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Climate Change 2008: Getting Ready for Carbon Trading, Platforms and Resources

Pennsylvania Environmental Law Forum, April 2008
Sustainable Pittsburgh Climate Conference, March 2008

Harry F. Klodowski, Esq.

Progress towards regulation of North American Greenhouse Gases (GHG) developed at a breathtaking pace in the last couple of years and will continue in the next few years. Voluntary GHG measurement programs, including emission inventory, GHG accounting, verification, and registration programs will cover most of the US in 2008. Mandatory regulation of some GHG sources also advanced, with a large number of states and provinces promising to begin some form of GHG regulation covering some industries between 2008 and 2012. This paper will summarize the most important GHG Trading Platforms for Pennsylvania, and discuss implications and resources for the quantification and preservation of GHG emissions.

1. GHG Trading Platforms

a. Introduction

Much of the United States (22 states)and Canada are now theoretically covered by a regional multi-state GHG cap and trade regulatory program which is mandatory for electric generating unit (EGU) sources and usually voluntary for other industry sectors. The effective date for mandatory caps varies, but all are scheduled to be in effect in some form between 2008 and 2012. There are two major gaps in the coverage of these programs; the Southeast U.S.; and Midwestern states including Pennsylvania, Ohio, West Virginia and Indiana. The "Midwestern Gap" is important because it includes Pennsylvania, but also the high GHG emission density states of West Virginia, Ohio and Indiana, all of which have significant coal fired electric generation or other industrial sources. Pennsylvania's status as a major exporter of electric power, outside the boundaries of the regional regulatory systems, leads to some interesting implications (and business opportunities) including a more important role for "leakage" into the regulated areas.

States to the north and east (including NY, NJ, MD) are in the Regional Greenhouse Gas Initiative (RGGI) program; states to the west are in the new Midwest Regional Greenhouse Gas Reduction Accord, where Ohio is an "observer".

The Chicago Climate Exchange, Inc. is a voluntary program where GHG reductions can be preserved, bought and sold. These regional North American programs incorporate conceptual aspects of the European Union Emission Trading System (EU-ETS) and the Clean Development Mechanism (CDM) administered by the UN under the Kyoto protocol. (Theoretically the US cannot participate in CDM as it did not sign the Kyoto treaty, but program concepts have carried over to the North American programs discussed here. A list of the Kyoto Annex 1 countries that can participate in CDM is given in the web references). There are other regional regulatory programs but the five mentioned above are most important for Pennsylvania and are discussed in this section.

b. RGGI

The Regional Greenhouse Gas Initiative (www.rggi.org) is a cap and trade system to limit CO2 emissions from powerplants, but it also recognizes offsets from other emitters and reaches beyond EGU sources, and beyond CO2. The ten participating states are NY, NJ, CT, MA, NH, VT, RI, MD, DE and MN. Pennsylvania was an observer in the process. The RGGI process started in 2003 and RGGI is preparing to distribute allowances this year for the first year of trading in 2009. Each state must promulgate regulations implementing RGGI. The Memorandum of Understanding (MOU), amendments and model state rules are on the RGGI website.

Powerplants rated at 25 MW or more, burning more than 50% fossil fuel are regulated. The emission cap was set at 120 mmt CO2 between 2009 and 2014, and will decline 2.5% per year in 2015 to 2018. Emission Allowance distribution is determined by the states, but 25% are to be used for a "consumer benefit or strategic energy" public benefit purpose.

Setting up a cap and trade system requires significant policy and technical decisions. Although RGGI has been in development for 4+ years, there are some significant questions that have not been answered: will EGUs receive a grandfathered allocation? Some states have proposed all allowances be sold at auction. Will the allowances be auctioned to EGUs only, or to anyone? Will there be a minimum or reserve price for auctions? The 10 state agency heads were supposed to decide "core principles" for the auction by April 2008, hire a contractor to run the auction, and hold the first auction in June 2008 for 2009 allowances. As states are supposed to incorporate the auction principles into state rules, it appears the 2008 auction may be held on somewhat shaky legal authority.

RGGI Generators can reduce emissions, purchase allowances, or use emission offsets from non powerplant sources. RGGI (and other programs that ostensibly regulate only CO2, or only EGUs) moves beyond one industry and one gas when it allows offset projects. Approved RGGI offset project classes include:

1. Methane Capture - farms

2. Methane Capture - natural gas operations

3. Gas/Oil End use Energy Efficiency

4. Afforestation

5. SF6 Capture from Utility Equipment

In addition, the RGGI Model Rule requires offsets be "real, additional, verifiable, enforceable and permanent", and not duplicate renewable energy credits (RECs). Offsets within RGGI states are worth more than those from outside the region. Offsets can be used for up to 3.3% of emissions and can come from anywhere in the U.S. (with a significant cap and trade system, or a MOU with RGGI), but there are adjustments if allowance pricing exceeds $7/t, possibly expanding to EU-ETS and Kyoto CDM projects.

c. Midwest Regional GHG Reduction Accord

To the west, nine states (and Manitoba) announced formation of the Midwest Regional Greenhouse Reduction Accord ("Midwest Accord") on Nov. 15, 2007. The states of WI, MN, IL, IO, MI and KS (with OH, IN and SD as observers) promise to develop a multi-gas regional cap and trade system and model rule in the next year, and implement it within 30 months (April 2010). There is reason to be skeptical this schedule is realistic. The website contains a beautiful color glossy brochure of about 4 pages and very little detail on the future program. A 36 page "Energy Security and Climate Stewardship Platform" for the Midwest was released the same day. Midwest Accord plans to use The Climate Registry for accounting of GHG emissions. The brochure mentions the Accord will promote the region's "world class renewable energy resources".

d. Chicago Climate Exchange, Inc. (CCXI)

The CCXI opened in 2003 as a privately owned, voluntary registration and trading mechanism. It covers the six Kyoto GHGs (CO2, CH3, NOx, PFCs, HFCs, SF6) and is audited by a privately held securities auditor. Participating members are required to reduce emissions 1% per year from 2003 to 2006 and 6% below baseline by 2010. The initial baseline was the average from 1998-2001.

CCXI members (over 300 industries, governments, brokers, NGOs) sign a written agreement incorporating an over 200 page Rule Book, theoretically binding all members. Trades are done on CCXI Carbon Financial Instruments TM contracts. A CFITM contract is 100 metric tons of CO2 equivalent.

CCXI offset generation projects include landfill and livestock methane destruction, renewable energy, foresting and no- till agriculture. CCXI has been criticized for recognizing offset projects such as no till agriculture, which are arguably not "additional" or "permanent" reductions, and generally being too friendly to industry. For example, CCXI has an annual emissions inventory component, but doesn't count emissions of more than 107% of baseline, making some emissions increases invisible. CCXI has also been lauded for attempting to take on the agricultural and forestry mitigation measures, which are difficult to quantify but still represent perhaps 40% of GHG emissions on a worldwide basis.

Chicago Climate Exchange, Inc. has registered service marks for six types of offsets, including landfill gas, agricultural methane, forestry offsets, soil offsets, coal mine methane collection, renewable energy systems, energy efficiency projects, Brazilian offsets, and early action offsets. As a for profit enterprise, CCXI transactions have fees that can be substantial. There are annual membership fees for five classes of members of $5,000 per year, an "enrollment fee" of $5,000 to join, and transaction fees for registration, verification and trading.

e. Kyoto Protocol, and CDM

The 1997 Kyoto Protocol (KP) set "binding targets" effective Feb. 16, 2005 to reduce GHG emissions 5.2% below 1990 baselines by 2012, using market mechanisms. The Clean Development Mechanism (CDM) set up by the UN in 2000 allows developing countries to participate in the global emission trading market under the Kyoto Protocol, and allows industrial countries to obtain cheaper reductions. The KP was limited in its rather modest reduction target, its time frame and the number of countries participating. What will replace it in four years is a subject of considerable speculation.

According to the World Bank, the CDM may have lowered the cost of reductions for developed countries. The projection is that 1600 projects may reduce 2 billion CERs (Certified Emission Reductions, with other gases standardized to CO2 impact) by 2012. The ostensible purposes of the CDM for underdeveloped countries were to promote domestic sustainable development and contribute to reductions of global GHG emissions. Almost half of CDM projects were end of pipe controls on HFCs, PFCs, methane or NOx, which were the low hanging fruit of GHG reduction. CDM has been less successful in fostering sector-wide decarbonization or climate friendly policies in undeveloped countries.

2. What To Do Now

Many companies and municipalities are taking some form of action to reduce use of energy, reduce GHG emissions, or implement other types of sustainable practices. There are tools described below to calculate GHG baseline emissions and the impact of mitigation efforts. There are a number of avenues to register and preserve these reductions. If your client has done something to reduce these emissions, you should register and preserve them. We have discussed some of the GHG reduction methods as we analyzed programs above, but there are many ways to reduce energy consumption, improve efficiency, or reduce GHG emissions. When looking for reductions, remember CO2 is not the only greenhouse gas. There are a number of industrial gases with greenhouse impact to look for. GHGs are described in terms of Global Warming Potential (GWP). CO2 has a GWP of 1, CH3 (methane) has a GWP of 21, N2O has a GPP of 310, and the Hydroflurocarbons and perflurocarbons have GWPs in the thousands.

a. Get Ready For Mandatory Multisector GHG Inventory

USEPA is preparing a mandatory GHG emissions inventory for all industry sectors under authority of the federal Omnibus Budget Act, H.R.2764, public law no.110-116. A draft regulation is due June 2008 and it is supposed to be final by July 2009. There may be reason to believe this schedule may "slip", but there are other international and federal programs that EPA may "borrow" program elements from, including USEPA's Climate Leaders program and US DOE-EIA's "Section 1605 b" program. EPA has published an annual GHG inventory since 1990, which is submitted to the UN. See www.epa.gov/climatechange/emissions/usinventoryreport.html . UN's IPCC published inventory guidelines in 2006. See http://www.ipcc.ch/.

b. Climate Leaders

In 2002 President Bush announced a voluntary reduction goal of 18% reduction by 2012. Two useful results were the EPA "Climate Leaders" program to encourage companies to develop comprehensive long term strategies including inventories and reductions, and recognition of their voluntary efforts, similar to the "Energy Star" program. 158 (mostly major) companies representing 10% of US GDP and 7 million jobs have committed as members.

Members are required to develop a customized inventory covering all US operations, for six GHGs, including both direct emissions, and indirect emissions from electricity, heat and steam. Optional "modules" cover international operations, offset projects, travel and commuting and product transport. Members create an Inventory Management Plan, and GHG reduction goals

EPA's technical guidance includes very recent (February 2008 in some cases) guidance modules on controversial offset projects such as the "Reforestation/Afforestation Project Carbon Online Estimator Tool" and less esoteric measures such efficiency improvements to Industrial and Commercial Boilers, and buying green power.

www.EPA.gov/climateleaders/resources/optional-module.html

c. US DOE EIA "1605(b)" Program Resources

Under §1605(b) of the Energy Policy Act of 1992, 42 U.S.C. §13385, and 2002 Presidential directive, DOE, EPA and USDA began working on improvements to GHG emission inventory and reduction measures. In 2007, EIA published (voluntary) Forms and Instructions, Reporting Software (drafts) a Simplified Emission Inventory Tool (SEIT) and calculation tools for inventories and emission reduction. 2007 filings covered 2006 emissions. Independent verification is optional but recommended.

The EIA provides emission factors for electricity and use and avoided emissions for 14 regions in the U.S., and 130 countries as well as calculation tools for inventories from a number of industry sectors and different Global Warming Potential (GWP) gases. www.eia.doe.gov/oiaf/1605 .

d. The Climate Registry (TCR)

In 2007 the Climate Registry was formed by 39 states, including Pennsylvania, as a voluntary common system to report GHG emissions and register reductions to support policies of the individual states. 54 "Founding Reporters" were announced in January 2008. TCR wants to be the recognized place for "credible and consistent GHG emissions reporting" and intends to have independent third party verification. The registry system is to start operation in June 2008.

Benefits of voluntary registration are:

1. Cost effective GHG measurement

2. Document early actions

3. Prepare for future regulation

4. Employee education

5. Save money and energy

6. Access to software and technical support

7. Recognition/image

The program covers six GHGs in the U.S., Canada and Mexico for direct and indirect emissions. Data is recorded on web-based software. TCR released its draft General Reporting Protocol (GRP) for comment in October 2007, has posted the comments and response to comments on the web, and plans to publish the final document in March 2008. The GRP is based on World Resources Institute and World Business Council on Sustainable Development international standards.

The (85 page) draft General Verification Protocol (GVP) was released in February 2008, the comment period closed in March 2008, and the protocol is to be released in May 2008. Accredited (by TCR) verifiers are to review reports against the GRP using the GVP process and the ISO 14064-3 standard. The conflict of interest provisions analyze organizational conflicts, case specific conflicts between the reporter, verification entity, and individual members of the verification team, and conflicts that may arise during or after the verification engagement. A number of entities are recently touting GHG verification protocols or services, but TCR protocols have a chance of becoming the gold standard for auditing in North America.

e. Preserve Reductions Under Pa ERC Rules?

DEP has operated a bank for state certified emissions reductions (ERCs) under its NSR rules since 1994. The program was created for construction permit offsets for nonattainment pollutants (NOx, VOC, PM-10) but the text of the rule refers to "emission reductions" and not any specific pollutant. Pa DEP has ERC reciprocity agreements with New York and Maryland. The fundamental standard for registering a "creditable emission decrease" is in 25 Pa Code §127.203 (l): surplus, permanent, quantified and enforceable. The RGGI GHG offset requirements of "real, additional, verifiable, enforceable and permanent" are very similar.

Under the May 2007 revisions to the Pa NSR Rules, ERC applications must be filed within two years of the reductions, 127.207(2). However, under new section 127.206(r), an ERC filing amnesty rule allows an application for any emission reduction from January 2002, or later, to be filed until May 19, 2008.

The broad wording of the Pennsylvania Emissions Banking rules and the amnesty period under the recent amendments suggest that a Pennsylvania company with reductions of the six Kyoto gases in any of the last five years could file an ERC application for GHG reductions and have DEP certify the reductions. Lower cost is an advantage of the mechanism. There is no filing fee. The cost of preparing the ERC application could range from nominal (for example, shutdown of an industrial boiler with utility grade CEM emissions data could meet the four standards rather simply) to reasonable, and the cost of review and verification is born by the state. A disadvantage of this approach is the limited life of shutdown offsets under §127.206 to 10 years if not used as offsets. However, overcontrol offsets have no expiration date. Registration of GHG reductions through the ERC rules may provide another option to preserve GHG reductions.

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