Regional markets take center stage as states weigh EPA proposal

Source: Jean Chemnick, E&E reporter • Posted: Friday, June 20, 2014

The nine Northeastern states that participate in the Regional Greenhouse Gas Initiative hailed U.S. EPA’s proposed carbon rule for existing power plants that would let them comply through their interstate cap-and-trade emissions system.

But RGGI members are now studying the rule’s fine print to see how EPA emission targets line up with reductions they’re already making and whether responsibilities are fairly divided across all 50 states.”I’m really excited that they’ve not only allowed RGGI to participate, but they’ve recognized that a regional approach would be the most cost-effective possible,” RGGI Commissioner Kelly Speakes-Backman said in an interview.The June 2 proposal makes clear that EPA would likely approve a state implementation plan that takes a regional approach to compliance. It allows states to petition for a two-year extension on the 2016 deadline to submit plans if they intend to join a regional compact.

And it justifies its assumption that many states can achieve emission reductions through conversions of coal-fired power plants to natural gas, zero-carbon energy deployments and demand-side efficiency. Independent system operators (ISOs) and regional transmission organizations (RTOs) already manage many regional power markets and can add cutting carbon to their already wide-ranging priorities.

“One of the things we like about this EPA rule is that it allows regional markets to work,” Speakes-Backman said. “It follows the natural path of electricity itself.”

But while the proposal validates RGGI’s approach, Speakes-Backman said that member states are still asking questions.

One issue is the process by which EPA’s proposed rate-based standard for each state could be converted to mass carbon budgets to allow states to participate in a cap-and-trade program. The draft allows for this conversion, but Speakes-Backman said RGGI members were still trying to understand how it would be calculated and hoped to schedule a call with EPA staff to facilitate that.

Another concern is whether EPA’s requirements can be satisfied with emission reductions that RGGI states already have in the pipeline. The compact has already trimmed emissions 40 percent since 2005 and expects to cut them by 50 percent compared with that year by 2020. But EPA proposes additional cuts for the nine states — locking them in to emissions rates that are lower than the national average. And while Speakes-Backman said those targets were likely in line with what the compact would have achieved anyway in future years, its analysts are still assessing that.

Those questions are likely to dominate RGGI states’ comments to EPA, but there’s also a third: Does the rule require all regions to do their fair share of the work of reducing emissions?

“If they’re giving some states a pass and other states a harder goal, then yes, I think it does matter,” Speakes-Backman said. “But it’s not our focus right now. Our focus right now is to make sure that each of our states individually and as a region can comply.”

David Cash, commissioner of the Massachusetts Department of Environmental Protection, said RGGI states were also working to understand whether and how EPA gave them credit for that combined 40 percent reduction since 2005. The agency claims not to have used any base line for state reductions, but those who track the rule say it has in effect tapped 2012 as the year from which emissions reduction measures would be credited.

“It’s unclear at this point how much of the emissions reductions that we’ve already gotten will be counted, and we’re still digging in to that and not sure where that’s going to land,” Cash said. “To the extent that we think we have not gotten credit, then our comments will reflect that.”

Western govs weigh regional program

RGGI officials have billed their cap-and-trade program as a “plug and play” model that other states could either join or borrow from to set up their own regional programs.

Speakes-Backman said that she had not personally been involved in any discussions about new members, but states have reached out in the past.

“I do know that we’ve had a lot of inquiry over the years, and especially leading up to the EPA guidelines being issued,” she said. “We’ve had a lot of conversations with states wondering how we did it.”

Membership has advantages, according to a report by the Boston-based Analyses Group that estimated the program yielded $1.6 billion in net economic benefits to participating states from 2009 to 2011.

And an expanded program could provide existing members with new, cheaper opportunities for reduction and compliance, Cash said.

“Certainly there are benefits from more states joining, expanding the region under which a market-based system would operate,” he said.

RGGI states are not the only ones that are taking stock of the proposal or looking at ways they might comply regionally. But it is not clear that more politically conservative, fossil fuels-driven states to their west and south would reach for the same kind of cap-and-trade program New England and the Mid-Atlantic have chosen.

Former Colorado Gov. Bill Ritter (D), who now heads the Center for a New Energy Economy at Colorado State University, said in a brief interview that he plans to initiate talks with Western governors about possible regional approaches to compliance. These would start with stakeholder meetings during EPA’s public comment period, which ends Oct. 16.

He declined to give details or name possible participants, but he said the integrated nature of the Western power grid makes a regional program practical.

Ritter said he expects states to air their frequently cited concerns about EPA’s authority to regulate carbon dioxide under the Clean Air Act when they submit comments this summer and fall. But he said they’d also have their air agencies and executive branch offices assess how EPA arrived at its targets for their state and ask it to correct any inaccuracies.

States should ultimately write implementation plans that are approvable by EPA, rather than inviting the agency to impose a federal rule, he said.

“I could make a very good case that states — even states that have concerns or want to move forward cautiously — that it’s still to their benefit to be at the table for implementation plans,” he said, adding that in the West those should be regional.

Call for a model interstate trading rule

While EPA’s rule envisions a regional approach to multistate cooperation, Conrad Schneider of the nonprofit Clean Air Task Force said that is not the only — or even the best — way to go.

“If everybody in a region has the same resources, that’s not a great place to trade with each other,” he said.

States might benefit from finding more distant trading partners with substantially different power mixes and reduction opportunities. For example, if the Great Plains states lack underutilized natural gas capacity to offset their coal use — a shift that is one of the “building blocks” of the EPA draft — they might prefer to buy allowances from another region that has that resource rather than make reductions in another way at home or among their neighbors.

“What’s really needed is a model interstate trading rule that states could easily join that would facilitate least-cost compliance,” Schneider said. EPA has so far declined to provide a model rule.

But the National Association of Clean Air Agencies is working on a proposal that it hopes will fill that purpose.

“It will address rate-based and mass-based scenarios, with and without trading,” NACAA Executive Director Bill Becker said. “It will cover a range of scenarios that different states will choose.”