Cap & Trade

Cap & Trade (Cap)

• A cap commits a region or country to limits on greenhouse gas emissions (GHG) and then reduces those limits over time.

• All proposals set an emissions target (cap) on sources covered by the program.

• The cap is normally set in terms of a percentage reduction below a prior year’s emissions level. – For example:

– 3 percent reduction below 2005 levels by 2012

– 20 percent reductions below 2005 levels by 2020

Cap & Trade(Covered Sources)

• Covered sources are likely to include major emitting sectors: – Power plants and carbon-intensive industries, fuel producers/processors

(coal mines or petroleum refineries), or some combination of both.

• In almost every case, electric power producers are a covered sector.

• Some sectors that emit greenhouse gases may not be covered, such as agriculture.

Cap & Trade (Allowances)

• The emissions cap is partitioned into allowances.

• Typically, one emission allowance equals the authority to emit one (metric) ton of carbon dioxide-equivalent. – A metric ton is equal to 2,200 pounds.

• Why “equivalent”? Greenhouse gases other than carbon dioxide vary in their global warming potential.– Other GHG’s: methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons,

and perfluorocarbons.

– Methane absorbs 21 times more radiant energy than carbon dioxide; nitrous oxide absorbs 310 times more radiant energy than carbon dioxide.

Cap & Trade (Trade)

• Trade means entities may buy, sell or trade “allowances” between themselves or others. – This creates a market for “allowances.”

• A trading system places a market price on allowances.

• The market price should motivate industry, businesses and families to reduce GHG’s.

• A well-designed trading system should encourage efficiency, innovation and lowest-cost solutions.

Cap & Trade (Offsets)

• An offset is an activity, other than a direct emission reduction that can be done to lower GHG emissions.

• An offset must be an approved, measurable activity reduction, avoidance, or sequestration of greenhouse-gas emissions from a source not covered by an emission reduction program.

• Examples of offsets:– Planting trees

– Paying dairy farmers for methane capture systems

– Paying farmers for reduced or no-till activities

• Use of offsets is normally limited (30%).

Cap & TradeHow does cap and trade work?

• Tally greenhouse-gas emissions– Energy Information Administration (EIA) and

Environmental Protection Agency (EPA) have the data.

• Set a cap– 2005 has been selected as the base year; emission cap will begin

in 2012 as a small percentage below 2005 levels.

• Distribute allocations– Some percentage given out freely, and some will be required to be purchased or traded.

• Enforce the cap– EPA will be given authority to regulate with severe penalties for non-compliance.

• Step it down– Cap decreases every year to reach a 80-90 percent decrease from 2005 levels by 2050.

Cap and Trade Basics

Baseline

Cap

Tons

Years

Reductions

How can the electricity industry respond? ?

Climate Change

• Basin Electric supports reasonable climate change legislation.

• We want to be a part of the solution, not part of the problem.

Energy Diversity

Largest carbon capture sequestration project in the world

Developing New Technologies

• Commercial-scale pilot carbon capture project at the Antelope Valley Station, Beulah, N.D.

• Working with a technology

provider

• Anticipated start = 2013

• Goal = 90% CO2 removal

What does Cap & Trade mean to an average household?

1 metric ton

carbon/month=

Annual Electricity Cost Increases to the Consumer

$10 – $60/metric ton carbon cost

$120 – $720 $240 – $1,440 $667,000 – $4 million

Power Supply Options Limited

• Natural gas price is highly volatile

• Nuclear option available but in the future

• Renewables, conservation and efficiency can not yet meet full base-load need

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•Flat between 2010 - 2020•3%/yr. decline beginning in 2020•Results in “prism”-like CO2 constraint on electric sector

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EIA Base Case 2007

Advanced Coal Generation

DER

PHEV

CCS

Nuclear Generation

Renewables

Efficiency

Technology

* Achieving all targets is very aggressive, but potentially feasible.

Electric Sector CO2 Reduction Potential

Key Elements in Legislation

• Incentives for technology development

• Credit for early adopters

• Time to develop the technology

• Price ceiling for carbon (safety valve)

• Free allocations vs. auction

• Regulatory certainty

• All sectors must be included

• Worldwide effort

Waxman-Markey Bill

• Cap and Trade

• Includes RES

• $1 billion/year in CCS grants

• Allocations

• Offsets

Henry Waxman (CA)Henry Waxman (CA) Ed Markey (MA)Ed Markey (MA)

American Clean Energy and Security Act(Waxman-Markey)

4 Titles

I. Clean Energy (RES and Transmission)

II. Energy Efficiency

III.Reducing Global Warming

IV.Transition to a Clean Energy Economy

• Bill has passed out of House Energy and Commerce Committee

• Still needs to go through several other committees

• Vote on entire House floor

Waxman-Markey Climate Provisions• Targets and timetables

– 17% below 2005 greenhouse gas emissions in 2020

– 83% below 2005 GHG emissions by 2050

• Allowance allocation

– 85% allowances will be freely given out at beginning – more allowances will be auctioned starting in 2026

• Offsets (agriculture and forestry)

– Domestic and international offsets are limited to 1 billion metric tons each of carbon per year

Allocations

• Allocations given to Local Distribution Companies (retail sales)

– Based 50 percent on sales and 50 percent on carbon intensity of electricity purchases

• Allocations given to merchant generators

– 5 percent of electric generator’s total

• Allocations to electric consumers phased out by 2030

Offsets

• Eligible Projects– Determined by EPA

• Project Requirements– Determined by EPA

• Verification – Determined by EPA

• Issuance of Credits

• Audits

• Offset Credits– 15 percent domestic and 15

percent international

• Offsets Integrity Advisory Board– 9 members established by EPA

• Offset Program– Regulations promulgated by EPA

w/consultation with Federal Agencies and Advisory Board

Performance Standards New Coal

• 2009 - 2020: 50% reduction in CO2

• After 2020: 65% reduction in CO2

Waxman-Markey Shortcomings

• Allocation formula is skewed– Some receive more than 100 percent of their needs and double

allocations are given to others

– Allocation should be based entirely on emissions

– Allowances are fazed out too quickly

• Offset Program should be administered by the U.S. Department of Agriculture

• Credit for current emissions reduction (Early Action) is missing

• Timing of emission reduction does not match the development and commercialization of carbon capture technology

Waxman-Markey Shortcomings

• Auction – no restriction on the types of entities or individuals who could purchase the allocations

• Safety Valve – no safety valve price is included in the bill that could mitigate the harmful economic impact on the end consumers

• Research, Development & Deployment funding - inadequate to fund the necessary advancement in carbon capture technologies

NRECA Negotiations

• NRECA will not oppose the legislation, but will stand aside and work to improve the bill in the Senate in return for:

– Pelosi will not object to Rural Utilities Service funding new nuclear generation

– No utility shall receive allocations that exceed 100 % of their needed emissions.

– Additional small utility allocations (less than 4 million MWh) for cooperatives.

Questions