Transcript Allocating to Generation

Architecture and Policy of
Cap and Trade:
Power Sector Issues
NARUC
Conference on Climate Change and Utility Regulation
July 23, 2008
Richard Cowart
The Regulatory Assistance Project
50 State Street, Suite 3
Montpelier, Vermont USA 05602
Tel: 802.223.8199
Fax: 802.223.8172
177 Water St.
Gardiner, Maine USA 04345
Tel: 207.582.1135
Fax: 207.582.1176
Website:
http://www.raponline.org
What is cap-and-trade?
 Set a fixed limit on OVERALL emissions, not each
single source, declining over time.
 Create a new kind of currency (tradable allowances)
for quantities of emissions.
 “Carbon credits are just another form of money”
 Require emitters (or consumers) to retire allowances to
match “their” emissions in each time period.
 Sell or give out allowances
 Permit trades in an allowance market
 Examples: US Acid Rain and NOx programs
 Warning: We are learning that GHG reduction is
DIFFERENT than earlier cap/trade efforts.
GHG Cap and Trade Architecture:
“This is not your father’s cap and trade”
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Cap coverage - what’s included?
Cap basics: base year, level & rate of decline
Point of regulation: Upstream to downstream
Allowance distribution: Auction or allocation?
Allocation choices: emitters, consumers, impacted
communities, set-asides, etc.
Leakage control: How to ensure cap integrity?
Flexibility mechanisms: Offsets, Banking and
Borrowing
Cost management strategies: circuit breakers,
efficiency programs, technology development
Trading rules: who can trade with whom for what?
Complementary policies: what else is needed?
CO2 Emissions by Country:
Total emissions since 1950 (b tons)
Graphic from: Michael Glantz, “What Makes Good Climates Go Bad? … and … “Why Care?” USAEE/IAEE Meeting, 9-19-05.
February 2008
1. C&T Scope: Which Sectors are in? Which gasses?
TRANSPORTATION 27.2%
ELECTRICITY &
HEAT 32.4%
WRI:
Sources & Notes: Emissions data comes from the Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2003, U.S. EPA (using the CRF document). Allocations from “Electricity & Heat” and “Industry” to end uses are WRI estimates based on
energy use data from the International Energy Agency (IEA, 2005). All data is for 2003. All calculations are based on CO2 equivalents, using 100-year global warming potentials from the IPCC (1996), based on total U.S. emissions of 6,978 MtCO2 equivalent.
Emissions from fuels in international bunkers are included under Transportation. Emissions from solvents are included under Industrial Processes. Emissions and sinks from land use change and forestry (LUCF), which account for a sink of 821.6 MtCO2 equivalent,
and flows less than 0.1 percent of total emissions are not shown For detailed descriptions of sector and end use/activity definitions, see Navigating the Numbers: Greenhouse Gas Data and International Climate Policy (WRI, 2005).
Power sector is 40% of CO2
Sources of U.S. Energy Related CO
Electricity Generation
from Coal
33.8%
Source: EPA 2006
Emissions: 2004
Transportation
33.1%
Other Electricity
Generation
7.0%
Commercial
4.0%
2
Residential
6.6%
Industrial
15.4%
300 power plants emit the CO2
of ~200 million vehicles
More Than 1/3
About 1/3
Less Than 1/3
3,000
Power Plants
200 million
Cars & Trucks
2 Billion
Other Sources
15% from 20 plants
50% from 100 plants
90% from 300 plants
Most vehicles made by 7
manufacturers
2. Cap Numbers
 Baseline period: 1990? Today? Yesterday?
Projected Business-as-usual (BAU) path?
 Reductions: How deep and for how long?
 Technology-forcing requires a long-term program
 Does the slope change over time?
 Slow now means big reductions later
 Gradual curve or step-wise cliffs?
 A ramp is better than a cliff, esp for carbon
We have a long way to go – Stern
Review of climate science
Source: Stern Review (UK) October 2006
Scenarios RGGI modeled
160
140
Million Tons
120
100
80
Ref
60
Case 2 - 10%
Case 3 - 15%
40
Case 4 - 25%
20
Case 5 - 35%
0
2006
2009
2012
2015
2018
2021
2024
3. The “Point of
Regulation”
 “Point of Regulation” -- the point in the chain of
commerce where emissions are counted and credits
must be retired
 E.g. “Upstream” at wellheads vs. “downstream” at gas
stations or vehicles
 Three emerging lessons:
 The points of regulation may be different across different
sectors
 Point of regulation NEED NOT be the same as the point of
combustion or emission
 Point of regulation NEED NOT be the same as the point of
allocation of allowances
What is the best point of regulation?
Choices for the power sector
“Upstream”
at mines,
wellheads
Mid-stream
at generation
Midstream at
load-serving
entities
Downstream at
customer
locations
Load-serving entity/
Portfolio manager
“Point of Regulation” –
a range of choices
Acid Rain (SOx) program: generators
Renewable Portfolio Standard: LSE
RGGI (CO2): local generators
Oil, gasoline (proposed): refinery
Natural gas: (usually) pipeline or LDC
California and WCI power: “First Seller”
or “First Jurisdictional Deliverer”
4. Auction & Allocation
Choices
 Free Allocation, Auction, or both?
 “Allocation +” or “Auction +” also possible
 If allocation, to whom? To covered sources,
or to others (such as states, consumer
trustees, etc) ?
 Auction proponents: polluter should pay
 Grandfathering proponents: free allocation
lowers costs to capped firms.
 Impact mitigation proponents: use
allowances to soften impacts in various ways
 Cost containment argument: use allowance
values to reduce cost of the program
Carbon reduction (and
trading) will be big business
Annual Asset Value of Emission Allowances
Apportionment in a
Multi-State Cap:
How Much for Each State?
RGGI
Emissions Cap
Apportionment
States
Allocation
RGGI assumes: States can adopt
different approaches to allocation.
Will Congress permit state
flexibility?
Sources
EE and RE
Programs
Customers
LSEs
Apportionment Choices:
RGGI example
State
Emissions Generation
Consumption
MWH
NJ
10%
18%
21%
MA
18%
12%
15%
VT
.4%
1.8%
1.6%
CT
10%
10%
9%
Allocation & Auction
(Some) Power Sector Issues
 Some variables:
1. Where is the “point of regulation”?
2. Are you in traditional regulation or “organized
& competitive” wholesale market?
3. What will the revenue be used for?
 RGGI states: large-scale auction, largely
invested in efficiency
 NARUC resolution: assign allowances to
distribution companies
 Key metric for regulators: How much will the
program cost consumers per ton of GHGs
reduced?
Is allocation just “distributional”?
DC version: allocation for 60 votes
6. Dealing with leakage
Leakage: additional emissions outside the
capped system (therefore not counted)
Effects:
Erosion of program goal
Competitive advantage to “foreign” sources
Unofficial safety valve on price impacts
Can be direct (imported electricity) or
more subtle (imported furniture)
7. Flexibility mechanisms
Banking – saving allowances you don’t
need now, for future use
Borrowing – emitting too much now,
promising to pay back later
Offsets – causing reductions outside the
capped system
 E.g.,Controlling landfill methane
 Trees in China?
 Advantage: finding cheaper reductions
 Problem: “anyway tons” and “hot air” reductions
 Reduces pressure for on-sector innovation
8. Cost containment
strategies
 Two ways to contain program costs:
 Relax the program
 Structure program to reduce compliance costs
 Trading, banking, multi-year compliance
periods, offsets are all cost-control mechanisms
 “Circuit breaker” tools also proposed to control
costs
 End-use efficiency is the #1 cost-containment
strategy – can we design cap & trade to
promote efficiency?
“Circuit breaker” could suspend
pace of cap declines
Cap Level
(Tons/year)
Circuit Breaker Value
($/ton)
Allowance Price
Year of Program
Letting the market work:
NOx allowance price history
Efficiency programs can save 7x
more carbon per $ than carbon taxes
Annual Carbon Dioxide Emissions Saved (Million Tons)
Annual CO2 Emissions Saved by: Increasing Rates 3%; and Increasing Rates 3% to Fund Energy
Efficiency (Ohio Example)
200
180
Annual carbon dioxide
emissions avoided from
raising rates 3% and
funding EE
160
140
120
Annual carbon dioxide
emissions avoided from
raising rates 3%
100
80
60
40
20
0
Assumptions: Electricity use increases by 1.7% per year; Retail electric sales increase by 3%; Price elasticity is -0.25 (-0.75 for a 3%
increase), distributed over 5 years; Carbon dioxide emissions are 0.915 tons per MWh in Ohio; Cost of EE is 3 cents per kWh;
Average EE measure life is 12 years
Cumulative CO2
emissions avoided
from raising rates 3%
and funding EE,
2006-2026: 1,557
million tons
Cumulative CO2
emissions avoided
from raising rates 3%,
2006-2026: 209
million tons
Efficiency is the low-cost
“carbon scrubber”
9. Trading Rules and
Trading Limits
 Who can trade for your carbon currency?
 As in any currency, “bad money drives out good”
 Needed: Common rules on offsets, monitoring
and verification of emissions and offsets, similar
reduction curves
 What about hoarding?
 Use it or lose it rules? Or “retire them if you want..”?
 Rules to control market manipulation?
 Beware leverage effects: “Carbon markets are
big, but power markets are even bigger”
10. Complementary and
integral policies
Increasingly understood to be critical to
emission reductions
Utility energy efficiency programs, CAFE
standards, Smart growth policies
 Where “complementary” policies are
crucial to cap-and-trade success, they
can be hard-wired into the C&T system
E.g., “efficiency allocation” of carbon credits;
credits for RPS, advanced energy
technology
Where will power sector
reductions come from?
Possibilities:
 Reduce consumption
 Lower the emission profile of new generation
 Re-dispatch the existing fleet
NB: bigger reductions come from the first two, which
are LSE activities (e.g., DSM and RPS )
For each opportunity, ask:
How many tons will it avoid?
2. How much will it cost consumers per ton ?
3. What tools get the best results on #1 & #2 ?
1.
Not cap and trade alone–
Portfolio management for carbon
Realistic power solutions require “what utility
regulators do” not just “what
environmental regulators do”—
Energy efficiency is the essential “bridge fuel”
2. Rediscover, update IRP and Portfolio
Management for LSEs
3. New capacity: Accelerate the transition with
explicit policies for low-carbon resources (e.g.,
Capture & Storage, RPS, all-resource FCM)
4. Promote a new business model for load-serving
utilities. (Decoupling, PBR, owned DG, etc.)
1.
The Regulatory
Assistance Project
RAP is a non-profit organization providing technical and
educational assistance to government officials on
energy and environmental issues. RAP is funded by
US DOE & EPA, several foundations, and international
agencies. We have worked in 40+ states and 16
nations.
Richard Cowart was Chair of the Vermont PSB, Chair of
NARUC’s Energy & Environment Committee, and of
the National Council on Electricity Policy. Recent
assignments include technical assistance to RGGI, the
New York ISO, the California PUC, the Oregon Carbon
Allocation Task Force, the Western Climate Initiative
and to China’s national energy and environmental
agencies.
For more information…
•Carbon Caps and Energy Efficiency: The Marriage of
Need and Potential (Energy Efficiency Finance Forum April 2007)
•“Power System Carbon Caps: Portfolio-based Carbon
Management” (NREL Carbon Analysis Forum November 2007)
•“Why Carbon Allocation Matters – Issues for Energy
Regulators” (RGGI memo March 2005)
•“Another Option for Power Sector Carbon Cap and
Trade Systems – Allocating to Load” (RGGI discussion memo
May 2004)
•“Load-Side Caps for Power Systems:
Environmental and Economic Goals” (CA PUC August 2007)
Richard Cowart, Regulatory Assistance Project
Posted at www.raponline.org
Email questions to [email protected]