design & implementation of the u.s. cap and trade programs

Design & Implementation of the

U.S. Cap and Trade Programs

Avanzando hacia un Diseño Integral de un sistema de Compensaciones Atmosféricas para la Región Metropolitana de Santiago

Jeremy Schreifels, US EPA

May 28, 2009

Acid deposition (rain, sleet, & snow)(1989 – 1990)

10,000 tonnes7,000 tonnes

3,000 tonnes

Emissions Cap = 12,000 tons

Emissions Standard = 500 grams/gigajoule

10,000 tonnes

4,000 allowances1,000 allowances 3,000 allowances

1,000 tonnes

Emissions Cap = 12,000 tons

1,000 tonnes3,000 allowances

BUY!

SELL!

3,000 tonnes

1,000 allowances

Government Authority• Collect data• Quality assure data• Audit data • Inspect facility• Publish data

3,000 allowances

Cap and trade:The U.S. Acid Rain Program

• Environmental results

• Design elements• Program operation• Revisions to

address health impacts of PM2.5

• Lessons learned

Results Design Operation Revision Lessons

Generation is up, electricity prices are down,

and pollution is down significantly

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%19

90

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Per

cent

Cha

nge

Rel

ativ

e to

199

0

Electricity Retail Price NOx Emissions

SO2 Emissions Electricity GenerationSO2 EmissionsNOX Emissions


States with the highest SO2 emissions in 1990

saw the largest reductions by 2007

Design Operation Revision LessonsResults

States with the highest NOX emissions in 1990

saw the largest reductions by 2007


1989-1991 2005-2007

Average wet sulfate deposition (rain & snow) decreased significantly between 1990 and

2007


1989-1991 2005-2007

Average wet nitrogen deposition (rain & snow) decreased significantly between 1990

and 2007


1989-1991 2005-2007

Average ambient sulfate (SO4) decreased significantly between 1990 and

2007


Compliance is near perfect and costs are lower than other policy approaches

Compliance Costs - 2010

0

0.5

1

1.5

2

2.5

3

TechnologyMandate

EmissionRate

Standard

Cap &Trade

Bill

ion

US

$

• Compliance rates are ≈100 % every year

• Compliance costs are significantly lower than technology mandates (command-and-control) or emission-rate standards

Source: Burtraw, Palmer, Cropper, and Carlson


The programs are effective, efficient, and credible

“Much has been written about the (SO2) program... Suffice it to say that it has succeeded spectacularly. Between 1995 and 2010, the SO2 trading program will result in greater reductions on a much faster schedule than likely would have been the case under more traditional technology-based standards, and will save more than $20 billion dollars cumulatively over that period of time. Even the most vocal ex-ante critics of emissions trading now agree that the program has been a raging success.”

Paul Portney, President, Resources for the Future

Environmental Finance, October 2004


Designing and operatingthe US SO2 cap and trade program

• Setting the emission cap and distributing allowances

• Assigning responsibility for meeting the emission cap

• Developing rules for allowances, emission measurement, and compliance

• Operating the infrastructure• Providing compliance

assistance


Distributing allowances

• Majority of allocation approaches lead to the same level and distribution of emission reductions; the emission caps and banking drive reductions

• Many options for allocation, but none are perfect– Direct allocation to sources facilities on historical and/or current

energy use (input), production/generation (output), or emissions– Auction with option to distribute revenues

Results Operation Revision LessonsDesign

Assigning responsibility: Coal-fired power plants are the dominant source

of emissions

About 530 coal-fired power plants (305 GW) with about 1,300 boilers generate the vast majority of power sector emissions:

-95% SO2

-90% of NOx

-83% of CO2


Developing rules: Allowance use

• One allowance offsets one ton of SO2

• Allowances can be freely transferred/traded with no restrictions

• Official transfers/trades must be recorded in EPA’s Allowance Tracking System

• Allowances issued for a specific compliance year; each allowance has a “vintage” (the first year in which it can be used for compliance)

• Surplus allowances not used for compliance can be saved and used in the future


Developing rules: Emission measurement, reporting, and

verification• Consideration: Accurate, consistent

measurement methods are essential to ensure environmental integrity, equity, and credibility

• Coal-fired units install, operate, maintain, and quality assure CEMS for SO2, NOX, and CO2

– Daily calibration– Semi-annual or annual testing

• EPA specifies – Equipment and data quality assurance procedures– Data substitution procedures for missing or invalid data

• EPA verifies CEMS operation and each hour of reported emission data• EPA provides a process for addressing unique or unusual monitoring

situations


Developing rules: Compliance

• Automatic penalties for excess emissions (i.e., non-compliance)– Financial penalties– Allowance offsets


Operating the infrastructure: Data collection, management, and

publication• Emission and allowance

data management– Collect and quality assure

emission data from sources

– Track allowance allocation, trades, and ownership

– Deduct allowances for compliance

– Publish information in an easy-to-understand and easy-to-use format


Providing compliance assistance

• Each EPA region has a dedicated analyst– Analyst answers questions

from power plants, state-level EPAs, and the public

– Analyst provides guidance on monitoring and data issues

• EPA informs power plants of their compliance obligations, including allowance requirements

Results Design Revision LessonsOperation

Operating the program: Resources

• Personnel – 8 monitoring experts with assistance from regional and

state inspectors– 1 market operations expert with assistance during auctions

and compliance assessment– Additional staff dedicated to environmental assessment,

design of new programs, developing and operating IT systems, and administration

• Budget– Approximately 1% of air pollution control budget– Funding is from the general operating budget

Results Design Revision LessonsOperation

SO2 and NOX have decreased, but more needs to be done

Nonattainment areas for both 8-hour ozone and fine particle pollution

Nonattainment areas for fine particle pollution only

Nonattainment areas for 8-hour ozone pollution only

• 126 ozone nonattainment areas with 474 counties

• 39 PM2.5 nonattainment areas with 208 counties

Source: EPA, April 2005

Nonattainment Areas for Ozone and PM2.5


The Clean Air Interstate Rule (CAIR) would reduce SO2 and NOX emissions further

Emission Caps*(million metric tons)

2010 2015

Annual SO2 3.4 2.4(2010)

Annual NOX 1.4 1.2(2009)

Seasonal NOX 0.5 0.4(2009)

States controlled for fine particles (annual SO2 and NOx)

States not covered by CAIR

States controlled for ozone (ozone season NOx)

States controlled for both fine particles (annual SO2 and NOx) and ozone (ozone season NOx)

Results Design Operation LessonsRevision

CAIR would result in major retrofits of coal-fired power plants in the US


CAIR will provide significant air quality improvements

Ozone and Fine Particle Nonattainment Areas* (April 2005)

Projected Nonattainment Areas* in 2015 after Reductionsfrom CAIR and Existing Clean Air Act Programs

Nonattainment areas for both 8-hour ozone and fine particle pollution

Nonattainment areas for fine particle pollution only

Nonattainment areas for 8-hour ozone pollution only

108 ozone nonattainme

nt or early action areas

36 PM2.5 nonattainme

nt areas

6 ozone nonattainme

nt areas

14 PM2.5 nonattainme

nt areas


Complexity and ambiguity increase costs and create uncertainty

• Simple, clear goals and rules save time and money, reduce confusion, and enhance compliance

• Clear legal authority for government agency to implement and enforce the emission trading program


A well-designed program can address differences in seasonal and geographic impacts of emissions, if

necessary

• Different compliance rates for geographic regions or zones affect the cost of emissions in “sensitive” or “high-impact” areas

• Different compliance rates based on when emissions occur affect the cost of emissions during “critical” seasons

• The most efficient approach for reducing PM2.5 in the US is to control the precursors (SO2, NOX)


Adaptability to new circumstances is essential

• The framework of the program should allow for changes based on new information, practices, or standards

• Most changes to the US Acid Rain Program were intended to :– Streamline the program– Improve the quality of emission data– Take advantage of advances in information technology and the

Internet– Reduce burden and costs for power plants, market participants,

and EPA– Improve the environmental accountability and results of the

program


Flexibility streamlines decision making and reduces costs

• Flexibility to develop control strategies and make decisions (technology, fuel, operations, and investment) reduces costs to industry– Strategies can be designed to complement, rather than conflict

with, business planning processes eliminating sub-optimal investments

• Flexibility provides continuous incentive to customize strategy and innovate to reduce costs

• Emission cap provides environmental certainty about total emissions, therefore, no need for EPA to review compliance strategies or trades

• Lower compliance costs makes it feasible to require greater overall reductions


Flexibility streamlines decision making and reduces costs (continued)

• Banking provides temporal flexibility– Creates incentive to reduce emissions

earlier than required– Provides a buffer for price volatility– Provides a pool of allowances for

phased cap reduction and unforeseen events

• Flexibility does not create “hotspots”– Largest reductions were in places with

the highest emissions– Broad, regional reductions occurred

where improvements were most needed


Accountability is the prerequisite for flexibility

• Accountability requires accurate emission data to ensure all facilities are in compliance and achieving the emission cap; it also establishes integrity of allowances and confidence in the allowance market– Standards for measurement, quality assurance, and reporting

• Strict and automatic penalties for non-compliance – Provide predictable consequences for non-compliance– Limit the discretion of regulators– Ensures all facilities are treated equally

• Complete coverage of all sources within the sector minimizes shifting of production and emissions (“leakage”)


Allocation methodologies are important, but do not affect environmental outcome of a properly

enforced program• Choice of an allocation approach has financial impact on facilities, but

does not affect the environmental goal• Majority of allocation approaches lead to the same level and distribution

of emission reductions; the emission caps and banking drive reductions• Different allocation approaches reward different types of facilties

– Input (fuel use) rewards facilities with low sulfur emissions per unit of fuel (e.g., facilities with emission controls)

– Output (generation) rewards facilities with low sulfur emissions per unit of fuel and efficient facilities (e.g., low fuel use per unit of output)

– Historical emissions rewards facilities with high sulfur emissions per unit of fuel (e.g., facilities with no investment in control technologies

• Allowance allocations can be recalculated on a predictable schedule to reflect changes at the facilities (e.g., shutdown, changes to generation) and new facilities

• Allowance allocation should balance need for certainty and allow for changing circumstances


Information technology streamlines program operation and reduces administrative costs

• The use of information technology and the Internet makes it possible to collect, evaluate, manage, and publish large amounts of data on emissions, allowances, compliance, and environmental results– Reduces administrative requirements– Improves speed and accuracy– Makes computerized data audits feasible


The government’s role should be focused on the program’s achievement of the

environmental goal• EPA focuses on performance of the program, not

compliance strategy– Enforcing emission measurement and quality assurance

protocols– Verifying emission data– Tracking allowance ownership– Assessing compliance (allowance holdings vs. emissions)

• EPA provides compliance assistance to facilities– Improves compliance rate– Reduces errors– Creates collaborative problem-solving relationship between

facilities and EPA


The cap and trade program should create incentives for facilities to “do the right

thing”• Performance-based approach creates strong

incentives– Emission measurement requirements set

progressively punitive measures for incomplete or invalid measurements

– Higher relative accuracy of emission measurement equipment results in fewer quality assurance tests

– Non-compliance penalties are greater than the cost savings from non-compliance

– Banking provisions encourage early reductions– Long-term emission reduction goals (and allowance

allocations) facility planning and investment decisions


Cap and trade policies complement programs intended to protect local air

quality• Cap and trade provides broad, regional emission

reductions• Cap and trade, if designed properly, can

complement programs designed to protect local air quality (e.g., technology mandates, emission standards)– Compliance with one program does not substitute nor

guarantee compliance with other programs


Recommendations for the Santiago MR trading program (1 / 2)

• Reduce complexity; keep the program design simple– Implement the program in phases, starting with large stationary

combustion sources and, if appropriate, expand to include other source categories

– Simplify procedures for processing transactions

• Focus on the pollutants with the greatest health impacts– SO2 and NOX are precursors responsible for a large portion of

PM2.5 in Santiago MR (they are also easy to measure)

Recommendations for the Santiago MR trading program (2 / 2)

• Enhance the emission monitoring program to provide accurate data on actual emissions– Include QA/QC procedures to enhance data quality

• Assess the options for addressing differences in seasonal and geographic impacts of emissions

• Consider more than one policy instrument; develop complementary policies – Consider control requirements for pollutants or source

categories for which cap and trade does not seem appropriate– Implement emission standards as a “backstop” on emissions

For More Information

• Visit the clean air markets web site to view– Emission data and allowance information– Information on cap and trade programs– Program rules and guidelines– Studies and reports– Information about international cooperation

http://www.epa.gov/airmarkets/

design & implementation of the u.s. cap and trade programs

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