Calif. issues first-in-U.S. compliance plan

Source: Anne C. Mulkern, E&E reporter • Posted: Thursday, August 4, 2016

California’s landmark cap-and-trade program for carbon emissions and proposed amendments to extend that system will be used to comply with U.S. EPA’s Clean Power Plan, the state said yesterday.

The Golden State is the first in the country to publish a draft blueprint for fulfilling the federal agency’s mandate, aimed at cutting existing power plant emissions, said Stanley Young, spokesman for the California Air Resources Board.

“We’re the first out of the gate, and we’re doing it because we want to make sure that we align” with CPP rules “in the later years of the [cap-and-trade] program,” Young said. As well, he added, it’s “a proof of concept for other states, to demonstrate that this is a program that can be adapted to each state and that can be set up in a way that we can form a regional association.”

ARB’s draft plan comes as a court weighs the validity of EPA’s Clean Power Plan. The Supreme Court in February put EPA’s rule on hold, pending an opinion on its legality from the U.S. Court of Appeals for the District of Columbia Circuit and perhaps until the Supreme Court ultimately decides the case. That could take years.

California is developing a compliance plan regardless. After the Supreme Court’s action, ARB Chairwoman Mary Nichols said that “California will not slow down our drive for clean air, renewable energy, and the good jobs that come from investing in green technologies.”

Young said yesterday that the state “chose to do it as a kind of insurance policy.”

ARB staff said they anticipated submitting the proposed plan, if approved by the board, to EPA “once the stay has been lifted.”

EPA’s CPP compliance periods begin in 2022, with full reductions mandated by 2031. ARB is proposing to comply with CPP via the “state measures” option, which gives states the choice to develop and use their own rules to achieve required cuts to greenhouse gas emissions.

Under ARB’s draft blueprint, power plants and other energy generating units (EGUs) that participate in cap and trade in addition to that state requirement would have a federally enforceable mandate to comply because of CPP. California under CPP must meet an emissions target of a 13.2 percent rate reduction from 2020’s level by 2030. It looks likely to hit that number.

The only state with an economywide carbon cap, California aims to cut its greenhouse gas pollution to 1990 levels by 2020. It’s writing regulations to reach 40 percent below that by 2030. Even in a high-emissions scenario, which could come about through higher-than-expected electricity demand or a drought that limits hydropower production, the state expects to be about 2 million tons below EPA’s 2030 target (ClimateWire, Feb. 25).

“The Cap-and-Trade Program establishes a declining limit on major sources of GHG emissions, and it creates a powerful economic incentive for major investment in cleaner, more efficient technologies,” ARB said in the draft. Other state rules will provide any assistance. Those include California’s energy efficiency standards and a mandated level of renewable power for electricity generation.

“As California continues to seek greenhouse gas reductions from the electric power sector, these complementary state programs will help ensure that the State meets and exceeds CPP targets,” the ARB draft said.

California’s CPP compliance plan would affect 246 energy generating units at 93 facilities owned by 67 companies, plus three units under construction. The affected units comprise 62 steam generating units, 121 combustion turbines and 63 steam turbines, the plan said.

ARB will hold a meeting on the proposal Sept. 22. The draft will be open to comments from interested parties through Sept. 19.

Creating a ‘backstop’ rule

Cap and trade in California covers about 400 industrial facilities that emit more than 25,000 tons of carbon dioxide equivalent per year. They must submit allowances for each ton of that pollution. They can buy those at auction or acquire them through trading.

It’s unclear whether ARB has the authority to go beyond 2020 with cap and trade currently, because of potentially limiting language in the original climate law, A.B. 32, and because of a lawsuit challenging the legality of cap-and-trade auctions. The suit argues that the program is subject to a law requiring a two-thirds legislative majority to approve taxes.

ARB last month released amendments to the plan that envision a carbon market through 2050 with increasing allowance prices. The amendments would establish decreasing emissions caps for covered entities through 2031 to reach 40 percent below 1990 levels and would include preliminary caps through 2050 “to signal the long-term trajectory of the program to inform investment decisions” (ClimateWire, July 13).

Other proposed amendments would provide for compliance with the CPP. California divided its cap-and-trade program into three-year compliance periods. At the end of each, every facility must surrender all allowances to cover emissions for the full three-year period. The CPP has two-year compliance periods, “so we adjusted to align with it,” Young said.

The ARB proposal includes a supplemental “backstop” policy for power plants, in what the draft described as the “extraordinarily unlikely” event that cap and trade and other existing mechanisms fail to get those facilities in line with EPA’s reduction requirements.

“Projected affected EGU emissions are well below — and in many cases over ten million short tons below — federal targets even under relatively conservative projection scenarios,” the ARB draft said.

The backstop is a trading mechanism. If California EGUs exceeded the state’s CPP emissions limit in a given year, ARB staff would look at the tons of emissions over the required cap. For the next year, it would lower the emissions cap by the overage amount, and they would have to make up the amount.

“So when you average out the two years, you hit the standard on two years,” Young said.

ARB would create a pool of special allowances equal to the emissions from all facilities in the first year that the overage occurred, which it would give at no cost to California EGUs. Affected EGUs could trade backstop allowances among themselves. If one facility was very good at cutting emissions, it could sell its extra allowances to other EGUs having trouble, Young said. Affected EGUs would be required to retire backstop allowances for each ton of carbon emitted during the backstop compliance period, the proposal said.

“Essentially, we would establish a secondary market under the CPP structure,” Young said. “I’m sure that it would develop some kind of pricing mechanism in order to make it work.”

“We believe it would take, like, an asteroid hitting the Earth before this happened,” he joked. “Nonetheless, we have this as a backstop. And we developed it so that this energy sector would be able to hit sector-specific targets, in essence independent of larger programs.”

Utilities Pacific Gas and Electric Co. and Southern California Edison Co. said that knowledgeable people were not immediately available to comment on the plan. San Diego Gas & Electric Co. did not immediately respond to requests for comment.

The Environmental Defense Fund praised the Golden State’s actions on emissions cuts.

“California has been leading the country in reducing dangerous climate pollution, protecting families from unhealthy air, and growing a stronger clean energy economy,” Erica Morehouse, a senior attorney for EDF, said in a statement. “Today’s proposed Clean Power Plan blueprint is another step toward a safer and healthier future — one we reached through bipartisan solutions and Golden State innovation — and we look forward to reviewing the proposal.”

EDF said that California’s proposal “demonstrates that states, including our largest states that serve the electricity needs of tens of millions of people and boast vibrant economies, can develop regulatory frameworks to comply with the Clean Power Plan swiftly and in a way that is consistent with existing state policies.”

California’s progress on state plan development, EDF added, “will not only help the state ensure compliance with the Clean Power Plan but will provide important information” for those across the West “working to develop compatible, durable solutions for securing cost-effective emissions reductions.”