Cap and Trade Programs for Air Emissions by theregoesthatman

VIEWS: 40 PAGES: 26

									                       Cap and Trade Programs
                          for Air Emissions
                                             Presentation for
                                      NARUC Winter Meeting 2008
                                Joint ERE-Electricity Committees Session


                                          Clean Air Markets Division
                                    U.S. Environmental Protection Agency
                                          Office of Air and Radiation
                                               February 19, 2008

Acid Rain and NOx Cap and Trade Program Experience
              Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



                               Overview

• Cap and trade: An innovative approach
• Successful U.S. cap and trade programs
   – Acid Rain Program (ARP)
   – NOX Budget Trading Program (NBP)
• Next generation cap and trade programs
   – Clean Air Interstate Rule (CAIR)
   – Clean Air Visibility Rule (CAVR)
• Why has cap and trade worked for U.S. emissions?
• Key lessons learned
• Emerging cap and trade issues for greenhouse gas programs




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                    Introduction Programs Next Generation Programs Elements     Lessons    Emerging Issues



Cap and Trade: An Innovative Approach
Government and industry have different but complementary
responsibilities to lower air pollution
Government                                        Industry
•   Sets a mandatory cap on aggregate air         •   Holds sufficient allowances to cover total
    emissions from a select group of sources          emissions
    or industrial sector(s)                       •   Develops a compliance strategy to lower
•   Distributes allowances to emit equal to the       emissions
    mandatory cap to the affected sources               –   If emissions are below holdings, a source
•   Allows trading of allowances between                    can trade or save (bank) allowances for
    sources and others under fairly                         future use
    unrestrictive ground rules                          –   If emissions are above holdings, a source
                                                            can purchase allowances
•   Tracks allowance transfers and holdings       •   Reduces overall costs because sources that
•   Compares allowance holdings and                   have the lowest abatement costs generally
    emissions to assess compliance and, in the        sell allowances and sources with high
    event of noncompliance, levies automatic          abatement costs generally buy allowances
    penalties for each excess ton of emissions


Because of the cap, the government does not need to define how or where emission
reductions are made. Government sets the goal, ground rules, and monitors
compliance. Industry determines how to comply
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                           Introduction Programs Next Generation Programs Elements   Lessons     Emerging Issues


   Successful Programs Emerged in the 1990s



                                                                                        NOx Budget Trading
                                                                                            Program (NBP)
                                                                                             covers ozone-season
                                                                                         (summer) nitrogen oxide
                                                                                     (NOX) emissions in selected
                                                                                      eastern states for fossil-fuel
                                                                                        electricity generation and
                                                                                            other large stationary
                                                                                      sources. Program phased in
                                                                                               from 2003 to 2007.
Acid Rain Program (ARP) covers
annual sulfur dioxide (SO2) emissions
from most fossil fuel electric generation
units. Program implemented in two phases:                Programs rely on an emissions cap
1995 for largest SO2 emitters; 2000 for all                with air emission allowances that
others.                                                    can be traded – cap and trade

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                      Introduction Programs Next Generation Programs Elements         Lessons    Emerging Issues



                  Acid Rain Program for SO2
             ARP Units                                   •      Program Phases:
                                                                 – 1995:
                                                                       • Monitoring: Most fossil fuel electric
                                                                           generation units >25 MW
                                                                       • Annual cap: Largest 300 emitters
                                                                 – 2000: Most fossil-fuel electric generation
                                                                     units over 25 MW under annual cap of ≈ 10
                                                                     million tons that dropped to 9.5 million
                                                                     tons after that year
                                                                 – 2010: New annual cap = 8.95 million tons

                                                             • Currently about 3,500 units covered.
                                                             • Majority of emissions (>90%) from 1,100 coal-
        ARP-affected Units’ Annual SO2 Emissions
                                                               fired units (≈420 power plants); units use
SO2 Allowances Transferred under the Acid Rain Program         Continuous Emission Monitors (CEMS) subject
                                                               to detailed operating and QA requirements
                                                             • Other units often have monitoring that is less
                                                               costly, but structured to assure emissions are
                                                               conservatively estimated
                                                             • Quarterly emissions reporting and annual
                                                               reconciliation of facility emissions and
                                                               allowances – “true up”

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                 Introduction Programs Next Generation Programs Elements                   Lessons   Emerging Issues



  SO2 Emissions Have Fallen in Most States
                                                                                   Acid Rain Emissions of SO2
State-by-state SO2 Emission Levels from Acid Rain Program-
                                                                              20
   affected Sources (1990-2006)
                                                                              15




                                                               Million Tons
                                                                              10

                                                                               5

                                                                               0
                                                                                    1990     1995    2000    2006




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                                         Introduction Programs Next Generation Programs Elements               Lessons   Emerging Issues



                                 Acid Rain Program Progress
                                                       Annual Mean Wet Sulfate Deposition
                     1989-1991 Average                                                                  2004-2006 Average




Water Quality Improvements, 1990-2005
                                                                  Aluminum (μq/L/year)   Substantial Gains:
                                                                                         • Reduced “Acid Rain”
                                                                  ANC (μeq/L/year)
                                                                                         • Improved Air Quality
                                                                  Nitrate (μeq/L/year)
                                                                                         • Improved Health (lives extended and
                                                                  Sulfate (μeq/L/year)     ailments reduced)
-6.0   -5.0   -4.0     -3.0   -2.0    -1.0     0.0   1.0    2.0       ANC = Acid         • Lowered Regional Haze
                     Slope of Regional Trend
                                                                          Neutralizing
                                                                          Capacity       • Provided Other Benefits
              New England Lakes                Adirondack Lakes
              North Appalachian Streams        South Appalachian Streams                                                                   7
                                                                                 Introduction Programs Next Generation Programs Elements                                                          Lessons            Emerging Issues



                                        Control Costs: Lower than Predicted

                                    Estimated SO2 Program Costs in 2010                                                                             Trends in Electricity Generation, Electric Prices,
                                                                                                                                                              and SO2 and NOX Emissions
                                    9                                                                                                50%




                                                                                                  Percent Change Relative to 1990
Billion Dollars (in 2006 dollars)




                                                                                                                                     40%
                                    8
                                                                                                                                     30%
                                             Edison Electric Institute




                                    7
                                                                                                                                     20%
                                    6                                                                                                10%
                                    5                                                                                                 0%
                                    4                                                                                               -10%
                                                                                                                                    -20%
                                    3
                                                                                                                                    -30%
                                    2
                                                                                                                                    -40%
                                                                           EPA




                                                                                        EPA




                                    1                                                                                               -50%
                                    0                                                                                               -60%
                                                                                                                                             1990

                                                                                                                                                      1995

                                                                                                                                                             1996

                                                                                                                                                                    1997

                                                                                                                                                                           1998

                                                                                                                                                                                  1999

                                                                                                                                                                                         2000

                                                                                                                                                                                                2001

                                                                                                                                                                                                       2002

                                                                                                                                                                                                              2003

                                                                                                                                                                                                                       2004

                                                                                                                                                                                                                              2005

                                                                                                                                                                                                                                     2006
                                                                         1990        2004
                                                                                        2004

                                    Source: EPA, 2007
                                                                                                                                                    Electricity Retail Price             NOx Emissions
                                                                                                                                                    SO2 Emissions                        Electricity Generation


                                                                                                                                           Source: EPA, 2007




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                       Introduction Programs Next Generation Programs Elements                    Lessons       Emerging Issues



               NOX Budget Trading Program
• The NOX Budget Trading Program (NBP) is a market-based cap and trade program created to reduce
  seasonal NOx emissions from power plants and other large combustion sources in the eastern United
  States. EPA started NBP in 2003 with phase-in of state groups
• NBP affected 2,570 units in 2006

        Eastern Control Area                                                Ozone Season NOx Emissions
                                                                                      (May 1- September 30)
                                                                     2000

                                                                     1500




                                                     Thousand Tons
                                                                     1000

                                                                     500

                                                                       0
                                                                            1990   2000 2003     2004 2005        2006

                                                                                   Ozone Season NOX Emissions
                                                                                   Ozone Season NOx Emissions
                                                                                   Total State Trading Budget



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                        Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



     Ozone Attainment Has Improved Dramatically
The NOX Budget Trading                        Changes in 8-Hour Ozone Nonattainment Areas in the East
Program is the most significant                 2001-2003 (Original Designations) Versus 2004-2006
contributor (of EPA and state
programs) to ozone
improvements in the East
 •   In 2004, EPA designated 104
     areas in the East as 8-hour
     ozone NAAQS nonattainment
     areas
 •   2004-2006 data show ozone air
     quality improvements in
     virtually all of these areas,
     bringing cleaner air to over 55
     million people
 •   In 2006, four out of five of the
     original nonattainment areas
     met the ozone standard

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                        Introduction Programs Next Generation Programs Elements                            Lessons    Emerging Issues

                    Next Generation Programs:
                Clean Air Interstate and Visibility Rules
States Covered in Clean Air Interstate Rule (CAIR) and Clean Air Visibility Rule (CAVR)
                                                      for SO2 and NOX




                                                                                                          CAVR
                                                                                          Outside of CAIR Region – BART controls or
                                                                                             States can create trading programs




Note: On February 8, 2008, the U.S. Court of Appeals issued a decision vacating the Clean Air Mercury
    Rules (CAMR) and thereby suspending the program that allowed mercury emissions trading. EPA is
    now evaluating the Court’s decision.
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                                        Introduction Programs Next Generation Programs Elements     Lessons   Emerging Issues



                             Benefits of Acid Rain and CAIR Programs
                               Monetary Benefits
                                                                               •   Majority of benefits result from:
                       350
                                                    CAIR - Canada                   – Avoidance of premature deaths
                                                           Acid Rain -Canada        – Reduced aggravation and incidence
                       300
                                                                                      of heart and lung ailments

                       250                                                     •   Other benefits include increased worker
                                                                                   productivity, reduced absences from
Billion Dollars 2006




                                                           CAIR - US               school and work, and visibility
                       200                                                         improvement in some parks
                       150
                                                                               •   Benefits not included in estimates:
                                                                                    – Acid rain environmental benefits
                       100
                                                                                    – Mercury co-benefits
                                                            Acid Rain - US
                                                                                    – Remaining visibility benefits from
                       50
                                                                                      parks and urban areas
                                                                                    – Others
                        0
                                 2010              2020
Source: EPA 2007 and 2008


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                   Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



          Key Elements of Cap and Trade
•   Emissions Cap: Establishes a fixed quantity of allowances for each compliance period
    (yearly, seasonally, or other)
     – Cap is the mechanism to achieve and maintain the environmental goal

•   Coverage: Determines sources and/or sector(s) included (existing and new)
     – Coverage should minimize shifting of production and emissions (“leakage”) that may
        reduce the environmental effectiveness of the program
     – Coverage should capture large share of emissions but be administratively feasible

•   Emission Monitoring, Reporting and Verification: Requires complete, accurate
    measurement and timely reporting of emission assures accountability and provides public
    access to data – leading to program integrity and confidence

•   Allowance Distribution: Provides initial allowances to regulated community and others
    (based on political decisions)

•   Allowance Trading: Allows companies to choose (and change) compliance options under
    modest rules – leads to significant cost savings

•   Stringent, Automatic Penalties: Ensures the environment is made whole and penalizes non-
    compliance

•   Assessment: Determines achievements of program and whether additional actions needed

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                 Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



                 Allowance Distribution
• Considerations: Equity, incentives, certainty, efficiency, revenue impacts,
  price effects, profitability
    – Allowance allocation should balance the need for certainty and changing
      circumstances
• Experience: The vast majority of allocation approaches that EPA has
  considered all lead to the same level and distribution of emission
  reductions; the emission caps and banking drive reductions
• Approach: Many options, none are perfect
    – Direct allocation to sources based on historical and/or current emissions,
      energy use (input), or production (output, e.g. MWH) with the option of set
      asides for certain sources and/or actions (new sources, renewables, demand
      side efficiency)
    – Auction
    – Hybrid
    – Auction phase-in starting with direct allocation



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                 Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



Monitoring, Reporting, and Verification
• Considerations: Equity, incentives, accuracy, timeliness, certainty,
  transparency, public perception, and confidence in program
• Experience: EPA collects high-quality SO2, NOX, and CO2 data from
  about 3,500 emission sources in the Acid Rain Program
• Approach: Focus on complete and accurate emission data
    – Most accurate methods required of largest emitters with flexibility through
      alternative, less-costly measurement approaches for other emitters
    – Built-in incentives for greater accuracy and completeness
    – Standardized quality assurance tests for every emission value through
      standardized tests and statistical analyses
    – Petition process to accommodate unexpected situations
    – Heart of process is maintenance of CEMS on major emitters (all coal-fired
      units and others) that monitor emissions (at high reliability and accuracy levels)
      hourly and report to EPA every quarter


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 Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



Some Details of Operations…
                                          Allowance Accounting

                                        • Official record of allowance
                                          transfers and holdings
                                        • Each allowance has a serial
                                          number
                                        • Parties reach agreement,
                                          then transfer allowances
                                          online, or authorize EPA to
                                          transfer allowances
                                        • CAMD Business System is
                                          not a trading platform


            E-government at work…
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                       Introduction Programs Next Generation Programs Elements                Lessons      Emerging Issues



                       Some Details continued…
                Routine Public Access to Emissions and Allowance Data
                                                                         Internet Query Capability




                                                 Type of transfer         Seller name and   Buyer name     Confirmation date,
                                                    (auction, private)    account info       and account   serial numbers and
                                                                                             info          total allowances
EPA just completed major “reengineering” of systems                                                        transferred          17
                    Introduction Programs Next Generation Programs Elements   Lessons    Emerging Issues



                                  Assessment
                                                            • There are annual program
                                                              assessments
                                                            • EPA considers results from
                                                              multiple sources; an urban
                                                              monitoring network and a rural
                                                              network developed for ARP
                                                              Temporary Integrated Monitoring of
                                                              Ecosystems/ Long Term Monitoring System
                                                              (Surface Water Monitoring)




•   Measure results through broad monitoring networks
     – Changes to deposition, water quality, ambient air quality
•   Compare to program goals; assess need for further action
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                Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



           Advantages of Cap and Trade
• Offers alternative to traditional regulation and credit trading
   – Not simply a trading feature added to existing regulation
• Provides certainty that a specific emission level is achieved and maintained
• Leads to regulatory certainty, compliance flexibility, and lower permitting
  and transaction costs for emission sources
• Fewer administrative resources from industry and government (if program
  keeps a simple design)
   – Government focused on setting goals & assuring results, not on
      approving individual compliance actions
• Creates incentives for innovation and early reductions
• Compatible with other mechanisms
• Lower costs makes further improvements feasible




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                   Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



      Why Has Cap and Trade Worked?
•   Cap on emissions
     – Focuses on environmental goal
     – Provides certainty to allowance market
•   Full-sector coverage of existing and new emission sources
     – Focuses on sources with heterogeneous compliance options and costs
     – Focuses on sources with capability to monitor and report emissions reliably and
       accurately
     – Limits ability to shift generation and emissions to non-converted sources
     – Eliminates need to conduct case-by-case review of emission reductions
•   Complete and accurate emission measurement and reporting
     – Assures accountability and program credibility
•   Limited restrictions on trading and banking complemented by source-specific limits
    where needed to protect local air quality
     – Allows companies to choose compliance options
     – Addresses “hotspots” through local requirements for direct controls, if necessary
     – Reduces costs




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               Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



                  Key Lessons Learned
• Greatest reductions occurred where the highest emissions existed
• Trading provides regional emissions reductions, which can (and are)
  augmented with local direct controls
• Caps protect the environment, not the allowance allocation
• “Banking” enables early emission reductions that provides early benefits
  and flexibility for sources that reduces compliance costs
• Implementation should be kept in mind when designing programs
        – Setting the goal
        – Verifying emission data
        – Administering and enforcing the program
        – Helping affected sources understand their options and obligations
• Good legislation makes the job much easier
• Virtually 100% compliance can result
• Start and pace of control matters, especially to gain cost advantages
• Cap and trade can work outside of the power sector

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                    Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



          Key Lessons Learned continued
•   Accountability and transparency essential to program integrity
     – Require accurate, complete emissions measurement
     – Provide transparent emission and allowance data
     – Create predictable and, preferably, automatic consequences for noncompliance
•   Simple and effective design and operation focused on key objectives reduces
    administrative burden and costs, and improves compliance and timeliness
     – Establishes a minimal, but effective role for government
     – Provides industry with compliance flexibility with accountability – this unleashes
       incentives for better, cost-effective controls
     – Facilitates market development to maximize flexibility and cost savings
     – Ensures environmental results through clear objectives, strong monitoring and
       predictable penalties
     – Requires a relatively small number of government staff to produce results (especially
       when advanced information management technology is used)
•   Assessment routinely enables programs to stay environmentally on track
•   Accurate baseline emissions inventory critical to effective design
•   The program’s flexibility with industry responsibility for compliance unleashes
    innovation and lowers cost and inputs
•   Valuable to program structure that is readily adaptable

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            Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues
A Better Look at a Lesson Learned: The Biggest Emitters
        Achieved the Steepest Annual Reductions




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               Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



    Emerging Issues for GHG Programs
• Levels and timing of control
    – Cost containment
•   Scope and scale
•   Federal and state roles
•   Technology development and deployment
•   Equity
•   Linkage to cheaper GHG tons
    – Energy efficiency
    – International programs
    – International and domestic offsets
• Cap and trade vs. tax


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        Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



To Learn More…..


      On emissions trading go to EPA’s
   Clean Air Markets Division Website at:
      http://www.epa.gov/airmarkets/




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              Introduction Programs Next Generation Programs Elements   Lessons   Emerging Issues



              To Learn a lot More…

Office of Atmospheric Programs: http://epa.gov/air/oap.html

 – Clean Air Markets Division: http://epa.gov/airmarkets/

 – Climate Change Division: http://epa.gov/air/ccd.html

 – Climate Protection Partnership Division: http://epa.gov/cppd/

 – Stratospheric Protection Division: http://epa.gov/ozone/




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