Law and the Environment : Environmental Lawyer & Attorney : Foley Hoag Law Firm : Boston, Washington D.C.

The nine states still participating in the Regional Greenhouse Gas Initiative are getting ready for the first auction of RGGI's second compliance period, scheduled for March 14th.  In the auction notice released last week, they announced 4 changes to the program, and analysts are predicting there are far more significant changes to come -- namely adjustments to the total emissions cap. 

The first change: which we knew was coming; New Jersey is officially out.  The second:  the reserve price, the lowest price at which allowances may sell, has been increased by 4 cents to $1.93, in line with the Consumer Price Index.  The third:  although RGGI usually offers allowances from two different compliance periods for sale at each auction, March's auction will offer only 2012 allowances, raising some questions about RGGI's own view of its future past this compliance period's end in 2014.  The fourth change:  the participating states announced that they will retire 87 million of the allowances that went unsold during the 2009-2011 auctions, a move that may indicate the states' willingness to set the cap for 2012 below the earlier levels, to avoid such over-allocation of allowances in future years.

The original plan for the RGGI program, when it was introduced in 2008, was to set the emissions cap on large power plants in the Northeast at 188 million tons (estimated 2005 levels) through 2014, then lower the cap by 2.5% per year over the next four years, for a net change of 10%.  But in the intervening years, emissions in the Northeast have declined significantly due to decreasing generation from higher-carbon dioxide sources such as fuel oil and coal, increasing generation from natural gas and renewable, carbon-free sources, and expanded energy efficiency programs -- many of which were paid for by funds collected by the states through the RGGI auctions.  As a result, emissions are now far below the planned reductions already -- 2011 emissions were 34% below the cap, according to Environment Northeast's analysis released last week.  As these changes in emissions are expected to be permanent, the RGGI cap would have to be lowered by a significant amount before the cap-and-trade program became the driving factor in carbon reductions.  

The participating states are currently working on a planned comprehensive review of the RGGI program, with the most recent topics of discussion including evaluating the use of offsets and other cost-containment mechanisms in the future.  While the participating states' willingness to retire the unsold allowances from the first compliance period may be a signal of their intentions to re-set the cap for the 2012-2014 compliance period as well, it remains to be seen whether the states will merely adjust the cap to reflect observed emission trends or try to create even further cuts in emissions. 

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The Environmental Protection Agency proposed a rule yesterday that would exempt carbon dioxide injected into underground carbon capture & storage (CCS) wells from regulation as hazardous waste, so long as the CO₂ is held in wells designated for that purpose under the Safe Drinking Water Act.  In its press release announcing the program, EPA noted that the purpose of the regulation -- as well as its prior rulemakings under the Clean Air Act to require emissions reporting by CCS facilities, and the Safe Drinking Water Act to require appropriate siting, construction and monitoring of CCS wells -- was to reduce barriers to the use of CCS and promote the technology, which has yet to be proven at a commercial scale.  If the EPA is behind it, what more could CCS need? 

The interagency task force charged with evaluating barriers to CCS concluded in a report released last year that the chief obstacle for CCS was regulatory uncertainty, since most of our environmental laws do not contemplate such a technology.  The task force recommended that EPA implement regulatory changes such as this hazardous waste clarification. 

But the biggest barrier remains -- without comprehensive climate legislation and a price on carbon, there is no stable framework to encourage investment.  And this barrier is taking its toll.  This uncertainty is why AEP recently shelved plans to build a $668 million CCS retrofit on its Mountaineer coal-fired electric plant in West Virginia.

Although the outlook for CCS projects within the U.S. is thus uncertain, the United Nations' support of the technology could prompt some CCS projects in developing nations.  E&E reports today that a decision to allow CCS projects to be eligible for credits under the Clean Development Mechanism may soon be forthcoming, if technical issues such as monitoring and verifying reductions, and environmental safety and insurance coverage can be resolved.  

Other international organizations are also jumping on the CCS bandwagon.  A recent report by the International Energy Agency's Greenhouse Gas R&D Program touts the potential benefits of combining CCS with biomass facilities, particularly in Asia and Latin America.  The IEA theorizes that because the plant life used to make biomass fuels absorbs CO₂ from the atmosphere, subsequent storage of the CO₂ released from highly efficient biomass processes could actually reduce global atmospheric concentrations of carbon.  It's like how celery has negative calories.

The report asserts that we technically have the potential to annually remove from the atmosphere up to 10 gigatons of CO₂ -- or about 1/3 of annual global emissions -- through the use of biomass integrated gasification combined cycle plants and CCS.  A more economically-feasible implementation of these nascent technologies would still lead to reductions of 3.5 metric gigatons of CO₂ annually.  Notably, even this "feasible" scenario assumes that CO₂ will be priced at 50 euros ($71) per ton, worldwide.  Even in dreams of what could be, the development of CCS still has to face the obstacle of the price on carbon.

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Demand for allowances in the nation's only cap-and-trade program for carbon dioxide emissions fell sharply last week.  At the 12th Quarterly Auction of the Regional Greenhouse Gas Initiative (RGGI), held on June 8th,  70% of the current compliance period allowances went unsold.  As the RGGI Market Monitor Report highlights, with only 25 bidders participating in the auction of the 2009-2011 compliance period allowances, only 30% of the 42 million allowances offered for sale by the 10-state group (including New Jersey) were actually purchased at the floor price of $1.89.  Demand for future allowances, good for the 2012-2014 compliance period, fared only slightly better, with the 5 participants in that auction buying just over 50% of the 1.86 million allowances offered by the still-participating states (minus New Jersey, which supplied allowances for the 2009-2011 auction, but not the 2012-2014 auction) also at the floor price of $1.89.  

This sharp drop in the sale of allowances at auction is surprising, particularly given that the last auction, held in March, sold out of allowances for the first time since Auction #8.  The number of participants who qualified to bid at the March and June auctions did not differ much -- 49 and 47, respectively -- but the number of participants who actually submitted bids fell sharply, from 36 to 25.  An even more significant difference is the number of allowances that each of these bidders bought.  For instance, while the top two bidders in March bought over 10 million allowances each, the top bidders in June bought just 2.6 million and 1.9 million respectively. 

As yesterday's ClimateWire highlighted, theories about the causes of this surprising drop abound.  My favorite is that companies regulated by RGGI already have most of the allowances they will need to cover their emissions in the compliance period ending in December, and these unsold allowances are primarily due to the excess supply under the RGGI cap.  Other theories cite to New Jersey's recent announcement that it would withdraw from the program by the end of the year as a sign to would-be-buyers that the program is threatened.  But New Jersey's break with RGGI will not be as quick as initially reported.  The official letter from New Jersey's Commissioner of the Department of Environmental Protection outlines that the state will continue to participate in the allowance auctions for calendar year 2011, as it did in the June auction last week, and that regulated power plants in New Jersey are not being relieved of their obligation to hold sufficient allowances to cover their emissions in the initial compliance period, which ends on December 31, 2011. 

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The cap in the nation's first mandatory cap-and-trade system is probably set too high.  As reported by ClimateWire this morning, it seems increasingly likely that participants in the Regional Greenhouse Gas Initiative (RGGI) will easily meet and beat RGGI's ultimate goal, even without any changes or reductions actually caused by the program.

RGGI's initial aim was to cut CO₂ emissions from large power plants in the 10-state region to 10% below 2005 levels by 2018.  This plan involved two stages: one with the cap stabilized at 180 million tons CO_2e from 2009-2014, and the second, from 2015-2018, with a cap declining by 2.5% each year.   However, in the two years that the program has been in action, emissions have already declined to 33% below 2005-levels.   Although the decline has been commonly attributed to the economic downturn, NYSERDA found that fuel switching by power suppliers from coal and petroleum to natural gas (cheaper than it was in 2005) has in fact had the greatest impact, contributing 31.2% of the decline. 

At a meeting on November 12, RGGI, stakeholders gathered to hear briefings on projections for future emissions, why the carbon footprint was overestimated thus far, and what changes need to be made to RGGI going forward.  Consultant IGF International reported that although emissions in the region are predicted to grow steadily into the future, they will stay well below RGGI's initial reduction target through 2030, even without additional reductions caused by the energy efficiency and renewable energy programs funded by RGGI itself.  Their data suggests that the RGGI cap would have to be tightened from 10% reductions by 2018 to 22% or higher, for the cap-and-trade system to have any impact at all. 

The RGGI member states are currently involved in evaluating the program, and could make changes to the cap, as well as the rest of the program, before the second compliance phase begins in 2012. It will be interesting to see what decisions they make over the next year.

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Now that the Senate has put an end to speculation about a federal cap-and-trade program, the laboratory of the states and patchwork of regional regulation seem even more important.   The Western Climate Initiative (WCI) will likely involve a little of both.

Yesterday, the WCI Partner Jurisdictions (seven US states and four Canadian provinces) unveiled their comprehensive strategy for a cap-and-trade program with the goal of reducing regional greenhouse gas emissions by 15% below 2005 levels before 2020. The program is planned to begin in 2012, although apparently only California, New Mexico, Quebec, Ontario, and British Columbia are on track to have trading systems operational by that date. Even so, these two states and three provinces account for 70 percent of the greenhouse gas emissions the WCI partners produce.

The report recommends standards for regulations governing allowances, creation and use of offsets, credits for early action reductions since 2007, and other design features of a cap-and-trade program, but does not itself dictate specific regulations. Instead, the regional goal will be reached through individual states’ and provinces’ implementation of separate programs that supply allowances for quarterly regional auctions. While this individualized approach makes sense given the wide diversity of settings and the fact that WCI crosses not only state but national boundaries, it does leave a large number of factors up to the individual jurisdictions.  

Among the details that are undecided is how many allowances will be at play (a critical issue and lesson learned from the implementation of RGGI). Each state or province will adopt its own budget and determine how allowances within that budget will be distributed to emitters – through allocations, direct sales or auctions. In yesterday's report and a more detailed one from early July, WCI recommends that each jurisdiction’s 2012 allowance budget be the expected 2012 actual emissions, rather than starting with an initial cut, but then begin to decrease (at a rate to be set by each jurisdiction), with another increase in 2015 when the cap expands to cover transportation fuels and residential and commercial fuels as well.  

Offsets would be more tightly defined by the regional structure: an offset certificate issued by a WCI partner jurisdiction must meet all recommended offset criteria and result from a project located in Canada, the US or Mexico. It is recommended that each jurisdiction restrict the use of offset certificates to 49% of aggregate emissions reductions – such a limit will be expressed as a portion of each emitter’s emissions that may be covered by offset certificates or allowances from other programs.  

The WCI partner jurisdictions seem to have adopted a number of RGGI’s features, including a quarterly regional, single-round, sealed-bid auction structure, 3-year compliance periods, unlimited banking of allowances, and an auction floor price.  But as the report notes, the partner jurisdictions expect auctions to be only one component of allowance distribution – different from RGGI, where nearly 100% of allowances are auctioned.  The portion of allowances that each jurisdiction submits to the quarterly regional auctions may vary across jurisdictions and may also change over time.  Such flexibility could allow each jurisdiction to address competitiveness and leakage issues more directly than a regional plan. 

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The Chairman's Mark of the Clean Energy Jobs and American Power Act (S. 1733), released late Friday night by Senate Environment & Public Works Committee Chair Barbara Boxer, fills in some of the details left out of the earlier-introduced Boxer-Kerry bill, notably identifying which sectors will get CO₂ allowances allocated to them for free. The bill largely follows the lead of the House-passed ACES, and in some areas uses identical language. For instance, as in ACES, the largest share of allowances (30%) is allocated to state-regulated local electric-distribution companies, who are instructed to use any revenue from the allowances to protect consumers from electricity price increases.

The precise allocation numbers are sure to be a source of debate as the negotiations move forward through the remaining 5 committees and individual Senators negotiate for their states’ interests to be met in the bill. But do the allocation numbers actually matter? A recent post by Harvard Professor Robert Stavins makes the case that once the decision has been made to allocate a set number of allowances for free, to whom they are assigned does not have a significant impact on the environment performance of the cap and trade regime or on the overall social costs imposed by the regulatory system.

That's why it is significant that one of the largest differences between the Chairman's Mark of the Senate Bill and ACES is how many allowances will not be allocated for free.  The size of the pot of allowances in the Senate bill to be set aside for the Treasury Department's use for deficit reduction rises from 10% in 2012 to a high of 25% between 2040 and 2050.  In comparison, the House bill earmarks for the Treasury Department only those allowances which are not already freely allocated or auctioned, a piece which falls to 1% by 2014.  The set of allowances marked for direct sale at auction is also larger in the Senate bill -- 15% of all allowances will be auctioned each year through 2029, rising to 18.5% in later years.  As in ACES, one of the key uses for the auction revenues are direct rebates to consumers to help them deal with higher energy bills.

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The Regional Greenhouse Gas Initiative (RGGI) has released the clearing prices from its 5th quarterly auction of CO₂ allowances, held on September 9, 2009.  Prices for the 28.4 million 2009 vintage allowances sold fell sharply from the June auction's clearing price of $3.23 to $2.19, and the 2.1 million 2012 vintage allowances sold for only $1.87, just one cent above the market floor of $1.86, and well below the $3.05 that they earned at the March 2009 auction, which was the first at which these later vintage allowances were offered for sale. 

Interestingly, while the number of participants in the 2009 vintage auction remained relatively steady, no non-compliance entities (persons not regulated under RGGI) participated in the 2012 vintage auction.  These participants had amounted to 38% of the bids for 2012 allowances in the June auction. 

RGGI, Inc. has also released the range of bid prices in the 5th auction, allowing some insight into how the players value these allowances.  Bid prices for the 2009 vintage allowances ranged from the minimum clearing price of $1.86 to $12.00, the same as in the 4th auction, while bid prices for the 2012 auction ranged from $1.86 to just $3.00, down from June's high bid price of $3.84 and March's high bid price of $4.40.

Wednesday's auction was the first since the passage of ACES by the House in late June.  ACES provides for an even exchange of RGGI allowances for national allowances, something that could increase the value of RGGI allowances going forward, as it removes some uncertainty.  Nonetheless, pundits had predicted lower prices from this auction for a number of reasons, including doubt about the likelihood that the Senate will pass a national cap-and-trade program

The decrease in prices and lack of participation in the 2012 auction is also interesting given a report released on Wednesday by Point Carbon which predicts that actual emissions from the RGGI-regulated northeastern power plants will already be much lower than the RGGI cap, set at 188 million allowances per year.  According to Climate Wire, the report notes that the economic downturn, combined with a cool summer and warm winter reduced the amount of fuel for electricity used in the 10-state region. Falling natural gas prices have also prompted generators to switch away from more carbon-intensive fuels like coal and oil to natural gas.  The report predicts that the CO₂ emissions from the 233 power plants regulated under RGGI will emit 155 million tons this year, well below the cap.

Although the RGGI cap will begin decreasing by 2.5% each year in 2015, the years until then may provide an opportunity for regulated generators and other interested bidders to stockpile  allowances.  Given that RGGI allowances may be banked for future use without restriction, such a large number of allowances being banked could keep prices depressed for some time.

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At the fourth auction of CO₂ allowances under the Regional Greenhouse Gas Initiative (RGGI) on June 17, participation was certified as robust by market monitor Potomac Economics, but auction prices decreased. Last week’s clearing price for 2009 vintage CO₂ allowances was $3.23 per allowance, only slightly above the clearing price of $3.07 at RGGI's initial auction in September 2008, and below March’s clearing price of $3.51.  The 2.1 million 2012 vintage allowances offered for sale in last week’s action sold for $2.06, almost one-third below the $3.05 price that they earned at the March auction, which was the first at which these later vintage allowances were offered for sale.  

RGGI, Inc. has released the range of bid prices from the fourth auction, allowing some insight into how CO₂ is valued by the players in these auctions.  Bid prices for the 2009 vintage allowances ranged from $1.86 (the minimum clearing price) to $12.00, up $2 from the maximum bid in the March auction, while bids for the 2012 vintage allowances ranged from $1.86 to $3.84, down from March’s high bid price of $4.40. Participation in the 2009 vintage offering remained high at 54 entities, while participation in the 2012 vintage auction was down from March’s 20 entities to only 13.

Interestingly, the share of non-compliance entities (persons not regulated under RGGI) who participated in the 2012 vintage auction rose this time, with only 62% of the bids submitted in that auction coming from compliance entities (power plants regulated under RGGI).  Even so, regulated generators and their affiliates continued the trend from previous auctions of winning the vast majority of the allowances – 85% of 2009 allowances and 81% of 2012.

The difference in the clearing price for the 2009 vintage and the 2012 vintage is not surprising. RGGI allowances may be banked without limitation and used in future years, making the 2009 allowances more valuable than later vintages.  What is notable is the drop in both participation in the 2012 vintage allowance and the clearing price (nearly 33% less than it was only 3 months ago). It seems that many market participants are uncertain about the value of the 2012 allowances, given the possibility that RGGI may be replaced by a national cap-and-trade program whose provisions are not yet known. 

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