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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).

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Design & Implementation of the U.S. Cap and Trade Programs

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  1. 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

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

  3. Emissions Standard = 500 grams/gigajoule Emissions Cap = 12,000 tons 10,000 tonnes 7,000 tonnes 3,000 tonnes

  4. 10,000 tonnes Emissions Cap = 12,000 tons 1,000 tonnes 4,000 allowances 1,000 allowances 3,000 allowances

  5. 3,000 tonnes 1,000 tonnes 3,000 allowances SELL! BUY! • Government Authority • Collect data • Quality assure data • Audit data • Inspect facility • Publish data 1,000 allowances 3,000 allowances

  6. Results Design Operation Revision Lessons 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

  7. Results Design Operation Revision Lessons Generation is up, electricity prices are down, and pollution is down significantly

  8. Results Design Operation Revision Lessons States with the highest SO2 emissions in 1990 saw the largest reductions by 2007

  9. Results Design Operation Revision Lessons States with the highest NOX emissions in 1990 saw the largest reductions by 2007

  10. Results Design Operation Revision Lessons Average wet sulfate deposition (rain & snow) decreased significantly between 1990 and 2007 1989-1991 2005-2007

  11. Results Design Operation Revision Lessons Average wet nitrogen deposition (rain & snow) decreased significantly between 1990 and 2007 1989-1991 2005-2007

  12. Results Design Operation Revision Lessons Average ambient sulfate (SO4) decreased significantly between 1990 and 2007 1989-1991 2005-2007

  13. Results Design Operation Revision Lessons Compliance is near perfect and costs are lower than other policy approaches • 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

  14. Results Design Operation Revision Lessons 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

  15. Results Design Operation Revision Lessons 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

  16. Results Design Operation Revision Lessons 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

  17. Results Design Operation Revision Lessons 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

  18. Results Design Operation Revision Lessons 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

  19. Results Design Operation Revision Lessons 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

  20. Results Design Operation Revision Lessons Developing rules: Compliance • Automatic penalties for excess emissions (i.e., non-compliance) • Financial penalties • Allowance offsets

  21. Results Design Operation Revision Lessons 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

  22. Results Design Operation Revision Lessons 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

  23. Results Design Operation Revision Lessons 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

  24. Nonattainment areas for 8-hour ozone pollution only Nonattainment areas for fine particle pollution only Nonattainment areas for both 8-hour ozone and fine particle pollution Results Design Operation Revision Lessons SO2 and NOX have decreased, but more needs to be done Nonattainment Areas for Ozone and PM2.5 • 126 ozone nonattainment areas with 474 counties • 39 PM2.5 nonattainment areas with 208 counties Source: EPA, April 2005

  25. States controlled for fine particles (annual SO2 and NOx) States controlled for ozone (ozone season NOx) States controlled for both fine particles (annual SO2 and NOx) and ozone (ozone season NOx) States not covered by CAIR Results Design Operation Revision Lessons The Clean Air Interstate Rule (CAIR) would reduce SO2 and NOX emissions further Emission Caps* (million metric tons) 20102015 Annual SO2 3.4 2.4 (2010) Annual NOX 1.4 1.2 (2009) Seasonal NOX 0.5 0.4 (2009)

  26. Results Design Operation Revision Lessons CAIR would result in major retrofits of coal-fired power plants in the US

  27. Results Design Operation Revision Lessons CAIR will provide significant air quality improvements Ozone and Fine Particle Nonattainment Areas* (April 2005) Projected Nonattainment Areas* in 2015 after Reductions from CAIR and Existing Clean Air Act Programs 108 ozone nonattainment or early action areas 36 PM2.5 nonattainment areas 6 ozone nonattainment areas 14 PM2.5 nonattainment areas Nonattainment areas for 8-hour ozone pollution only Nonattainment areas for fine particle pollution only Nonattainment areas for both 8-hour ozone and fine particle pollution

  28. Results Design Operation Revision Lessons 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

  29. Results Design Operation Revision Lessons 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)

  30. Results Design Operation Revision Lessons 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

  31. Results Design Operation Revision Lessons 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

  32. Results Design Operation Revision Lessons 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

  33. Results Design Operation Revision Lessons 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”)

  34. Results Design Operation Revision Lessons 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

  35. Results Design Operation Revision Lessons 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

  36. Results Design Operation Revision Lessons 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

  37. Results Design Operation Revision Lessons 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

  38. Results Design Operation Revision Lessons 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

  39. 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)

  40. 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

  41. 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/

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