Overview of Cap-and-Trade Legislation Presentation by Matt Ward Climate Communities July 30, 2008

1. Overview of Cap-and-Trade LegislationPresentation by Matt WardClimate Communities July 30, 2008

2. Federal Role in GHG Reductions • Setting overall national target for GHG reductions in set time period • Setting uniform national approach (that accounts for regional issues) • Reducing costs and inefficiencies of regulation • Fostering transition to a green economy

3. Advantages of Cap-and-Trade Approach • Command-and-control (set emission rates and control technologies) is inflexible, costly & stifles market and technological innovation • Carbon tax is politically challenging, with no certainty on cap & emissions reductions • Successful precedents with Acid Rain and NOx trading programs • Market-based system results in overall economic efficiency through price on carbon control • System fosters technology development & innovation

4. Basic Cap-and-Trade Structure • Overall national annual cap on carbon-equivalent GHG emissions, declining over time to desired total reductions • Under this cap, “allowances” (rights-to-emit) would be distributed and/or sold to covered emitters and/or to other targeted sectors • 1 ton of carbon equivalent = 1 allowance • Covered emitters must hold sufficient number of allowances to cover annual GHG emissions • Emitters who reduce GHG efficiently have extra allowances to sell on open market, emitters who cannot reduce efficiently must buy allowances on market

5. Comparison of Economy-wide Cap-and-Trade Emissions TargetsIncludes Legislation Introduced in the 110th Congress as of May 30, 2008 Source: Pew Center on Global Climate Change

6. Covered Sectors of Economy • Lieberman-Warner approach: • Coal-fired and gas-fired electric utilities, fossil-fired manufacturers, petroleum refiners, natural gas processors, possibly others under EPA rule • 2,100 sources • 87% of U.S. economy • Upstream cap-and-auction • Sectors not typically covered: • Farming, local governments, individual vehicle tailpipes, small sources

7. Cap-and-Trade Operation • EPA establishes system for issuing, recording, transferring & tracking allowances • Other federal boards to oversee and support markets and technology incentives • Target date for starting 2012 with key targets in 10-20 years and by mid-century • Measurement, monitoring and reporting of emissions & allowances critical to successful system • Cost containment approaches – offsets, borrowing, banking, compliance period flexibility, cost safety valves • Enforcement (pay 3x market value or $200)

8. Auctions vs. Free Allocations • Free allocation of allowances to covered emitters based on historic emissions baseline • Advantage – easy to determine recipients; recipients do not need resources to obtain; institutional precedents • Disadvantage – some industries will pass compliance costs onto customers anyway, reaping “windfall” profits; no proceeds for investment in transition and green economy • Auctions require sources to bid and buy allowances • Hybrid or shifting allocations

9. Targeted Distribution of Allowances & Auction Proceeds • Transition assistance – carbon intensive states, carbon intensive industries, utility customers, carbon workers, CCS technologies • Green activities – local governments, green buildings, transit, renewables, efficient manufacturing, advanced vehicles & fuels, low carbon technologies • Adaptation – vulnerable states & localities, wildlife • Public benefits – farmers, foresters, international • Consumer dividends

10. Allocation of Cap-and-Trade Resources under Lieberman-Warner Source: Office of Senator Joseph Lieberman

11. Lieberman-Warner Allocations (cont.) Source: Office of Senator Joseph Lieberman

12. Offsets • Regulated entities could comply by purchasing GHG emissions reductions elsewhere: • Activities outside the cap (e.g., landfill gas recovery) • Terrestrial carbon sinks (forestry, no-till farming, international reductions) • Different views on offset levels • Offsets must be real, measurable, verifiable, additional & enforceable • Proposal for new offset approaches by localities

13. Issues to Resolve • Stringency of national carbon cap • Regional issues • Technology availability for GHG control, sequestration, transformation • Energy price impacts (gas, utility bills) • Utility issues – nuclear, coal, auctions • Federal preemption of state & regional trading • Worker transition • Cost safety valves • Involvement of developing countries • Complicated system