States Move Forward With Implementation of Greenhouse Gas Reduction Initiatives

Regional compacts in both the West and the Northeast are moving forward to implement initiatives for the reduction of greenhouse gas (“GHG”) emissions. In the West, members of the Western Climate Initiative (“WCI”)[1] announced plans on August 22, 2007 to reduce GHG emissions, in the aggregate, by 15 percent below 2005 levels by 2020. WCI is comprised of six states and two western Canadian provinces. The aggregate goals adopted among WCI’s members set up the possibility of emission trading among members of the regional pact. The WCI also set standards for the admission of new members. In the Northeast, the states of Massachusetts and Maine issued regulations this month to establish a cap-and-trade program for meeting goals adopted by the Regional Greenhouse Gas Initiative (“RGGI”), which is comprised of ten Northeast and Mid-Atlantic states.[2]

Western States and Provinces Adopt Regional Emissions Reduction Targets

The WCI’s agreement is reflected in its “Statement of Regional Goal,” which can be viewed at this link. In order to meet the WCI’s regional target of a 15% reduction below 2005 levels, individual states and provinces will have to meet reductions ranging from 11% for Washington to 32% for Oregon by 2020. The table below shows the percentage decrease and absolute decrease in emissions agreed to by the WCI members:

The aggregate goals for the region do not replace individual state and provincial goals already established. With the exception of Utah, all WCI members have already established individual GHG emissions reduction targets. Utah has agreed to adopt such targets by 2008.

The goal announced by WCI is economy-wide, meaning it calls for overall reductions in all sectors of the economy. It covers all GHGs, including carbon dioxide, methane, nitrous oxide, hydrofluoucarbons, perfluorocarbons and sulfur hexafluoride.[3] In addition, each WCI member agrees to assess and report gross emissions of all GHGs, and to report consumption-based (“load-based”) emissions estimates for the generation of electrical power.[4]

Members of the WCI invited other states, tribes and provinces (including those in Canada and Mexico) to participate with them. Requirements for participation are: (1) adoption of an economy-wide GHG reduction goal; (2) development of a comprehensive multi-sector climate action plan; (3) commitment to adoption of tailpipe standards for passenger vehicles; and (4) participation in the Climate Registry.[5]

Northeast States Continue Implementation of Regional GHG Cap-and-Trade System

While WCI is building out an economy-wide trading system, ten Northeastern states are moving rapidly toward implementation of a cap-and-trade system covering the electric power sector. Like the WCI, the RGGI is a regional initiative. Unlike the WCI, it focuses on emissions from fossil fuel fired power plants only. The goal of the RGGI system is to cut CO2 emissions from power plants by 10 percent by 2019. When RGGI becomes operational in 2009 it will become the first mandatory GHG trading program in the United States.

Earlier this month, the RGGI system took a significant step toward implementation when the states of Massachusetts and Maine issued draft regulations that provide the detail as to how the program will be implemented in those states. The regulations were designed to meet the states’ commitments under the Memorandum of Understanding (“MOU”) that each state signed when they joined the RGGI.

Massachusetts’ draft regulations, which have been jointly proposed by the Massachusetts’ Department of Environmental Protection (“MDEP”) and the Massachusetts Division of Energy Resources (“MDER”), can be viewed at this link.[6] Maine’s draft regulations, which have been proposed by the Maine Department of Environmental Protection, can be viewed at this link.[7] The two states’ regulations closely follow a model rule adopted earlier by the RGGI. For ease of reference, the significant elements of the Massachusetts’ regulations are outlined below, and the few unique features of Maine’s regulations are listed at the end of this article.

Thresholds. The draft regulations apply to any fossil fuel fired electric generator with a capacity of 25 megawatts or greater.[8] The term “fossil fuel” is defined as natural gas, petroleum, coal or other fuels derived from those sources.[9] The regulations apply to plants in operation prior to January 1, 2005 if those plants use fossil fuels to generate 50% or more of the heat input for the plant. For plants which commenced operation after January 1, 2005, the regulations apply if the plant uses fossil fuel for more than 5% of its total heat input.[10] In a press release issued in conjunction with publication of the regulations, MDEP stated that this regulatory change will extend coverage of carbon dioxide emissions governed by the regulations from 6 plants (which were previously covered under existing regulations issued in 2001) to 32 plants.[11]

Effective Date. The regulations become effective on January 1, 2009.[12]

Emission allowances and diminishing budgets. An allowance is essentially an authorization or permit to emit a specified amount of pollution. In developing a cap-and-trade system, regulators must decide how to allocate or distribute allowances to companies required to participate in the regulatory program. The options typically include distributing allowances for free or auctioning them off. How allowances are distributed directly affects the compliance costs for meeting the emission reduction targets.

The Massachusetts regulation calls for the allocation of CO2 allowances at auctions. While this has the potential to increase energy costs, the state intends to use auction proceeds to increase efficiency and curb growth in energy use, and asserts that this will ultimately lower energy costs.[13] While regional auctions are anticipated, the regulations allow for a state-specific auction in the event that there is no regional program available.[14]

Like all cap-and-trade programs, the Massachusetts regulation contemplates an emissions budget that declines over time. For the initial year of the RGGI program, Massachusetts proposes a CO2 emissions budget of 26.6 million tons.[15] This initial budget is based on the current CO2 emission level for covered facilities. The budget will cap emissions from both existing and new sources at those levels. Beginning in 2015, the emissions budget will decrease by 2.5% per year through 2018, forcing a 10% reduction in CO2 emissions or, alternatively, the purchase of an equivalent amount of offsets or a combination of the two.

Credits for early reductions. Plants will be allowed to claim credits for CO2 reductions that are instituted prior to January 1, 2009, though no credit will be allowed for plant shutdowns.[16]

Offset Projects. An offset is a credit for emission reductions that are achieved by an entity in a sector that the regulatory program does not cover. The regulations track the RGGI model rule and provide for CO2 offsets to projects that result in either emissions reductions or carbon sequestration. Offsets are limited to five categories: (1) landfill methane capture; (2) reduction in emissions of sulfur hexafluoride; (3) sequestration of carbon from forestation; (4) reduction or avoidance based on end-use energy efficiency; and (5) avoided methane emissions from agricultural manure management operations.[17]

In order to qualify as an offset, a project must be located in a RGGI state or its territorial waters, or in a state which has a cooperative agreement with the state where the offset is sought to be used.[18] In addition, offset projects located outside the state must exceed a minimum threshold of 20,000 tons of annual reductions.[19]

The regulations limit the number of offset allowances that can be used by any single plant to 3.3% of the plant’s CO2 allowances, unless the 12-month average price per carbon unit exceeds $7, in which case the limit goes to 5% of total CO2 allowances. In the event that the 12-month average price exceeds $10, then plants may use offsets for up to 10% of their allowances.[20]

Unique Aspects of Maine’s Cap and Trade Regulations.

Maine’s proposed regulation largely mirrors Massachusetts’ with the following limited exceptions: Maine’s projected CO2 emissions budget is 5,948,902 tons for the years 2009 through 2014.[21] Like Massachusetts’ program, Maine’s regulation will become effective no earlier than January 1, 2009. However, this date is applicable only if other states whose electrical utilities are administered by the same regional transmission organization as Maine have instituted a similar cap and trade program, and the combined CO2 emissions budgets from those states is at least 35 million tons per year.[22]

Maine’s regulations exempt plants that supply no more than 10% of their electricity to a transmission and distribution utility annually.[23] Massachusetts’ regulations have no such exemption.

Conclusion

States on both the east and west coasts are now well on their way to developing and implementing regional GHG trading programs. The development of these regional trading systems is bound to create additional pressure on the federal government to develop a uniform national program for reducing GHG emissions.

If there is no national program, by sometime next year there is a distinct possibility that the Unitd States will have a number of independent, but linked, regional trading systems. California’s Governor Schwarzenegger has already announced plans to explore linking the WCI with the trading systems in the RGGI and in Europe.[24] Even so, there may be a system in the Northeast focused on power plants, and in the West on multiple sectors of the entire state economies. Amid the conflict and confusion, there are potential economic disadvantages for businesses operating in states with carbon controls relative to others operating in states that do not have such controls in place.

For more information about climate change regulation, please contact Steve Jones or Brad Marten.