US: Cap-and-trade likely to change under 111D rules, official

An Air Resources Board (ARB) official said the state’s cap-and-trade programme is likely to undergo some alterations to comply with the Environmental Protection Agency’s (EPA) rules for existing power plants, but those changes are yet to be determined.

The ARB, the cap-and-trade regulator, is requesting feedback on how to regulate emissions from existing power sources as it begins to develop comments to submit to the EPA on the environmental agency’s proposed rules – the so called 111D rules ( see EDCM 2 June 2014 ). The EPA’s proposed rules would reduce overall power emissions by 30% from 2005 levels by 2030. States have until 16 October to submit comments to the EPA.

During a workshop to discuss the EPA’s plan, Edie Chang, an ARB deputy executive officer, said the state is looking at ways to comply through a regional programme, state commitments or a combination of approaches. However, Chang said the existing cap-and-trade programme would likely face some changes as officials develop the state’s plan.

“We all realize there is going to have to be some alteration to the cap-and-trade programme,” Chang said during the workshop.

Advisors said shortly after the EPA released its rules for existing power plants that California’s economy-wide cap-and-trade programme may need to be changed to ensure it reaches its emissions target set by the EPA.

Specifically, advisors questioned whether California would need to separate existing power sources from the other regulated sector to ensure or prove the state meets its target. California, however, seems likely to use modelling to prove its own track.

Market participants said the state would also need to figure out how carbon offsets fit into the state’s plan and how to properly regulate imported emissions. A trader at a compliance entity said those two issues would be the biggest hurdles for California’s cap-and-trade programme.

In a discussion paper released last week, California asked for feedback to ensure imported power is properly credited. ARB officials said during the workshop that they may need to reach bilateral agreements or follow EPA guidelines to ensure imported and renewable power is not double counted.

ARB officials did not speak at length about how offsets would factor into the state’s plan. Non-power sector offsets are not allowed in the EPA’s proposed plan for existing power sources.

Likely will over comply

California is projected to be 25% under its emissions target based on increased generation from renewable sources and retirement of CO2e-intensive sources.

The ARB projects its emissions rate to be 403 pounds (183kg) of CO2e/MWh, or about 25% below its target of 537 pounds of CO2e/MWh, officials said during a workshop Tuesday. However, the ARB said a variety of factors, including the drought and unexpected retirements, could push the rate closer to 500 pounds of CO2e/MWh.

Officials said the below-target rate could give other states an incentive to join their cap-and-trade programme or ancillary carbon programmes. ARB said they are speaking with neighboring states, but the discussion are very preliminary.

To make that more appetizing for states, ARB officials said they are discussing a modular approach that would allow states to sign up to specific emission reduction programmes, such as renewable portfolio standard (RPS).

Under the proposed EPA rules, a multi-state programme would have to have identical rules. California officials said they are asking whether a modular approach would be acceptable.

ARB officials said they are still waiting for the final rules from the EPA, which are due out in June 2015, before developing their final compliance plan. The state is also exploring the use of state commitments to fulfil their obligations.

A commitment would allow the state to maintain flexibility and control of its existing programmes, such as the cap-and-trade system, but it could also meet the reporting requirements from the EPA. ARB officials said a similar approach was taken with ozone standards. Dan X. McGraw