2010 U.S. Federal, Regional and State Climate Policies

1. 2010 U.S. Federal, Regionaland State Climate Policies Ned Helme, President Center for Clean Air Policy Mitigation Action and the Role of Market Instruments Seoul, Korea March 9, 2010

2. ABOUT CCAP • Founded in 1985 • Washington, DC based non-profit think tank working at local, regional, national, and international levels on innovative market-based solutions to climate change issues • Offices in Brussels, Belgium, New York and San Francisco • Convene stakeholder dialogues, including bringing together lead UN climate negotiators from 30 nations • Played major role in design of SO2 and Nox emissions trading systems in US, assisted California and other states • Assisting Brazil, China, India, Indonesia and Mexico in design of climate policies • Lead consultant on original design of EU ETS • Designing sectoral approaches for European Commission

3. US Climate Legislation 2010 Prospects • Hard and getting harder (but not over) in 2010; compromises necessary on C & T design, cost containment, energy policies • COP-15 in Copenhagen in December 2009 - better received in US than elsewhere – has muted complaints about DC actions and MRV • Alternative more limited cap-and-trade being developed by Senators Kerry, Graham, and Lieberman; bill likely to remove oil products from cap, delay industrial sector implementation • Kerry-Graham-Lieberman bill should be introduced in March 2010 and may expand domestic oil and gas drilling offshore, assistance for nuclear power plant construction, and incentives for natural gas use • Without U.S. national legislation, the U.S. EPA will begin regulating carbon dioxide but congressional efforts underway to delay some regulations • Required air quality regulations would stimulate power plant carbon reductions

4. April 2007 – decision reached in U.S. Supreme Court case (Mass v. EPA) brought by 12 states, several local governments and NGOs; EPA has authority to regulate GHGs under CAA June 2009 – EPA waiver of Clean Air Act preemption to California for its greenhouse gas emission standards for motor vehicles beginning with the 2009 model year Sept 2009 – EPA final rule for mandatory reporting of GHGs; does not preempt state/regional programs Dec 2009 –EPA finding that GHGs endanger public health and welfare (“Endangerment Finding”) & that new motor vehicles and new motor vehicle engines contribute to GHGs (Alaska Senator Murkowski challenging finding) ●Feb 2010 EPA letter re: phase in No facility required to address GHG emissions in permitting new construction or modifications before 2011 Smaller facilities not subject to permitting for GHG emissions before 2016 Feb 2010 EPA launches website to help State and Local governments plan and implement GHG reduction strategies March 2010 – expected EPA GHG emissions standards for cars and light duty vehicles (CA, 13 other states and Quebec have already adopted vehicle emissions standards) + DOT revised fuel economy standards US EPA Regulation of GHGsunder the Clean Air Act (CAA)

5. States and Regions as Policy Laboratories North American Regional Initiatives Map from World Resources Institute Regional Greenhouse Gas Initiative (“RGGI”) Western Climate Initiative (“WCI”) Midwestern Greenhouse Gas Reduction Accord (“MGGR”)

6. Scope of Regional North American Climate Regimes (RGGI, WCI & MGGR) • Participating U.S. states account for one-half of the U.S. population and GDP, and one-third of all U.S. GHG emissions; the Canadian provinces account for more than three-quarters of the Canadian population and GDP, and nearly one-half of Canadian GHG emissions (from World Resources Institute) • RGGI, WCI and MGGR have held 2 joint meetings to date; collaboration sought on offsets, complementary policies, and identifying issues that would have to be addressed if the regions were to link their programs • Feb 2010 Point Carbon article suggests that RGGI and WCI would have a value of $100 billion in 2016 with allowances for carbon dioxide equivalent (CO2e) costing $42 per ton; results in a reduction of US and Canadian 2020 emissions by 107 million tons and 83 million tons respectively, achieving about 41 per cent of the US and 24 per cent of Canada’s pledged emission reductions (pursuant tocountries' submissions to the UN Copenhagen accord)

7. Structure of Regional Initiatives • RGGI – ten Northeast and Mid-Atlantic states have capped emissions from the power sector, and will require a 10 percent reduction in these emissions by 2018; implemented through state regulations, based on a RGGI Model Rule, linked through allowance reciprocity; • WCI – regional, multi-sector cap-and-trade program covering 90% of GHG emissions in partner states/provinces to begin 2012 • Target to reduce emissions 15% below 2005 levels by 2020 • WCI mandatory reporting rules advanced in July 2009 currently being harmonized with US EPA reporting rules and engagement with Environment Canada also proceeding to achieve consistency • MGGR – June 2009 recommendations & Oct 2009 Draft Model Rule; flagged preference for federal systems and regional cap-and-trade system as an alternate solution if federal policies should stall; target goal of 20% below 2005 levels by 2020 and 80% below 2005 levels by 2050

8. California’s Climate PoliciesHighlights • AB32 – Global Warming Solutions Act; comprehensive economy wide emissions reduction target achieved through cap-and-trade, supported by ‘complementary policies’; 1990 levels by 2020 (30% below BAU); 80% from 1990 levels by 2050 • SB375– first U.S. law to curb GHG emissions by reducing urban sprawl; establishing regional targets for transportation-related GHGs (metropolitan planning organizations must develop strategies to reduce vehicle miles traveled) • Pavley I and Pavely II (2nd more stringent phase) – vehicle technology standards • Low Carbon Fuel Standard – including indirect land use in life cycle analysis • Renewable Portfolio Standard – 33% • Revision of California Environmental Quality Act (environmental impacts assessment and mitigation statute) to include GHG considerations • California Adaptation Strategy (pursuant to Executive Order S-13-08) – first of its kind multi-sector strategy for adapting to climate change impacts

9. Comparison of Systems:Cap & Trade Coverage • RGGI – electric power CO2 only, began Jan 1, 2009, can be expanded to other sectors – review in 2012 • Cal – all major sectors, all 6 gases beginning in 2012, forestry and ag likely to be offsets • WCI – very similar to Cal but some sectors delayed til 2015

10. Comparison of systems:Auction and allocation • RGGI - ~87% auction of allowances • States decide allocation policies individually • 2/3 of auction revenues to energy efficiency, up to 25% to low income • CA – substantial auction likely, allocation policies to be proposed in April • 25% likely dedicated to public investments, rest to citizens • WCI – minimum 10% auction in 2012, 25% in 2020 • States decide auctioning above 10% and decide levels of free allocation individually • States decide use of auction revenues individually

11. Comparison of systems:Offset Policies • RGGI: offsets limited to 3.3% of plant’s compliance obligation, can increase to 5-10% if allowance prices reach level • Domestic offsets limited to landfill gas, SF6, manure management, afforestation, nat gas/heating oil end use efficiency • At higher price levels CDM projects could be permitted but standardized benchmark process would be used • WCI: company can meet up to 49% of required redux w/ offsets including Canadian and Mexican projects • States recognize each other’s offsets • CDM projects likely allowed • CA: offsets limited to 4% of entity’s compliance • Considering limiting international offsets to sectoral credits and subnational REDD, not allowing traditional CDM projects • Pt Carbon high scenario = 2-300 mt total CER demand

12. California Cap-and-TradeRulemaking Timeline

13. ICF Forecast: RGGI 9-State CO2 Emissions

14. RGGI Auction Results (first 6 auctions) • Most advanced auction globally, w independent auctioneer and Market Monitor • 2009 vintage allowances have traded from $3.51 to $2.05. • 2012 vintage allowances have traded from $3.05 to $1.86. • Last auction had 2.6 offers for each allowance, reflecting low prices and desire by bidders to bank allowances for future use • Nearly $500 million raised so far. • Majority of funds flowing to the originally designated uses, with ~$275 million going to energy efficiency. • Some funds diverted to other uses. • Maryland transferred $70 million in RGGI funding from efficiency investments to short-term rebates. • New York is using $90 million to fill state budget deficit.

15. Conclusions, Implications and the Road Ahead • Comprehensive U.S. Climate Legislation still possible • EPA will otherwise regulate GHGs but Congress could delay EPA implementation • Regional and State Climate programs are underway and continuing to develop with movement toward linkage and harmonization • Combination of aggressive state/regional action (including Midwest states) and EPA regulation could achieve US target of -17% < 2005 by 2020 • Regional and state programs could be small source of demand for international offsets/sectoral credits beginning in 2015

16. Lessons from US State and Regional Programs • Flexibility to periodically review and adjust programs and targets is important in early years (weak RGGI targets could not be strengthened) • Allowing member states to decide auctions/allocations can cause leakage and competitiveness problems (EU experience) • Important to build systems with an eye to eventual linkage – key building blocks include data collection, MRV, auction/allocation, offset policies • Auctions can generate valuable resources for energy efficiency and renewables but can be tapped by legislatures for other purposes

17. Domestic C and T and the Linking Decision • Decision to build domestic cap and trade and other market-based systems makes sense to reduce compliance costs • Decision to link to other country’s trading and offset systems is more complex. • Options for DCs include: supported NAMAs, sectoral crediting, intensity-based trading, and full cap and trade • Countries who recognize eventual need to contribute significant domestic reductions to a global effort may want to preserve low-hanging fruit at home and offer more costly reductions as offsets

18. Options for accessing the global carbon market • Supported NAMAs are win-win for developing country governments • Tradable intensity standards bring world carbon price in to developing country but only at the margin – amount by which you achieve or miss the intensity standard times your production • cap and trade brings full carbon price to all facilities in participating sectors – beneficial for low cost plants but costly for less efficient operators • Developing countries may want to phase in to participation via NAMAs and sectoral crediting followed by full participation

19. THANK YOU For more information: www.ccap.org

20. Backup Slides Detailed slides on Cal, WCI and RGGI follow

21. Western Climate InitiativeCap-and-Trade Program • Sectors: electricity (including imported electricity), Industrial and commercial fossil fuel combustion, Industrial process emissions (including oil and gas process emissions), Gas and diesel consumption for transportation, Residential fuel use • Six GHGs: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride • Compliance phases/banking/borrowing: begins Jan 2012 (electricity, industrial combustion @ large sources, industrial process emissions); all other sectors from 2015; 3 year compliance period; unlimited banking except where restrictions need to prevent manipulation; no borrowing • Offsets - (1) offset limit will be set at the point of regulation, and will apply to percentage of total emissions budget; (2) a common use limit should exist across jurisdictions, although partners are free to allow fewer but not more offsets; (3) offset limit should be the same % of compliance obligation in each compliance period; (4) no carryover of offset limit, as flexibility is addressed by allowing allowance banking • BC Carbon tax - individual jurisdictions may utilize fiscal measures such as carbon tax to internalize the price of carbon as expected through the regional cap-and-trade program • Threshold for Compliance and MRV - 25,000 metric tons CO2 annual emissions for entities or facilities subject to compliance; 10,000 metric tons for threshold for reporting; 3rd party verification required; each jurisdiction to establish reporting requirements • Aggregate regional cap = sum of the WCI Partner jurisdictions allowance budgets Auction - Partners will auction a minimum of 10% in the first compliance period; This minimum percentage will increase to 25% in 2020, with aspiration to a higher auction percentage over time, possibly to 100%.

22. Setting WCI Partner allowance budgets • Budget based on the best estimate of expected emissions for sources covered in the cap-and-trade program in the WCI Partner jurisdiction in 2012 • Population growth, economic growth, voluntary and mandatory emission reductions, and other factors will be considered in making the estimate. Each WCI Partner jurisdiction’s allowance budget will be adjusted to account for the production and consumption of electricity megawatt hours within each WCI Partner jurisdiction, population growth, and the share of total WCI Partner jurisdictions emissions in 2001 through 2005. Each WCI Partner jurisdiction will make a one-time contribution of 1% of their 2012 budget to be allocated to make these adjustments. • In 2015 – Phase 2 sectors added to additional trajectory • Once established, each WCI Partner jurisdiction’s allowance budget will not be adjusted except as necessary to account for: • Changes in WCI membership; • Changes in scope or thresholds; or • Data found to be incorrect or inaccurate that were used to determine the cap or the WCI Partner jurisdiction allowance budgets, which may become apparent, for example, after the start of mandatory reporting.

23. WCI Sector Specific Provisions • The point of regulation is the First Jurisdictional Deliverer (FJD). For sources within WCI jurisdictions, the FJD is the generator. For power that is generated outside the WCI jurisdictions, the FJD is the first entity that delivers that electricity over which the consuming WCI partner jurisdiction has regulatory authority. • Transportation fuel combustion covered upstream. • Decision regarding carbon neutrality of biomass left to each implementing WCI jurisdiction. • Combustion of pure biofuels, or the proportion of carbon dioxide emissions from the combustion of biofuel in a blended fuel (e.g., B20 or E85), are not included in the cap-and-trade program, except for purposes of reporting.

24. Motivation: Projected CA Losses from Climate Impacts Apr 2009 Biennial California Climate Action Team Report ● Actual greenhouse gas emissions are outstripping 2006 projections ● Changes in water availability could result in gross revenues losses of up to $3 billion by year 2050 ● Average annual monetary impacts due to home loss may be on the order of $2 billion per year by mid-century and up to $14 billion per year by the end of the century. ● Statewide electricity demand may increase by up to 55 percent by the end of the century.

25. California Cap-and-Trade: Preliminary Design Elements • Compliance period: Preliminary Draft Rule (PDR) suggests 3 years with partial annual surrender to address bankruptcy, dissolution, etc. concerns (1 year periods still being considered) • Phase-in?: inclusion of all sectors from first compliance period starting in 2012 is still being considered (otherwise first compliance period would include only electricity generation and large industrial sources/processes at or about 25,000 MTCO2E) • Allowance Allocation? – at the time of publication of the PDR, the CA Air Resources Board was still awaiting recommendations of the Economic and Allocation Advisory Committee and thus did not include allocation provisions; April 2010 Draft Rule expected to contain allocation provisions • Offsets – a covered entity may use offsets for up to 4% of its required surrender of allowances; rules from offsets from jurisdictions outside CA not yet defined; PDR noted a preference to support movement toward sector-based crediting in developing countries; entity submitting offset responsible for replacing deficient offsets • Localized impacts – direct, indirect and cumulative impacts from cap-and-trade still being studied; Public Health Advisory Committee • Linkage – criteria that an external program would have to meet to be approved still not defined, but harmonization of offset certification and MRV systems expected; meant to address leakage issues • Enforcement – compliance provisions still under development; CCAP and Paul Hastings law firm convening compliance dialogue with counsel and other stakeholders from NGOs, regulated entities and 3rd party market participants to identify points of convergence and divergence to be presented to ARB • MRV – mandatory reporting regulation became effective Jan 2009 – revisions expected Spring 2010; list of accredited verifiers – verifier produces an annual verification statement for ARB Banking – will be allowed to encourage early reductions; rules still need to be fleshed out

26. Size of California Cap-and-Trade Program • Covers 85% of state GHGs • California Air Resources Board (CARB) preliminary cap-and-trade allowance budget projections total 2.9 billion allowances over nine years, from 2012 to 2020. • An average allowance value of $10/allowance at auction would yield $29 billion in revenue during that period, presuming 100% auction. • If CARB follows through with the Economic Allocation Advisory Committee recommendation to reserve 25% of auction revenue to finance public investment (and other initiatives), then around $7.25 billion would become available.

27. Allocation Under CACap-and-Trade • Economic and Allocation Advisory Committee – formed May 2009 – Jan 2010 delivered recommendations re: allowance allocation and use of value • ARB will address allowance allocation in cap-and-trade rulemaking; but use of allowance value (auction proceeds) will be determined by State legislature • Move toward “cap-and-dividend” with EAAC recommendation that 75% of value be returned to households through lump sum payments (or possibly tax cuts with payments first to low-income households to avoid regressivity) & remainder devoted to investments • Recommended creation of independent Investment Advisory Board, criteria for selecting investments, (cost effectiveness, fairness, accountability and transparency), & investments to include: low cost emissions reductions, job training, improvements to disadvantaged communities, adaptation and environmental remediation • Recommended that auction be primary – and perhaps exclusive (100%) – method of allowance distribution; with free (output-based) allocation only recommended for energy-intensive, trade exposed industries where an alternative form of border adjustment is not practical • Auction design – uniform price, sealed bid (single round), double auction recommended

28. California AB32 - Sectoral Approaches • Electricity - for imported electricity – the covered entity will be the first entity to place power onto the California grid; AB32 measures for energy efficiency, RPS - increasing percentage of electric load met with renewables to 33% by 2020: Renewable Energy Transmission Initiative (RETI) identifies transmission projects need to meet renewable energy goals; million solar roofs program requiring publicly-owned utilities to adopt, implement and finance solar incentive programs; feed-in tariff program • Forestry – 5 mmt target representing no net loss of carbon sequestration; AB32 scoping plan assumptions may be flawed - Jan 2009 USFS study shows federal forests lands will become carbon emitters by 2050; interagency forest working group has subcommittees that have developed work plans but no real movement toward a compliance program has been accomplished since Dec 2008 • Agriculture – not included in Dec 2008 AB32 Scoping Plan; voluntary protocols for manure digesters were adopted as early action measures; $60 Billion/year wine industry through to be vulnerable to anticipated climate change impacts; Strategic Growth Council created in Sept 2008 (cabinet level committee – coordinates state agencies in a variety of tasks including assisting local and regional governments to create sustainable communities and protecting natural resources and agricultural lands) • Industrial – includes measures for energy efficiency audits of large industrial sources, for oil and gas recovery operations and transmission/refineries + Recycling & Waste Measures; High Global Warming Potential Gas Measures; GreenBuildings and Water Sector Measures

29. 4 Proposed Options for Calculating Surrender Obligations for Fuel Deliverers Four proposed options for how transportation fuel deliverers’ surrender obligation is determined under CA cap-and-trade: • surrender obligation is based on net “carbon content” (combustion emissions for gasoline and diesel, zero for biofuels); • surrender obligation for gasoline, diesel, and biofuels is based on direct combustion emissions; • surrender obligation is based on net “carbon content” plus some portion of the fuel’s lifecycle emissions; and • surrender obligation is based on the lifecycle carbon intensity factor (as determined by the Low Carbon Fuel Standard).

30. California Transportation Strategies Examined Climate strategies have created a vast new market characterized by the Wall Street Journal as a “new gold rush”. • LCFS – program established in 2007; reduction of at least 10 percent in the carbon intensity of California's transportation fuels by 2020; life cycle analysis includes indirect land use analysis- in 2009 Exxon-Mobil entered into a $600-million partnership with Synthetic Genomics – a San Diego biotech company to develop fuels from algae • Pavley I and II (possibly to be combined with ‘feebates’); CA only state allowed to adopt its own vehicle standards (CA is 8th largest economy in the world) – but it must be granted a waiver by USEPA; waiver was granted in June 2009 • Medium and Heavy Duty Vehicle standards – to encourage hybridization and aerodynamic efficiency • LEV and ZEV – Lower Emission Vehicle program and Zero-Emission Vehicle program (includes hydrogen fuel cell and batter electric vehicles) & near-zero emission vehicles (plug-in hybrids, conventional hybrids, compressed natural gas vehicles); State role in ZEV commercialization with required environmental performance stickers to inform and education consumers; federal government awarded more than $500 million to Fisker Automotive (Irvine, CA) for electric vehicle development • SB375 – Smart Growth Strategies to reduce vehicle miles traveled; ARB must propose draft regional targets in June 2010 and adopt final targets by Sept 30, 2010 • AB118 – Alternative and Renewable Fuel and Vehicle Technology Program – CEC authorized to spend up to $120M/year from 2008-2015 to develop, demonstrate and deploy innovative fuel/vehicle technologies

31. Regional Greenhouse Gas Initiative • RGGI is a regional cap-and-trade program involving ten Northeast and Mid-Atlantic states that started on January 1, 2009. • Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. • Currently includes only the power sector. • Potential for future expansion to other sectors.

32. ICF Forecast:CO2 Allowance Prices – Package Case

33. Allowance Distribution • Most allowances (~87%) distributed through a quarterly auction. • 25% of allowances must be sold via auction, with proceeds used for consumer benefit. Remaining allowance allocation choices left to each state. • Frequent monitoring of market activity to identify attempts to manipulate prices in the auction and/or the secondary market.