Recent Cap and Trade Programs: EU ETS and RGGI

1. Recent Cap and Trade Programs: EU ETS and RGGI Joe Kruger Resources for the Future

2. Overview • Key features of the EU ETS • Key features of the RGGI proposal • Conclusions

3. Summary of the EU Trading System • Participants: 25 Member States (MS) • Timing: Periods are 2005-2007 and 2008-2012 • Coverage: • Sectors:Energy activities (including electric power), iron & steel, minerals, pulp and paper • ~12,000 installations covering 46% of CO2 emissions

4. Summary of the EU Trading System (cont.) • Allowance Distribution • European Commission provides general guidelines on allocation • MS submit National Allocation Plans (NAPs) to Commission • Commission reviews 25 plans and can request changes • NAPs set both the cap level and allocation methodologies for each Member State

5. Kyoto Target Allocation to ETS Allocation to Trading Sectors Allocation to Installations NAPs:Multiple Decisions • Decision #1: How much of Kyoto target will be in trading program? • Decision #2: What will be the allocations for each sector? • Decision #3: How will allowances be allocated to each installation?

6. National Allocation Plans (NAPs) Criteria for EU ETS • Consistent with overall Kyoto target • Take into account • Proportion of emissions in capped sector • Other policies • Technical potential of activities within sector • Early action • Competition from non-EU countries • New entrants • May auction 5% in Phase I, 10% in Phase II

7. Results of Phase I Allocation Process • For Phase I, most Member States have • chosen 100% free allocation • allocated allowances using historical data from most recent years available • In general, electricity sector required to take most reductions • Commission reduced the caps of some Member States • Phase II NAPs due June 2006

8. Summary of the EU Trading System (cont.) • Other Provisions • Banking: Restrictions in Phase I; but Member States must allow in Phase II • Project-level offsets: JI/CDM credits • Monitoring guidelines: Standardized but some discretion given to Member States • Registries: MS registries are linked • Excess emissions penalties: • € 40/ton CO2e in 1st Phase (2005-2007) • €100/ton CO2e in 2nd Phase (2008-2012)

9. Regional GHG Initiative (RGGI) • Regional cap and trade program proposed by Governor Pataki • Nine states in New England and Mid-Atlantic have joined • Status: Draft proposal released last week

10. Summary of the RGGI Proposal • Coverage: Electric power sector, units over 25 MW (~500-600 units) • Cap and Timing: • Phase I (2009-2015) stabilize emissions at current levels • Phase II (2015-2020) 10% reduction from current levels • Apportionment to States: • Based on historic emissions, but also considers electricity consumption, population, expected new sources and other factors

11. Summary of the RGGI Proposal(continued) • Allocation to Firms • Generally, decisions left to States (similar to NOx Budget Trading Program) • However, • States must propose that 20% of allowances be used for a “public benefits” purpose • States set aside 5% for a Strategic Carbon Fund to achieve additional emissions reduction outside the cap

12. Summary of the RGGI Proposal(continued) • Other Provisions • Unlimited banking • Compliance and enforcement provisions similar to SO2 and NOX programs • Offsets allowed, with some restrictions • Use of CDM and EU allowances if prices hit a certain level • Comprehensive review in 2015

13. Conclusions • Both programs largely follow the SO2/NOx downstream model, but add some new twists • Transport sector not covered • Allocation processes are decentralized to meet political considerations of multiple jurisdictions