Regulatory Platforms for CO2 trading regulation

1. Regulatory Platforms for CO2 trading regulation • Last Week Discussion of Agencies, Purpose and How Operate that may be in charge of Carbon Trading at the US Federal Level • CFTC, FERC, SEC? • Really two (3?) separate components • Primary, Secondary

2. Last Week • Particular Focus on CFTC • Control of Market Manipulation • Focus of Concern in Carbon Trading • Secondary Market

3. Primary Market • Definition • Allocation • Monitoring for Fraud • Enforcement – Surrender of Allowances

4. Focused on Federal Agencies • But Could it be Accomplished by Private Sector? – Definition, Monitoring

5. Environmental Protection Agency • Created by the CAA 1970 • Rulemaking/ Implementation • Monitoring • Enforcement • With States – Joint Federalism

6. EPA and SO2 • Legislation • Implementation • History

7. Legislation • Permanent Cap on SO2 emissions that may be emitted nationwide at about 50% of 1980 total (by 2008 and thereafter). • Two phases – phase I – 1995; phase II- 2000 • Phase I – 263 units at 110 highest emitting facilties • Allocated for free based on emission rate of 1.20 lb/MMbtu and historic utilization

8. Legislation cont. • Phase II – added 3,456 units • Allocations under phase II effectively halved • Some allowances held back for auction – 5% for new sources • Early reduction credits if reduce beyond what was required in compliance section\ • Allowances for other uses (renewable energy, etc. . . ) • Banking allowed

9. Tracking • 40 CFR 73.30, 73.31, 73.32 • Tracking System • Accounts • Alternate account representative • Can be bought by anyone in the primary market

10. Penalties • $2000/ton, adjusted for inflation from 1990 dollars assessed for excess emissions • In 2007, $3,042/ton

11. History • 35% reduction in SO2 from 1990 to 2005 • In 2005, 9.5 million new allowances granted • Between 1995-2004, sources had emitted less than their allowances, so there were an additional 6.8 million unused allowances available • Thus, 16.4 million SO2 allowances available for 2005 or any year thereafter • In 2005 sources emitted 10.2 million tons, subtracting from the surplus

12. Market Activity • In 2005, nearly 5,700 private SO2 allowance transfers involving 19.9 million allowances recorded in the EPA’s tracking system • After initiation, price dropped from $400+ to ~$175 • 2004/2005 reaction to future emission reduction by CAIR; $700 - $1,550… • Why? What would be reduced • Back to $600 at end of June 2006

13. Monitoring • Each Affected Source (those that must surrender emissions allowances at the end of the year) must have continuous emissions monitoring

14. Trading and The Market • EPA delegated authority to conduct auction and trades to the Chicago Board of Trade • But trades can occur privately • CFTC has jurisdiction over trading in the SO2 futures market (without explicit legislative authority) • The EPA did not have allowance and tracking program ready when first sales and auction with through.

15. RGGI Auction • RGGI representatives emphasize need for market monitor – fair, transparent, competitive

16. RGGI Auction Results 16