A Trading Ready Option for Clean Power Plan Compliance

Sponsored & Written by: Doug Scott Vice President, Strategic Initiatives, Great Plains Institute and former Chair and Commissioner, Illinois Commerce Commission

Doug Scott Vice President, Strategic Initiatives, Great Plains Institute and former chair and commissioner Illinois Commerce Commission

Doug Scott

As everyone involved with energy policy in the United States eagerly awaits the issuance of the final rule of the Clean Power Plan (CPP) to limit carbon dioxide emissions from existing power plants, it is important to consider what compliance options might make sense for states and affected parties. Many discussions have focused of the prospect of multi-state compliance, and interstate trading of emissions allowances or credits as a way for regulated entities to work with entities in other states to reduce their costs of meeting the federal requirement.

The proposed CPP requires that states interested in multi-state collaboration to blend their respective state emissions rates prescribed by EPA and submit one combined plan. While this may be practical for the Northeast and mid-Atlantic states participating in the Regional Greenhouse Gas Initiative (RGGI), which have already been working together for a number of years on a joint regional program, a combined plan does not seem very likely for other states for many reasons. First, it takes time to set up such a program, and there may not be enough time under the guidelines in the CPP. Second, the blending of target rates between states may be problematic from a political standpoint, as states may be seen as “winners” or “losers” under such an arrangement.

In my previous position with the Illinois Commerce Commission, I was part of a group that has been analyzing compliance options for states. The Midwestern Power Sector Collaborative (MPSC or Collaborative) has been in existence for three years, and is comprised of stakeholders (electric utilities, merchant generators, municipal power agencies, co-ops, environmental organizations and state officials) from a number of Midwestern states. This group has submitted comments to EPA on two occasions, and also recently submitted some suggestions on how EPA should enable interstate trading to reduce the costs of compliance. The MPSC is staffed by the nonpartisan Great Plains Institute, for which I now have the pleasure of working and continuing my involvement with the group.

The MPSC operate on a “no regrets” basis, where members are free to stop participating at any time, and where participation does not indicate support or opposition to the CPP. The discussion is not over the benefit or the detriments of the rule, but over potential options for implementing the rule, should legal challenges to the rule not succeed, and states have the choice of developing their own plans or risk having EPA step in.

One of the issues that arose early in the Collaborative’s discussion was whether there was a different way to look at multi-state cooperation, rather than blending rates and submitting a combined plan. The “trading ready” approach arose from these discussions, and may provide an alternative to multi-state blended rates.

Under a trading-ready approach, a state could choose a mass-based approach (meaning that it’s CO2 emissions rate target from EPA is converted into a mass number and expressed in tons), keep their own state target, and allocate their allowances (one allowance for every ton of CO2 emitted) in order to meet the target. The electric generators in the state would then be required to turn in allowances at the end of a compliance period to meet the amount of emissions it had during that period. If a generator’s emissions exceed the tons it was allocated by the state, it would need to purchase allowances equal to excess emissions; a generator with emissions below its allocation of allowances would have surplus allowances to sell.  Without trading, generators still have emissions reduction options in their own systems and states (such as fuel switching, operating fewer hours, carbon capture, energy efficiency programs or using renewable energy to supplant fossil emissions, to name just a few), but trading allowances affords them greater access to a wider range of lower-cost emission reduction opportunities through the marketplace.

In the trading-ready approach, the state—when and if it decides it is in its best interests—could allow generators to turn in allowances from other states that have similar programs, according to a state 111(d) plan that has been approved by EPA. Other than agreeing to use an identical measurement (a ton is a ton) and an accounting platform to record emissions and allowances turned in, there would need to be few additional requirements for states to enable their regulated entities to trade since the CO2 emissions themselves are already recorded by EPA for each generator. The MPSC has recommended to EPA that it either host or financially support an accounting platform. Alternatively, EPA could recognize platforms maintained by a state or group of states.

Many utilities appreciate interstate trading, especially those that have operations in more than one state. They want the opportunity to at least trade allowances between their operations in different states and preferably with other utilities on an interstate basis. Trading doesn’t change the environmental outcome, but allows the company to meet their environmental responsibility at a lower cost to ratepayers and the economy. And, if a power plant needs to run for reliability reasons, this type of program allows the generator to keep the particular plant running by purchasing surplus allowances from other power plants that have achieved reductions beyond what is required of them.

States would be able to keep their own target, and submit their own plan to EPA. The price for the allowances would be set by the companies doing the trading, not by the state, by a regional transmission organization, or by EPA. Thus, the market sets the price. Finally, the trading-ready approach would not require states to identify up front other states and regulated entities with whom their utilities may trade, leaving generators free to make the best deal possible.

In a rate-based system, the parameters would be similar, but states would need to set up some additional pieces. Because energy efficiency (EE) and renewable energy (RE) may provide credits against actual emissions (whether trading is allowed or not) in a rate-based compliance plan, credits desks will need to be set up in addition to the accounting mechanism. These credit desks are necessary because states will want to make sure that credits claimed for EE and RE are verifiable, and not double-counted. Renewable energy credits (RECs) are already traded and are subsequently recorded by a number of tracking organizations, but this will need to be established for EE, and arrangements for both will need to be approved by EPA.

These concepts are also being discussed by the Nicholas Institute at Duke University, which has published a white paper on what they call “common elements” trading. A white paper has also been produced by Franz Litz of GPI and Jennifer Macedonia of the Bipartisan Policy Center that goes into great detail on these concepts.  Thanks to the work of the MPSC and the impact of these reports, states in the Midcontinent, Mid-Atlantic, Southeast and Western regions are now jointly exploring the potential for “trading ready” approaches to implementing the CPP.

Of course, these discussions are only to help states understand options, and will need to be adapted to the language of the final CPP rule when it is issued later this summer. And, even if the EPA recognizes the trading-ready approach in the final rule, it is unlikely to require states to adopt it.

There is a great deal of work to do, but states are doing their due diligence to understand options for CPP compliance, should they be required to implement the rule.

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