some details on auction rules.

CARB also held an advance auction of 2016 vintage allowances on May 16. 7.5 million of roughly 9.6 million allowances available were purchased at this advance auction. The settlement price was the same as the minimum bid price allowed, $10.71 per metric ton CO2e. Though all of the 2016 vintage allowances offered were not sold in the third advance auction, demand rose over the second advance auction held in February 2013. In the third advance auction, CARB received about eight bids for every ten 2016 vintage allowances available; in the second advance auction, there were about five bids for every ten 2016 vintage allowances. 

An Allowance Price Containment Reserve sale will take place June 27, 2013. The next allowance auction will be held August 16, 2013.

California Links to Québec's Cap and Trade System

On April 19, 2013, the California Air Resources Board (CARB) voted to link the California cap and trade program to Québec’s cap and trade system. CARB approved changes to the California cap and trade regulation on Friday to allow for the linkage, which is effective January 1, 2014. In practical terms, the linkage opens a new market for greenhouse gas allowances and offsets for California’s regulated entities and offset generators. As Québec’s cap and trade participants enter the California market, regulated entities in California could face tighter competition in bidding for allowances at CARB’s quarterly auctions. 

CARB is also planning for additional amendments to the California cap and trade regulation this year. Many of the potential changes were teed up for consideration in CARB Resolutions 12-33, 12-51, and 11-32. Topics up for potential amendment include:

  • Refining the definition of resource shuffling and clarifying how CARB will deal with the problem. CARB will base proposed amendments to resource shuffling provisions on the recommended actions presented by staff in October 2012. 
  • Providing transition assistance to electrical generating facilities with legacy power purchase agreements that do not provide for recovery of the cost of compliance with the cap and trade program. 
  • Exemption for steam and waste heat emissions from combined heat and power. 
  • Exemption for emissions from waste-to-energy facilities during the first compliance period (2013-2014).
  • Evaluate trade exposure categorizations and modify leakage risk determinations for rare earth mineral extraction activities, acid battery recycling activities, and liquid hydrogen production.
  • Product benchmarks for rare earth mineral extraction, acid battery recycling, dry gas extraction, food processing, foundries, metal casting, metal forging, and ethanol production. Staff may also propose benchmark modifications for thermal and non-thermal oil extraction, natural gas extraction, petroleum refining, hydrogen production, coke calcining, flat glass and container glass manufacturing, recycled boxboard manufacturing, and tissue product manufacturing.
  • The allowance allocation approach for the petroleum refining sector for the second (2015-2017) and third (2018-2020) compliance periods.
  • Allowance allocation to California universities that took early actions to reduce greenhouse gas emissions and invest in energy efficiency and combined heat and power.
  • Issues surrounding the implementation of the offset program.
  • New offset protocols for coal mine methane capture and rice cultivation practices.
  • Ensuring allowances prices do not exceed the highest tier price of the Allowance Price Containment Reserve.
  • Requirements for the retirement of renewable energy credits from electrical generating facilities to prevent double-counting.
  • Changes to implementation of the Auction Platform and Compliance Information Tracking Services System (CITSS) and modification of the current schedule for auctions and reserve sales.
  • Modification of information disclosure requirements for the CITSS.
  • Modification of current auction purchase limits.

CARB currently plans to release the language of draft proposed amendments in June 2013 and will consider adopting them in October 2013.

Results of California Cap and Trade Quarterly Auction Released

On February 19, 2013, the California Air Resources Board held its second auction of greenhouse gas (GHG) emission allowances for its Cap and Trade Program. This was the first quarterly auction for 2013; the first auction was held November 14, 2012. All ‘covered entities’ – GHG emitters regulated under Cap and Trade – were eligible to participate in the auction. Voluntarily associated entities, i.e. groups who wish to retire allowances or sell allowances on the market, were also eligible to participate. Some key rules of the auction: 

  • Participants submit sealed bids, for multiples of 1,000 allowances. 
  • For 2013 auctions, the minimum bid is $10.71 per allowance.
  • One allowance equals the right to emit one metric ton of CO2 (or other GHGs in CO2-equivalent terms). 
  • Allowances are awarded beginning with the highest bid and proceeding through successively lower bids until the total number of allowances available for sale have been awarded.
  • The final price of allowances for all participants in the auction, the “settlement price,” is the lowest bid received at which the supply of available allowances for sale is exhausted.

In this auction, the settlement price for 2013 vintage allowances was $13.62. All of the approximately 13 million allowances offered for sale were sold. The auction also included the advance sale of 2016 vintage allowances. The settlement price for 2016 allowances was $10.71. 4,440,000 2016 vintage allowances were sold, approximately half the total number offered for sale. There were approximately 2.5 bids for every one allowance, compared with approximately one bid for each allowance during the November 2012 auction. Not surprisingly, auction participation is up, with covered entities facing compliance obligations this year.

 

The settlement prices for this auction were slightly higher than those of the first auction, held November 14, 2012. The settlement price for 2013 vintage allowances in November 2012 was $10.09. Advance sales of 2015 vintage allowances were settled at $10, the minimum price, in the November 2012 auction. The Air Resources Board will hold an allowance price containment reserve sale on March 8, 2013, offering allowances at a three tiers of fixed prices.

First California Cap-and-Trade Auction Delayed, Lawsuit Filed to Challenge Offset Protocols

From Allison C. Smith and Lee N. Smith:

Last week was busy for the California Cap-and-Trade Program, adopted by the California Air Resources Board (CARB) last December under A.B. 32. First, last Tuesday, CARB Chairman Mary Nichols announced at a Senate hearing that the first scheduled Cap-and-Trade allowance auction, scheduled for August 2012, will be a “practice” auction rather than a “real” auction for the purchase of actual allowances. Reportedly, the delay is to allow industry to gain an understanding of how actual, future auctions will work. The first “real” auction is still scheduled for November 1, 2012.

On Wednesday, March 28, two environmental groups, the Citizens Climate Lobby and Our Children's Earth Foundation filed suit in San Francisco Superior Court challenging the use of greenhouse gas emission offsets by entities regulated under Cap-and-Trade to meet their Cap-and-Trade compliance obligations. Although the suit will not necessarily delay implementation of Cap-and-Trade and the offset program, if the lawsuit ultimately invalidates the offset protocols and eliminates the use of offsets to meet Cap-and-Trade obligations, the cost of compliance for industry could be substantially increased. Plaintiffs are alleging that the offset program, with its four adopted offset protocols, are reductions that would have occurred in the normal course of business, and are therefore not "additional” greenhouse gas reductions and threaten the overarching integrity of the Cap-and-Trade Program. The plaintiffs request a repeal of the four offset protocols approved in December 2011 and a prohibition on using offsets in place of greenhouse gas allowances to meet Cap-and-Trade obligations.

Governor Kulongoski's Climate Change Agenda Unveiled

Earlier this week, I attended Climate Solutions’ Business Briefing on the Governor’s Proposed Climate Change Policy. Hosted by Gerding Edlen, the briefing offered a snapshot of the Governor’s legislative agenda for 2009 and beyond, and gave the sustainable business community the opportunity to offer feedback on what needs to happen to move the plans forward.

The Governor’s Climate Change Agenda (the “Agenda”) covers four major areas: greenhouse gas (“GHG”) reductions, renewable energy, sustainable transportation, and energy efficiency. Some highlights follow.

 

Greenhouse Gas Reductions

 

There are three major components to the GHG reduction plan: a cap and trade program, an emissions performance standard, and an authorization of the development of Environmental Quality Commission (“EQC”) regulations. Included in the proposed 2009 legislation is the authorization for Oregon’s participation in a regional cap and trade program. Once authorized, the plan calls for a statewide public process to gather input on how best to structure the program. The program design recommendations will be brought back to the 2011 Legislature for approval, with the regional program scheduled to go into effect in 2012.

 

Renewable Energy

 

In the renewable energy realm, the Agenda includes a solar feed-in tariff, a beefed-up Business Energy Tax Credit (“BETC”), and initiatives to help the state meet the Governor’s goal of 100% renewable energy for state government. Following Germany’s lead, which has had amazing success with the solar energy incentive program known as a “feed-in tariff”, the Governor’s proposed legislation will create a production incentive pilot program to help pay for the electricity produced by a solar project. 

 

The Governor also plans to create a BETC Energy Fund to offer up-front project funding. As with the Cultural Trust program, this proposal will enable citizens to donate money into the fund and take a tax credit on the donation.

 

Sustainable Transportation

 

Thinking about buying a Prius? If you are hoping for a state tax credit, you may want to revise your wish list. The Governor’s plan calls for a shift toward vehicles that produce less carbon and that have not yet permeated the market, such as plug-in hybrids and all-electric vehicles. In addition, the Agenda would authorize the EQC to develop and phase in a low-carbon fuel standard, that will require fuel providers to lower the average carbon intensity of fuels sold by 10%. The plan also includes an Expanded Transportation Options program and the development of a least carbon planning model.

 

Energy Efficiency

 

Because energy efficiency investments are such a cost-effective way to reduce both our energy demand and GHG emissions, a large chunk of the Agenda is devoted to this area. The Governor has put forth several proposals, such as the creation of energy performance certificates, the expansion of the BETC for energy efficiency investments, and the authorization of bonding authority for local governments to finance energy efficiency projects.

 

Proposed legislation seeks to establish a goal of net-zero emissions homes and buildings by 2030. As a start, the legislation seeks to increase energy efficiency in commercial and residential building codes by 30 percent and 15 percent, respectively. The Agenda also calls for expanding the BETC for industrial energy efficiency projects from 35 percent to 50 percent of the total project costs, up to $20 million. 

 

The various pieces of the Governor’s Agenda will add teeth to existing state programs aimed at addressing climate change, and help keep Oregon at the forefront of innovation and entrepreneurship in the sustainable business realm.