National Renewable Energy Laboratory 

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A national laboratory of the U.S. Department of Energy

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NREL is operated by Midwest Research Institute ● Battelle Contract No. DE-AC36-99-GO10337 

Incorporating Wind Generation in 

Cap and Trade Programs 

Joel Bluestein 

Energy and Environmental Analysis, Inc. 

Elizabeth Salerno 

American Wind Energy Association 

Lori Bird and Laura Vimmerstedt 

National Renewable Energy Laboratory 

Technical Report 

NREL/TP-500-40006 

July 2006 
Incorporating Wind Generation in 

Cap and Trade Programs 

Joel Bluestein 

Energy and Environmental Analysis, Inc. 

Elizabeth Salerno 

American Wind Energy Association 

Lori Bird and Laura Vimmerstedt 

National Renewable Energy Laboratory 

Prepared under Task No. WER6 6006 

Technical Report 

NREL/TP-500-4006 

July 2006 

National Renewable Energy Laboratory

1617 Cole Boulevard, Golden, Colorado 80401-3393 

303-275-3000 • www.nrel.gov 

Operated for the U.S. Department of Energy 

Office of Energy Efficiency and Renewable Energy 

by Midwest Research Institute • Battelle 

Contract No. DE-AC36-99-GO10337
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Table of Contents 

FIGURE___________________________________________________________________________________ ii

LIST OF TABLES __________________________________________________________________________ ii

ACKNOWLEDGEMENTS ____________________________________________________________________1

EXECUTIVE SUMMARY ____________________________________________________________________2

1. INTRODUCTION _________________________________________________________________________4

2. FUNDAMENTALS OF CAP AND TRADE PROGRAM DESIGN _________________________________6

2.1 OVERVIEW OF CAP AND TRADE PROGRAMS ____________________________________________________6

2.2 ALLOWANCE DISTRIBUTION ________________________________________________________________7

2.2.1 Method of Allowance Distribution _______________________________________________________7

2.2.2 Frequency and Basis for Distribution ____________________________________________________9

3. IMPLICATIONS: POLICYMAKER AND WIND GENERATOR PERSPECTIVES _________________11

3.1 STATE AND EPA RATIONALES FOR INCLUDING RENEWABLE GENERATION IN CAP AND TRADE PROGRAMS __11

3.2. HOW CAP AND TRADE PROGRAMS CAN BENEFIT WIND GENERATORS ______________________________11

3.2.1 Selling Allowances into the Market for Emission Allowances _________________________________12

3.2.2 Retiring or Bundling Allowances to Participate in Voluntary Retail or Compliance Renewable Energy 

Markets _______________________________________________________________________________12

3.2.3 Retiring Allowances to Create Creditable Emission Reductions _______________________________13

4. HOW CAN WIND GENERATION BE INCLUDED IN CAP AND TRADE PROGRAMS? ___________15

4.1 RENEWABLE ENERGY SET-ASIDES __________________________________________________________15

4.1.1 Design of a Renewable Energy Set-Aside ________________________________________________15

Definition of Eligible Technologies and Projects______________________________________________________ 16

Size of Set-Aside and Addressing Oversubscription ___________________________________________________ 17

Distribution Procedure __________________________________________________________________________ 18

Administrative Burden__________________________________________________________________________ 18

4.1.2 Advantages of a Renewable Energy Set-Aside _____________________________________________19

4.1.3 Disadvantages of a Renewable Energy Set-Aside __________________________________________20

4.1.4 Experience with EE/RE Set-Asides______________________________________________________21

Experience with State Set-Aside Programs __________________________________________________________ 22

4.2 DIRECT OUTPUT-BASED ALLOCATION TO RENEWABLE ENERGY ___________________________________24

4.2.1 Design of Output-Based Allocation to Wind Generators _____________________________________24

Definition of Eligible Technologies and Projects______________________________________________________ 25

New Source Set-Aside __________________________________________________________________________ 25

4.2.2 Advantages of Direct Output-Based Allocation to Wind Generators____________________________25

4.2.3 Disadvantages of Direct Output-Based Allocation to Wind Generators _________________________26

5. INCORPORATING RENEWABLE ENERGY INTO THE CLEAN AIR INTERSTATE RULE _______28

5.1 THE EPA MODEL RULE __________________________________________________________________29

5.2 RENEWABLE ENERGY SET-ASIDE ___________________________________________________________30

5.3 DIRECT ALLOCATION TO RENEWABLE ENERGY ________________________________________________33

5.3.1 Full Output-Based Allocation System ___________________________________________________34

5.3.2 New Source Set-Aside _______________________________________________________________34

5.4 DECREASE LAG TIME FOR ALLOCATIONS _____________________________________________________35

6. SUMMARY AND CONCLUSIONS __________________________________________________________37

APPENDIX A. RESOURCES _________________________________________________________________39

 i 
APPENDIX B. RESOLUTION SUPPORTING EMISSIONS ALLOCATIONS FOR NEW CLEAN ENERGY 

SOURCES _________________________________________________________________________________41

APPENDIX C. NOX BUDGET TRADING PROGRAM SET-ASIDE RATIONALES ___________________42

GLOSSARY OF ABBREVIATIONS AND ACRONYMS __________________________________________43

REFERENCES _____________________________________________________________________________44

Figure 

Figure 1. States affected by the Clean Air Interstate Rule (U.S. EPA) [21]________________ 28 

List of Tables 

Table 1: Allowance Distribution Design Features ____________________________________ 7 

Table 2. Summary of SIP Call Set-Aside Parameters_________________________________ 21 

 ii
 

Acknowledgements 

The authors gratefully acknowledge the contributions of others to this report. This work was 

funded by the U.S. Department of Energy (DOE) Office of Energy Efficiency and Renewable 

Energy (EERE) under the Wind Powering America program. The authors wish to thank Phil 

Dougherty of the U.S. DOE for his support. We appreciate the guidance of Lawrence Flowers, 

Wind Powering America lead at the National Renewable Energy Laboratory (NREL). The 

American Wind Energy Association (AWEA) provided wind industry perspectives, leadership, 

and support. 

 

We thank contacts who offered insights on their experiences with wind energy projects under cap 

and trade programs, including: 

Julia Blankenship, AMP Ohio 

Tom Carnahan, Wind Capital Group 

Dale Osborn, Berkshire Wind Farm 

Kevin Rackstraw, Clipper Wind 

Tom Rawls, THR Associates LLC 

We wish to acknowledge the following reviewers for their insightful comments: 

Paul Denholm and Doug Arent, NREL 

Ed Holt, Ed Holt & Associates, Inc. 

William Lamkin, State of Massachusetts 

Robert McCarron, State of Minnesota 

Karen Palmer, Resources for the Future 

Kevin Rackstraw and Rob Gramlich, AWEA 

Tom Rawls, THR Associates LLC 

We are grateful to Ruth Baranowski, NREL, for editorial support and Gail Mosey, NREL, for 

research support. 

Although we appreciate these contributions, the authors retain responsibility for any remaining 

errors in this report. 

 1 
Executive Summary 

Cap and trade programs are increasingly being used to reduce emissions from electricity 

generation in the United States. Cap and trade programs primarily target emitting generators, but 

programs have also included renewable generators, such as wind generators. 

States cite several reasons why they have considered the policy option of including renewable 

generators in cap and trade programs: to provide an incentive for lower-emitting generation, to 

achieve emissions reductions in non-capped pollutants, and to gain local economic benefits 

associated with renewable energy projects. The U.S. Environmental Protection Agency also notes 

these rationales for considering this policy alternative, and the National Association of Regulatory 

Commissioners (NARUC) passed a resolution supporting the inclusion of renewable energy in 

cap and trade programs. This report explores why states consider this policy option, what 

participation could mean for wind generators, and how wind generation can most effectively be 

included in state, federal, and regional cap and trade programs. 

Including wind generators in a cap and trade program could serve as a tangible incentive, through 

several mechanisms. Wind generators could receive an allocation of emission allowances and 

then sell them to emitting generators. They could receive allowances and retire them on behalf of 

customers when they participate in voluntary retail renewable energy markets. Similarly, wind 

generators could simply retire emissions allowances to make creditable emission reduction 

claims, with possible secondary financial benefit. If allowances were auctioned instead of being 

allocated for free, policymakers could use auction proceeds toward policy goals and could 

consider incentives for wind generators among their other options. 

While other methods are possible, states are now using or considering two primary methods to 

include renewable generators in cap and trade programs that target generation: renewable energy 

set-asides and direct output-based allocation to renewable generators. 

A set-aside establishes a specific amount of allowances for renewable generators, offering 

certainty for existing generators about the number of allowances allocated to them, but imposing 

uncertainty (and reduced value) on renewable generators about future allowance allocations if the 

set-aside becomes too small to accommodate all new renewable energy generators in the longterm. For regulators and affected generators, the administrative costs of a set-aside may also be 

higher than direct output-based allocation. 

Under a direct output-based approach, allowances are allocated to all generators, including 

renewable energy generators, from the main allowance pool based on generation output. This 

makes all generators part of the main allocation process, reducing administrative costs relative to 

a set-aside and increasing certainty for renewable generators about future allowance availability. 

The primary drawbacks to this approach, relative to a set-aside, are that it has not been used in 

emission trading programs to date, and it could reduce allocation to conventional generators as 

renewable generation shares increase. 

 2
 

This report includes sample regulatory language to allocate allowances to wind generators under 

the Clean Air Interstate Rule (CAIR) using either of these methods. These regulatory approaches 

will also be relevant if future trading programs, especially for CO2, present similar opportunities. 

To date, wind generator participation in cap and trade programs has proven to be highly sensitive 

to transaction costs and regulatory issues. Programs to include renewable generation in cap and 

trade will benefit from ongoing evaluation of “best practices” to improve their design and 

implementation. 

 3 
1. Introduction 

Cap and trade programsa are one of the leading policy choices for reducing electricity-sector 

emissions in the United Statesb

 [1]. The U.S. Environmental Protection Agency (EPA) notes that 

the strengths of this market-based approach include simplicity, excellent compliance record, and 

cost-effectiveness [2]. A number of cap and trade programs have been or are currently being 

implemented or proposed at the state, regional, and national level in the United States. 

• The Clean Air Act Amendments of 1990 established the first national cap and trade 

program in the form of the Title IV sulfur dioxide (SO2) cap and trade program for electric 

utility generators to address acid rain [3]. 

• In 1999, the 12 states of the Northeast Ozone Transport Regionc implemented a NOx

Budget Trading program to reduce regional transport of nitrogen oxides (NOx), a precursor 

to ground-level ozone (smog). The program used a regional, summertime cap and trade 

program to reduce NOx emissions from large stationary sources. [4] 

• In 2003, the NOx Budget Trading Program was expanded to 22 northeastern statesd [4] 

under the NOx SIP Call promulgated by the EPA in 1998 [5]. 

• In 2005, the U.S. EPA promulgated the Clean Air Interstate Rule (CAIR), expanding the 

scope of the NOx Budget Trading Program to 28 eastern U.S. statese and establishing both 

summertime and year-round NOx cap programs. The EPA also promulgated the Clean Air 

Mercury Rule (CAMR), which allows states to participate in a national trading program for 

mercury emissions from coal-fired power plants [6]. 

• In December 2005, seven Northeastern states endorsed a regional cap and trade program to 

reduce carbon dioxide (CO2) emissions from power plants. If implemented, this would 

become the first binding regional cap and trade program on greenhouse gases in the United 

States [7]. 

• Several bills have been proposed or discussed in the U.S. Senate to establish national cap 

and trade programs for SO2, NOx, mercury, and CO2 [8]. 

 

a

 A cap and trade program for emissions control establishes a total emissions cap for an identifiable group of sources 

of a specific, measurable pollutant; establishes a market for allowances that represent emissions of that pollutant; and 

allows allowance trading among the sources. Though related, offset programs are sufficiently different that they are 

not discussed in this report. 

b

 Other emissions reduction approaches include performance standards for emissions rates for existing and new 

power plants, plant-specific emissions caps, requirements to use specific control technologies, and pollution taxes. 

Analysis of these alternatives is beyond the scope of this report. 

c

 Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, 

Rhode Island, northern Virginia, and Washington, D.C. (D.C. is treated as a state for air quality regulation.) 

d

 Alabama, Connecticut, Delaware, Illinois, Indiana, Kentucky, Maryland, Massachusetts, New Jersey, New York, 

North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Washington, D.C., West 

Virginia, and parts of Georgia (Phase 2), Michigan, and Missouri (Phase 2) 

e

 Includes NOx Budget Trading Program states except Rhode Island, and also adds Arkansas, Florida, Iowa, 

Minnesota, Mississippi, Texas, and Wisconsin 

 4
 

Cap and trade programs designed to reduce emissions from electricity generation primarily target 

emitting generators. Wind and other types of renewable electricity generation generally have 

lower air emissions than fossil-fuel generation, leading to public policy interest in using 

renewable generation to reduce emissions in the electricity sector. Some states have shown 

interest in policies to include renewable generators in cap and trade programs. They view this 

policy alternative as an incentive for lower-emitting generation that will achieve emissions 

reductions in non-capped pollutants and offer the local economic benefits associated with 

renewable energy projects. 

This report explores why states consider policies to include wind in cap and trade programs, why 

there has been little participation among wind and other renewable energy generators in cap and 

trade programs to date, the mechanisms by which wind generators could benefit from 

participation, and how wind generation can most effectively be included in these programs. The 

report covers methods for including wind generators in emission reduction programs that are in 

use today or under active consideration in current state regulatory decisions, including: 

• Allocation of allowance set-asides to renewable energy 

• Output-based allocation of allowances to wind generators.f

 

Because this report is sponsored by the Wind Powering Americag program, it focuses on wind 

generation; however, the practices and regulatory principles discussed in this report apply 

generally to non-emitting renewable generators and in some cases, to energy efficiency measures. 

And while the report provides specific regulatory options for allocating allowances to renewable 

generators under the CAIR, the overall findings of this report are generally applicable to other cap 

and trade programs as well. 

Effective inclusion of wind generation in cap and trade programs has implications beyond the 

CAIR and NOx Budget Trading Programs. Regulations on national electric-sector CO2 and 

greenhouse gas emissions would most likely use cap and trade programs, similar to programs 

already being implemented at the state and regional levels. 

Chapter 2 of this report provides a general background on emissions trading, primarily for readers 

not already familiar with or who would like a review of cap and trade programs. Chapter 3 

explores reasons why including renewable energy in cap and trade programs is considered and 

examines the different approaches by which wind generators could benefit from programs. 

Chapter 4 discusses the specific approaches to including wind generators in cap and trade 

programs. Chapter 5 illustrates the inclusion of wind generators in state regulation in response to 

the CAIR, including regulatory language that can be used for that purpose. Chapter 6 offers a 

summary and conclusions. 

 

f

 Specific design details of California’s load-based program are not determined at this time, so detailed analysis of that approach is 

beyond the scope of this report. See California Public Utilities Commission. Decision 06-02-032 February 16, 2006. Order 

Instituting Rulemaking to Promote Policy and Program Coordination and Integration in Electric Utility Resource Planning. 

Rulemaking 04-04-003 (Filed April 1, 2004) http://www.cpuc.ca.gov/PUBLISHED/FINAL_DECISION/53720.htm#P89_1988. 

Accessed June 14, 2006. 

g

 The U.S. Department of Energy’s Wind Powering America program seeks to increase the use of wind energy in the United States 

(see http://www.windpoweringamerica.gov). 

 5 
2. Fundamentals of Cap and Trade Program Design 

2.1 Overview of Cap and Trade Programs 

Emissions regulation options include market-based approaches, such as pollution taxes and cap 

and trade programs, and non-market approaches, such as pollution standards for emissions rates 

for existing and new power plants, plant-specific emissions caps, and requirements to use specific 

control technologies. Cap and trade programs are a market-based emission regulation approach, 

and as such are fundamentally different from non-market regulations, such as plant-specific 

emissions standards [9]. Under a cap and trade program, an overall emission tonnage cap is set for 

an affected sector or set of plants.h For example, the Title IV acid rain SO2 trading program sets a 

cap of approximately 9 million tons of SO2 emissions per year for U.S. power plants. 

Allowances are created that represent a temporary right to emit one unit (e.g., 1 ton) of the 

allowable cap. The allowances are distributed to the affected plants. The primary compliance 

requirement is that each plant must hold allowances equal to its actual emissions at the end of 

each compliance period. However, there is no fixed emission cap or limit on individual plants, 

and each plant’s emissions are not limited to the allowances that it receives. It can purchase 

additional allowances from another plant or it can sell allowances if it has a surplus. 

A cap and trade program has several benefits. The emission cap leads to greater certainty in the 

overall level of emissions than other approaches because the total tons of emissions are held to a 

specific limit regardless of plant operation or growth in the sector. The trading program also can 

help reduce the cost of compliance relative to non-market approaches because it allows reductions 

to be made at plants where they cost the least, rather than requiring specific reductions from each 

plant. In theory, trading encourages plants with lower cost of control to make more reductions 

while plants with higher control cost make fewer. Through trading, all plants have the option of 

compliance at essentially the same cost per ton, reducing the overall cost of compliance to 

consumers and the regulatory impact on plants with higher control costs [10]. 

The trading program also monetizes emissions and control investments. Each ton of pollutant 

emitted has a specific cost because it requires the retirement of an allowance that has a market 

value. Plant operators seek to recover this cost in competitive electricity markets, creating an 

ongoing market incentive to reduce emissions to make each plant more competitive. 

While the cap fixes the total emissions from the sector, the cap and trade program does not 

impose a fixed emission limit at the plant level.i

 Each plant can emit more or less each year as 

long as it can acquire the required allowances. If a plant faces emissions control options that are 

more expensive than the market price of allowances, then the least-cost option for that plant may 

be to forego emission controls, emit more than its allowance allocation, and purchase allowances. 

If allowances are more expensive, it may pay to install capital-intensive control technology and 

 

h

 Markets for tradable emissions commodities, such as offsets, also have been established. These markets do not 

establish an emissions cap. Because this approach differs substantially from cap and trade, it is beyond the scope of 

this report. 

i

 Other regulations, such as state permits and New Source Review, do impose plant-specific limits. 

 6
 

possibly have allowances to sell. The total cost of compliance for the individual plant under a cap 

and trade program is the cost of allowances retired to cover emissions plus the capital and 

operating costs of any control measures that may be installed. 

2.2 Allowance Distribution 

Many of the effects of a cap and trade program are not inherent to the basic program but instead 

are a function of how the allowances are distributed. Allowances must be distributed to affected 

entities in some way. The distribution design does not affect the overall level of emissions (the 

cap) and may not affect the dispatch of specific generating assets. However, it can affect the 

profitability of individual units, amount of generation from each unit, total program cost, and the 

future choice of generating technologies. Because allowance distribution can affect the 

competitiveness and profits of individual companies, it can be one of the most contentious and 

politically difficult aspects of cap and trade program design. 

The key design features of allowance distribution can be thought of as three design decisions that 

result in numerous possible policy designs. Table 1 shows a simplified summary of the major 

combinations of policy design features, with each arrow representing possible combinations. 

Table 1: Allowance Distribution Design Features 

*Indicates design feature combinations that have been most commonly used to date. 

Design Decision Options 

Distribution 

Method 

Free Allocation Auction 

Frequency of 

Distribution 

One time 

(grandfathering) 

Updating 

(reallocation) 

One time 

(grandfathering) 

Updating 

(reallocation) 

* 

Basis for 

Allocation 

Input 

* 

Output Input 

* 

Output Basis for Allocation does not apply to 

auctions 

The first dimension is the distribution method, accomplished by either allocation to sources 

without charge (free allocation) or by an auction. This report uses the term “distribution” to mean 

either one of these methods, and the term “allocation” or “free allocation” to refer to distribution 

of allowances without charge. The second dimension is the frequency of distribution: one time 

(grandfathering) or periodic reallocation. The third is the basis for allocation — typically based on 

heat input or generation output. 

2.2.1 Method of Allowance Distribution 

There are two primary options for allowance distribution: free allocation or auction. Under 

allowance allocation programs, the government distributes allowances in a free allocation to 

affected sources. It is free in the sense that there is no charge for the allowances, other than 

possible nominal administrative charges, though of course the allowances have value in the 

market. This system has been used in emission trading programs to date. Affected industry prefers 

this approach because most allowances do not need to be purchased. This approach also avoids 

 7 
the policy question of what to do with the income from an allowance auction. Allocation can also 

create advantages for those who receive free allowances because they are a valuable commodity 

that can be sold in a market. Allocation does not necessarily change current compliance actions, 

but it can change plant profitability (and amount of generation), asset valuation, and future 

investment decisions. It therefore can create incentives or biases. For example, differences in 

allocation between new and existing plants or among different fuel types may provide different 

benefits depending on plant vintage or fuel. 

Under an auction, affected plants and others have the opportunity to purchase the available 

allowances in an open auction. Once purchased, allowances could be traded on a secondary 

market. All generators must pay up-front for all allowances, so there is no free allocation under a 

pure auction,j

 consistent with the “polluter pays” principle. All emitters in the program have an 

equal position in the auction, so the auction does not create any bias. 

Economists generally consider auctions to be the most economically efficient distribution 

mechanism because each participant makes unbiased tradeoffs among investment in technology, 

fuels, or allowances [11]. Also, the auction generates revenue that the government can redistribute 

in ways that offset the impacts of the regulation or meet other policy goals. It is also simple in that 

the government does not have to determine, track, and administer the basis for allocation (such as 

heat input or generation output). 

Despite these theoretical benefits, auctions are not widely used as distribution methods under cap 

and trade programs, likely because they appear politically unattractive [12]. Under an auction, the 

affected industry incurs up-front costs to purchase allowances, rather than receiving a free 

allocation. Also, there may be controversy over what constitutes a beneficial use of auction 

revenues.k

Although auctioning all allowances has not been implemented in cap and trade programs to date, 

auctioning some portion of the allowances to ensure market liquidity or to generate income is a 

more accepted part of cap and trade programs. The Title IV SO2 trading program auctions a few 

percent of the allowances each year to promote liquidity and price discovery. More recently, the 

Regional Greenhouse Gas Initiative (RGGI) has proposed a minimum set-aside of 25% of the 

allowances in each state that can be sold to raise funds for energy efficiency and other beneficial 

programs for the public good [13]. 

 

j

 It is possible to adopt hybrid distribution systems that are combinations of the options discussed here, such as 

combinations of auctions and free allocations. This analysis addresses only the individual options to more clearly 

illustrate the differences among them. 

k

 State experiences with Clean Energy Funds could inform the use of auction funds as an incentive for renewable 

energy, if that policy were selected. For example, see p. 13 of Clean Energy Funds: An Overview of State Support for 

Renewable Energy. Bolinger, Mark, and Ryan Wiser (2001). LBNL-47705. Berkeley, CA: Ernest Orlando Lawrence 

Berkeley National Laboratory. April 2001. http://eetd.lbl.gov/EA/EMS/reports/47705.pdf. Accessed April 7, 2006. 

 8
 

2.2.2 Frequency and Basis for Distribution 

The second parameter, the frequency of distribution, determines whether the allowances are 

distributed only once or whether they are periodically reallocated or “updated.” Allocation and 

auction can both occur as one-time or updating programs, although auctions are usually 

envisioned as updating programs. The third parameter is the basis for the allocation (heat input or 

generation output), which only applies under free allocation programs and is irrelevant to 

auctions. 

Under grandfathering or one-time distribution, the allowances are allocated or auctioned only 

once, at the beginning of the program. The allocation basis can vary but does not affect future 

behavior and so is less important than under the updating approach. The acid rain SO2 trading 

program uses grandfathering, with allocation based on historical heat input. The plants that 

received allowances will continue to receive them (unless the program is changed) regardless of 

their emissions or operation, even if they shut down. New plants will never receive allocations. 

Grandfathering with free allocation provides financial benefit to the initial allocation group 

regardless of their emissions, efficiency, or other attributes. Those who are not in that group are at 

a greater financial disadvantage than if they had received allowances. 

Under an updating system, the allowances are periodically redistributed (typically every 1 to 3 

years). Most auction systems are envisioned as updating systems in which the allowances are 

auctioned every year. 

Compared to grandfathering or one-time allocation, an updating system means that the basis for 

allocation has greater influence on decisions about how to operate the plant. A variety of different 

approaches can be used to determine the basis for the allocation, but the heat input or power 

generation output are most commonly used. The basis will be determined from each plant’s data 

in the few years prior to the redistribution. In each year, each plant's allocation will be 

proportional to its share of total heat input or generation during baseline years. For example, if a 

plant generates 1% of the total power generated by affected plants, it would receive 1% of the 

allowances in an output-based system. Allocation typically occurs several years in advance to 

provide some certainty. For example, in Year Four of a program, allowances would be allocated 

for Year Seven based on average operation in Years One through Three. 

Since new plants do not have a history of operation on which to base their allocation, an updating 

program typically includes a new source set-aside. This is a small pool of allowances that can be 

allocated to new plants until they have an operating history, at which time they become part of the 

normal allocation pool.l

The updating system is more work for regulators than grandfathering since the allocation occurs 

every 1 to 3 years instead of just once at the beginning of the program. The basic calculations are 

simple, but the process can be time-consuming, and the heat input or generation data must be 

 

l

 A new source set-aside could be used under a grandfathering system, but because new plants never enter the main 

allocation pool under grandfathering, the new source set-aside would need to be sized to accommodate all future 

generation growth. 

 9 
collected, tabulated, and checked. Quality assurance and quality control of all data must meet high 

standards because each plant's allocation contributes to the calculation of the allocation for all 

other plants, so an error in any single facility’s numbers affects others as well. 

Updating allocation has several effects. One of the most important is that it brings new sources 

into the program as they begin to operate. It also phases older plants out of the program as they 

reduce or cease operation. If reallocation is based on an operating parameter such as heat input or 

output, it can affect decisions about future operation of affected plants. Depending on the program 

design, this can be used to promote policy goals (as discussed in Chapter 4). 

The choice of whether to allocate allowances based on heat input or generation output is one of 

the more contentious allocation issues. It can be an issue for a grandfathering or updating 

allocation program, but it is more important for an updating program because the allocation is 

repeated and continues to affect future actions. In any year, the operation of the plant will affect 

the next allocation. Thus, the updating allocation creates incentives for certain behaviors. If the 

allocation is based on heat input, it rewards increased heat input. If it is based on generation, it 

rewards increased generation. In effect, an input-based system rewards fuel consumption while an 

output-based system rewards efficiency in generation.m 

 

m Economic modeling studies suggest that updating output-based allocation provides an “output subsidy” that 

encourages increased generation output, which could increase allowance prices. See Reference 11. 

 10
 

3. Implications: Policymaker and Wind Generator Perspectives 

Before addressing methods for including wind generation in cap and trade programs, we briefly 

examine implications of this policy option from the perspectives of public policymakers and wind 

generators. Public policymakers expect that including renewable generation in cap and trade 

programs will provide an incentive for renewable energy, and they cite environmental and 

economic public benefits that they expect to achieve as the primary rationale for including 

renewable energy in cap and trade programs. Wind generators could benefit from cap and trade 

programs through several different mechanisms discussed below. 

3.1 State and EPA Rationales for Including Renewable Generation in Cap and 

Trade Programs 

Public policymakers in states that have included renewable generation in cap and trade programs 

often view this as an incentive that will provide environmental and economic public benefits. In 

its Guide to Action, a document prepared for state regulators and policymakers, EPA has 

described the potential environmental and technology innovation benefits of using output-based 

standards to promote cleaner, more efficient generation [14]. And in July 2004, NARUC adopted 

a resolution supporting the inclusion of energy efficiency and renewable energy in cap and trade 

allowance allocations, citing the fuel diversity, national security, and emissions reductions 

benefits of these technologies (see full resolution in Appendix B). 

In addition, several states that have created energy efficiency and renewable energy (EE/RE) setasides under the NOx Budget Trading Program have indicated that they have done so for 

environmental and economic benefits (see Appendix C for specific language). For example, 

Massachusetts specifically cited reduced compliance costs and general economic benefits as the 

rationale for developing its EE/RE set-aside, while Indiana also noted the electricity system 

reliability benefits. New York’s State Energy Plan emphasized the environmental benefits of its 

EE/RE set-aside, noting the benefits of year round NOx reductions as well as carbon reductions. 

Elsewhere, the New York State Energy Research and Development Authority has studied the 

effects of renewable electricity generation and noted potential economic benefits [15]. 

In addition to the states implementing EE/RE set-asides under the NOx Budget Program, several 

other states have considered or plan to include renewable generation in their implementation of 

the CAIR. For example, Minnesota has proposed a 15% EE/RE set-aside under the CAIR for a 

number of reasons, including that it will support the state’s renewable energy policies and goals, 

provide a financial incentive to support the development of new renewable energy resources, and 

benefit the state and local economy [16]. 

3.2. How Cap and Trade Programs Can Benefit Wind Generators 

This section explores the methods by which wind generators could benefit from participating in 

cap and trade programs. Including wind generators in a cap and trade program means allocating 

some portion of allowances or proceeds of allowance sales to them. 

The wind generators can gain additional income by selling allowances that they receive in an 

allocation because they do not produce any direct emissions. Thus allocation of allowances to 

wind generators creates a market-based incentive for increased development of wind capacity. 

Alternatively, some wind generators may retire the emission allowances to make emissions 

 11
reductions claims or seek higher revenue streams through compliance with renewable energy 

mandates (if required) or voluntary retail renewable energy markets. 

We examine three mechanisms by which wind generators can benefit from inclusion in cap and 

trade programs: 

• Selling the allowances back into the allowance market 

• Retiring or bundling allowances with other renewable energy attributesn

 to participate in 

voluntary retail renewable energy markets 

• Retiring the allowances to create creditable emission reductions. 

The first of these mechanisms is not likely to reduce total emissions of the capped pollutant below 

the cap amount in the near term. The other mechanisms would reduce total emissions below that 

level because they involve retirement of allowances. 

3.2.1 Selling Allowances into the Market for Emission Allowances 

Once wind generators receive allowances under a cap and trade program, they can receive value 

for the emission allowances (for example, by selling the allowances into the market). If an 

emitting generator buys these allowances and uses them for compliance, then the allowances that 

were allocated to the wind generator will not have reduced total emissions of the capped pollutant 

below the level established by the cap. For illustration, the value of a NOx allowance is currently 

approximately $2000 per ton [17,18]. This translates to approximately $1.50 per megawatt-hour 

(MWh) for wind generation, depending on the allocation method (see Chapter 4). While small on 

a per-MWh basis, this amount could be significant in aggregate if it is received annually, over the 

lifetime of the project. This revenue stream could facilitate the financing of wind generation 

projects that are currently on the margin of competitiveness. Of course, the value would be larger 

if the total value of the revenue stream from allowances were greater, as might be anticipated 

under possible future cap and trade programs for CO2 reduction. In addition, revenues could be 

more substantial if generators are able to participate in allowance markets for multiple pollutants 

(e.g., NOx, mercury, SO2, CO2). 

3.2.2 Retiring or Bundling Allowances to Participate in Voluntary Retail or 

Compliance Renewable Energy Markets 

An alternative to selling allowances into the emissions market is to retire them or “bundle” them 

with the renewable energy or renewable energy attributes to serve consumers who make voluntary 

purchases of renewable energy in voluntary retail renewable energy markets. Retirement of 

allowances may also be necessary to participate in markets or programs under renewable energy 

mandates if these mandates prohibit separation of the environmental attributes of renewable 

energy that the allowances represent. 

Generators may sell renewable energy or its attributes to consumers interested in supporting 

renewable energy development. Customers can make voluntary purchases of renewable energy in 

 

n

 Renewable energy attributes can be sold separately from the generation. See discussion in text below. 

 12
 

those markets where Green Power is available as “delivered product,” meaning that the renewable 

electricity is on the same physical system as the customer. Alternatively, throughout the United 

States, customers can choose to buy a commodity that represents the other attributes of renewable 

generation besides the electricity itself. These attributes are generally referred to as renewable 

energy certificates (RECs). In these voluntary markets, some consumers purchase renewable 

energy, or more commonly its attributes, for its air quality or carbon reduction benefits. To make 

emission reduction claims for capped pollutants, generators must retire allowances or transfer 

them with the renewable energy.o Some organizations that certify or track the sale of renewable 

energy in voluntary markets require that emission allowances be retired or transferred to the enduser as a stipulation of certification.p

 

Generators may also sell renewable energy or RECs to meet state renewable energy mandates. 

More than 20 states have established mandatory Renewable Portfolio Standards (RPSs) that 

require electricity suppliers to obtain a certain percentage of their electricity generation from 

renewable energy sources [19]. Whether allowances must be included with the renewable energy 

or RECs for compliance with state RPS policies depends on the implementing rules in each state. 

In states where the RPS rules do not explicitly require emission allowances to be retired with 

RECs for RPS compliance, wind generators could sell RECs for RPS compliance and also sell 

emission allowances separately in the allowance market. In other states, allocated emission 

allowances must be retired to meet the requirements of the RPS. This can be accomplished by 

bundling the allocated allowances with the RECs used for RPS compliance, but this requires that 

administrative mechanisms exist to coordinate across potentially different schedules for the two 

programs. Bundling and retiring allowances with RECs for compliance represents a policy choice 

to reduce emissions below the cap-mandated level. 

3.2.3 Retiring Allowances to Create Creditable Emission Reductions 

Some state or local governments have considered using emission reductions created by renewable 

generators under a cap and trade program as a potential contribution to meeting National Ambient 

Air Quality Standards (NAAQS). This can be done by requiring or paying renewable generators 

to retire any allowances that might be allocated to them. These retired allowances represent 

emission reductions to levels below the cap level and might be usable by the state as part of the 

State Implementation Plan (SIP) to demonstrate attainment of the NAAQS.q

 The EPA provides 

 

o

 Wind generators or renewable energy marketers should ensure they are meeting emission reduction claims by 

making the appropriate retirement of allowances, if necessary. 

p

 For example, Green-e, which is the leading certifier of renewable energy in U.S. voluntary purchase markets, 

requires that “to be eligible [for certification], a REC or energy product must, to the extent possible based on current 

law, contain all of the environmental attributes that were associated with that unit of renewable generation when it 

was generated.” (See the Green-e National Standard at www.green-e.org/pdf/Green-e_National_Standard.v1.pdf, 

modified June 19, 2006.) In addition, the U.S. EPA Green Power Partnership requires its partners, which include the 

vast majority of nonresidential voluntary renewable energy purchasers, to retire the emissions attributes of their 

renewable energy purchases. (See partnership requirements at 

www.epa.gov/greenpower/pdf/program_requirements_memo.pdf, U.S. Environmental Protection Agency, Green 

Power Partnership, Green Power Partnership Program Requirements. April 2004.) 

q

 Choosing this approach as a SIP measure would imply that the air quality planners for the local non-attainment area 

are placing priority on reducing emissions throughout the cap and trade region or that the renewable generation in 

question would reduce emissions at specific power plants that affect the non-attainment area. 

 13
guidance on SIP credit for energy efficiency and renewable energy projects [20]. For example, 

Montgomery County in Maryland used a purchase of wind generation and associated retirement 

of the NOx allowances to help demonstrate compliance with national ozone standards [21]. 

In summary, state policymakers include wind generation and other renewable generation in cap 

and trade programs to provide an incentive for technologies that they believe will provide 

environmental and economic benefits. Wind generators could benefit through several different 

mechanisms. Whether the policymakers’ goals are achieved and the potential benefits of these 

programs to society and to wind generators are realized will depend on effective implementation, 

the subject of the next section.

 14
 

4. How Can Wind Generation Be Included in Cap and Trade 

Programs? 

Once the decision has been made to include wind generators in a cap and trade program, 

program design must be determined. In this section, we examine the two approaches for 

including wind generators in a generation-based cap and trade program that are now used or 

appear most likely to be used in the near-term for CAIRr

: 

• Renewable energy set-asides 

• Direct output-based allowance allocation to wind generators. 

This chapter addresses the purpose and design of these structures, as well as the advantages and 

disadvantages of each one.

4.1 Renewable Energy Set-Asides 

Under a renewable energy set-aside, a regulating agency allocates a portion of the total emission 

allowances to support specific energy technologies, such as renewable energy, energy efficiency, 

and sometimes fuel cells or other advanced technologies. This portion of allowances is reserved 

and distributed to the eligible technologies as an added incentive for development outside of the 

standard allocation process to conventional sources. 

Major examples of these set-asides include the Conservation and Renewable Energy Reserve that 

was established during Phase I implementation of Title IV of the Clean Air Act Amendments of 

1990 [22] and the NOx Budget Trading Program opportunity for states to establish energy 

efficiency/renewable energy (EE/RE) set-asides, as described in EPA rulemaking [23] and 

guidance [24]. A previous NREL report provides a comprehensive overview of the role of 

renewable energy in federal air quality regulations, including a summary of issues that affected 

participation in the Conservation and Renewable Energy Reserve under the SO2 trading program 

[25]. 

In response to the EPA rulemaking that established the NOx Budget Trading Program, seven 

states have established or sought to establish EE/RE set-asides in that program. An EPA 

summary [26] of state EE/RE set-asides describes the details of these programs. 

4.1.1 Design of a Renewable Energy Set-Aside 

There are several key components to the design of a renewable energy set-aside, including: 

• Definition of eligible technologies and projects 

• Size of set-aside and dealing with oversubscription 

 

r

 Other approaches, such as auctions or load-based allocation, are under development for greenhouse gas control 

programs but are not discussed here in detail. For example, California’s load-based approach for carbon emissions 

will affect the market for renewable generation, but specific mechanisms have not been determined. In addition, an 

auction process is under development for the Regional Greenhouse Gas Initiative in the Northeast. 

 15
• Distribution procedure 

• Administrative procedures. 

These components are discussed below. Section 5 provides actual regulatory language for 

implementation of a renewable set-aside under the CAIR. 

Definition of Eligible Technologies and Projects 

Qualifying Technologies. The set-aside regulation must identify the qualifying generating 

technologies that are eligible to receive allowances. The list of eligible technologies will depend 

on the policy decision about where to focus incentives, and usually includes generation from 

wind, small hydropower, solar, tidal, and other non-emitting renewable technologies. Emitting 

renewable generation, such as biomass or landfill gas, can be included, and states have also 

sometimes included advanced low-emitting technologies, such as fuel cells. Since biomass and 

small emitting facilities are usually excluded from the emission cap programs, adding them to 

the allocation system may require including them in the emission cap as well to account for their 

emissions. 

Project Vintage and Size. In addition to the technology, the definition can address the project 

vintage and size. If the main goal is to promote the development of new renewable generation, 

programs may limit the applicability to projects that come online after the proposed 

promulgation of the program. This also reduces possible concerns over a “windfall” allocation to 

long-standing generating resources. That said, including some recent-vintage existing renewable 

projects can help to make them more viable in the electricity market and provide financial 

support to active renewable energy development firms. This trade-off may be a reason for states 

to consider “fine-tuning” the applicability dates in their rules. 

Allocation to New Units. Under either an input- or output-based allocation,s

 the generator must 

establish an historic baseline on which to base the allocation (typically 3 years of operation). 

While this baseline is being established, the generator cannot receive allocations. Most programs 

establish a new source set-aside to provide allowances to new generators that have not 

established their baseline.t

Directly allocating allowances to new wind generators on a similar basis as other new sources 

provides an incentive for new wind energy development, but does not assist existing wind energy 

generating units. While such units may not rely on allowance value for financing, as new units 

might, they can displace emissions and may wish to make emission-reduction claims. Under a 

cap and trade program, non-emitting generators, such as wind, cannot claim to reduce total 

emissions unless they obtain and retire allowances. 

Size. Most cap and trade programs apply to conventional generators larger than 25 MW to limit 

the administrative burden on regulators of dealing with many small generators with relatively 

 

s

 See Section 2 for explanations of input and output basis. 

t

 There was no new source set-aside under the Title IV SO2 cap and trade program. Therefore, new units must 

purchase allowances from existing units. 

 16
 

low emissions. Renewable energy set-asides usually do not have to limit their applicability to 

such large projects but may impose a minimum allocation of one whole allowance. For some 

renewable energy generation, especially wind generation, it is also important to distinguish 

between generating units and projects. Wind projects often comprise a large number of small 

generating units (e.g., 1- to 2-MW turbines). To avoid excluding such composite projects and to 

limit the administrative burden for regulators and generators, it is important to allocate 

allowances to an entire project rather than to individual turbines. Further, set-asides can allow 

aggregation across projects to reduce transaction costs while including and encouraging the 

greatest number of renewable projects. 

Size of Set-Aside and Addressing Oversubscription 

A set-aside does not increase the overall level of the cap; it reserves a percent of the current 

allowance pool for specified technologies, such as renewable energy. As noted above, most setasides to date have been a few percent of the total allocation pool. This is often sufficient to 

cover existing and near-term renewable energy generation; however, it may not be sufficient to 

keep up with longer-term growth. As installed capacity of wind and other renewable energy 

generation increases, it may exceed the available set-aside allowances. If the state has a 

renewable portfolio standard, comparison of that goal with the size of the renewable energy setaside could be one indicator of the likelihood and timing of oversubscription. Establishing an 

initial set-aside that adequately allows for future growth will help keep administration simple and 

consistent. However, because set-asides reduce the number of allowances allocated to 

conventional generators, establishing a set-aside that is large enough to accommodate growth 

may be politically difficult. 

Addressing oversubscription is one of the main potential problems with a set-aside approach; 

however, only Massachusetts has actually experienced oversubscription to date. If and when 

renewable generation starts to exceed the available set-aside allowances, there are several 

possible responses: 

• One alternative is to prorate the available allowances as the renewable generation grows. 

This means that the allocation becomes less valuable to any individual wind project over 

time and the value of the set-aside as an incentive for new development is reduced. 

• Another approach is to limit the number of years that a renewable project can receive 

allowances from the set-aside. Under this approach, projects are cycled in and out of the 

program, making room for new projects to come in. Again, this reduces the ability of the 

program to provide long-term economic value to new renewable projects. 

• Another alternative is to increase the size of the set-aside once it becomes oversubscribed. 

A less contentious issue is how to handle an undersubscribed set-aside. The most common 

approaches are to reallocate the unused allowances to conventional generators or to bank them 

for future allocation to eligible renewable projects. Both of these approaches have been 

successfully used in state set-aside programs. 

 17
Distribution Procedure 

Most current trading programs allocate allowances for free to conventional units based on heat 

input times an allocation factor. The allocation factor is usually the nominal value on which the 

cap is based. For example, the NOx Budget Trading Program cap is based on emissions of 0.15 

lb/MMBtu, and this same factor is used as the nominal allocation factor for most state allocation 

systems. The actual allocation is rarely exactly equal to this factor because the allocations must 

be normalized to meet the cap, allowing for growth in heat input, set-asides, and other design 

factors. 

Renewable generators cannot use the same approach if they do not have heat input. However, a 

common approach is to convert the input-based allocation factor to an output-based factor and 

apply it to the renewable generation. For example, 0.15 lb/MMBtu could be converted using a 

typical power plant heat rate of 10,000 Btu/kWh to 1.5 lb/MWh. Then renewable generators 

would receive an allocation of 1.5 lb/MWh generated. This method has the advantages of being 

straightforward, easy to calculate, and consistent with the approach taken for conventional 

generators. 

A variation on this approach is to calculate the emissions rate of the generating resources that 

would actually be displaced by renewable generation and use that rate as the allocation factor. 

While this can provide an allocation more directly linked to actual emissions, the displacement 

calculation can be complex and change from year to year, potentially adding to the cost, 

complexity, and controversy of the set-aside allocation. One way to minimize these concerns is 

to use a standard allocation factor but allow generators the option to calculate an actual 

allocation factor if they wish. 

Another issue related to allocating allowances is how to track electric output for use in the 

allocation process. The most effective approach seems to be to require generators to report their 

generation directly as part of their application. Renewable generators typically measure and 

record their generation with billing-quality meters for wholesale sales, net metering, or other 

commercial purposes. This monitoring can be used to document generation for allocation 

purposes. 

Typically, allowance allocations within the set-aside must be recalculated periodically, anywhere 

from annually to every few years. This is true for two reasons. First, new generators will be 

entering the program and need to receive allowances. In some cases, the addition of new 

generators may lead to oversubscription of the set-aside, requiring allowances to be prorated 

among all participating renewable energy generators. Second, new projects often generate more 

electricity after the first year of operation after equipment goes through shakedown and contracts 

are established in the market. 

Administrative Burden 

Excessive transaction costs can prevent a set-aside program from achieving its full potential 

benefit. Renewable developers and operators are typically not familiar with air quality 

regulations, procedures, schedules, and requirements of trading programs and broader air 

regulator programs. Air quality regulators are not always familiar with zero-emitting renewable 

energy technologies, projects, and accepted monitoring procedures. Going through a learning 

 18
 

process on both sides requires time and effort. Some states that established set-asides under the 

NOx Budget Program have not yet established the rules governing the application process. 

Some of the components that can simplify a set-aside program and reduce the potential burden 

include: 

• Establishing a simple and straightforward allocation procedure; for example, by 

establishing a default allocation rate 

• Designing a simple and clear application form 

• Allowing aggregation of small projects without burdening the state; for example, by 

requiring a single application from one representative of the aggregated project 

• Providing a simple and clear procedure for continuing allocation once a facility has 

entered the program 

• Providing outreach to inform potential participants about the program. 

4.1.2 Advantages of a Renewable Energy Set-Aside 

Renewable energy set-asides are the best known and most widely applied method for allocating 

allowances to renewable generators. They have been established under several programs (the 

Title IV SO2 trading program and the NOx Budget Trading Program) and in at least seven states. 

A renewable energy set-aside provides a concrete number of allowances that are specifically 

allotted to support renewable energy sources. Therefore allowances can be allocated to 

renewable generators immediately at the start of operation, whereas under a direct allocation 

approach there may be a lag between operation and allocation depending on baseline 

requirements. 

Because the number of allowances reserved for renewable energy remains unaltered over time 

under a set-aside, it creates certainty for both the renewable energy generator regarding the 

number of allowances that are available and to the fossil fuel generators regarding the number of 

allowances that will be allocated. This certainty may be easier to accept politically than other 

approaches that allocate an uncertain number of allowances in proportion with generation output. 

Because a set-aside pool is not affected by growth in the fossil fuel electric generating sector, 

renewable energy sources do not have to compete with fossil fuel sources for allowances. So 

from the renewable generator perspective, a limited but exclusive set-aside is advantageous. 

Depending on the size of the set-aside, in the initial years of the cap and trade program, 

individual renewable energy generators have some certainty regarding the number of allowances 

they will receive by using expected generation and the standard allocation rate, which allows for 

a more likely inclusion in project financing. However, this certainty is removed if renewable 

energy generation outgrows the size of the set-aside. 

 19
4.1.3 Disadvantages of a Renewable Energy Set-Aside 

Even though a set-aside guarantees the number of allowances available to renewable energy 

sources as a whole, there are two primary drawbacks to a set-aside relative to other distribution 

methods: 

• There is a limit on the long-term availability of allowances for wind and other renewable 

energy generators. 

• The transaction cost for receiving allowances may be high compared to other approaches 

to distribution. 

• Uncertainty associated with the application process reduces the financial value of the 

allowances to wind and other renewable energy generators. 

Most set-asides have been set at 1% to 5% of the total allowance pool. While this may be 

adequate to accommodate the market in the near term, in the longer term it may not be sufficient 

to provide allowances for a growing wind power sector. This leads to competition among the 

wind generators for the limited pool of allowances, reducing the value of the allowances. If wind 

generation outgrows what can be accommodated by the set-aside, allowances are likely to be 

distributed on a prorated basis, decreasing the number of allowances each generator receives and 

reducing the program’s value to new projects. Alternatively, the program may limit the years of 

eligibility in the program for wind generators, dropping them after a few years to allow newer 

projects to come into the program. Either way, the value of the set-aside to wind developers is 

diminished over time. Because of this, a set-aside program is not as valuable to new wind energy 

development as allocation of allowances on the same basis as other energy sources from the 

main allowance pool. 

Relative to other allowance distribution methods, a set-aside program also creates administrative 

complexity for the regulating agency and the electric generator because it treats renewable 

generation separately from the rest of the cap and trade program. Typically, allocations to 

conventional generators are automatic, but wind and other renewable energy generators must 

apply to receive set-aside allowances. In some cases, they must reapply every year. This 

application process can be an administrative burden and create a transaction cost that must be 

compared to the expected value of allowances that might be allocated to determine whether it is 

worthwhile to apply. The regulating agency must administer an entirely separate program when 

using a set-aside, requiring additional resources to review and verify set-aside applications and to 

allocate allowances appropriately across the wind generators. Transaction costs for both 

regulators and generators can reduce the effectiveness and value of a set-aside. 

In addition, the uncertainty associated with the application process means that renewable energy 

generators cannot count on the value of allowances until after the application is approved. This 

reduces the effective value of the allowances. Uncertainty related to the application process is 

particularly high if the requirements of that process have not been formally established, as is the 

case in some states that adopted set-asides for the NOx Budget Trading Program. 

 20
 

Despite these disadvantages, some states have had full subscription of their set-aside program 

under the NOx Budget Trading Program. The next section discusses some specific results for 

wind energy projects. 

4.1.4 Experience with EE/RE Set-Asides 

The only active emission allowance trading market today with renewable energy set-asides is the 

NOx Budget Trading program. The NOx Budget Trading Program took effect in 2003 to reduce 

emissions of NOx in 22 eastern states and the District of Columbia. This program aims to reduce 

the production of ground-level ozone (smog), of which NOx is a precursor. Affected states must 

limit NOx emissions during the ozone season, from May 1 until September 30 every year. Of the 

23 affected jurisdictions, only six currently have a set-aside for EE/RE projects (see Table 2): 

Indiana, Massachusetts, Maryland, New Jersey, New York, and Ohio. Missouri has established a 

set-aside to take effect when it enters the program in 2007. 

Table 2. Summary of SIP Call Set-Aside Parameters 

*

 NOx Budget units not eligible. **Starting 2007 

Size of Applicability 

Annual 

SetAside 

(Tons) 

% of 

Total 

Budget 

Allocation 

Basis 

Length of 

Allocation 

Generator 

Online Date 

RE EE Biomass CHP 

Indiana 1,115 2% 1.5 lbs/MWh, 

discounted by 

75% for 

projects owned 

by affected 

entities 

5 yrs within 2 yrs 

of request 

x x x 

Maryland 463 3% 2.5 lbs/MWh NA on or after 

5/1/00 

x x 

Massachusetts 643 tons, 

768 tons 

allocated 

to date 

5% 1.5 lbs/MWhe

0.44 

lbs/mmBtu 

useful thermal 

output 

No limit for 

RE; 7 years 

for EE 

after 

12/31/99 

x x x*

New Jersey 410 5% 1.5 lbs/MWh No limit 1992 and 

after 

x x 

New York 1,241 3% 1.5 lbs/MWh 5 yrs after 5/1/03 x x x 

Ohio 454 1% 1.5 lbs/MWh 5 yrs x x x x*

Missouri** 134 1% 1.5 lbs/MWh 5 yrs after 

5/1/2006 

x x x x 

The set-asides are typically between 1% to 5% of the total NOx allowance budget. The types of 

EE/RE projects considered to be eligible vary somewhat by state but include: 

• Zero-emitting renewables, such as wind and solar 

 21
• Energy efficiency projects such as retrofitting lighting, air conditioning, and other systems 

with more efficient equipment 

• Renewable projects burning biomass 

• Combined heat and power (CHP) projects. 

Projects typically are only eligible if they are considered to be “new,” with the definition of 

“new” varying by state from 1992 to 2003. Projects receive allowances in units of pounds of 

NOx per megawatt-hour (lbs/MWh) saved (by energy efficiency) or generated. The allocation 

factor is typically 1.5 lbs/MWh saved or generated, which is based on the nominal emission cap. 

Depending on the state, a project may receive allowances for up to 5 years or more but must reapply each year. Based on current prices for NOx allowances, the value of allocations is around 

$1.50/MWh [17,18]. 

Experience with State Set-Aside Programs 

To assess the experience to date with EE/RE set-aside programs, interviews were conducted with 

state air regulators and wind energy developers who had existing or proposed projects in states 

with set-asides. In most states, the EE/RE set-asides have not been fully subscribed, and 

generally very few types of projects have benefited from them. 

For instance, in Indiana, the program has not yet been fully utilized and only landfill gas projects 

have received allowances. Maryland has had applications from two wind projects but has not yet 

developed rules for the application process or granted allowancesu

. Ohio has allocated 

allowances primarily to hydroelectric facilities, and also to one wind project, with 80 of the 454 

allowances allocated for the 2006 ozone season. New Jersey typically allocates 10% to 12% of 

the allowances in the set-aside each year. To date, two landfill gas projects have received 

allowances, while most allowances go to energy efficiency projects. New York is now 

developing its rules for applications and has not allocated set-aside allowances to date. 

Massachusetts is the only state in which the set-aside is over-subscribed. There, as in New 

Jersey, most of the allowances go to energy efficiency projects, although two hydroelectric 

facilities have also received allowances. 

Thus, set-aside programs offer very limited examples of allocating allowances to renewable 

generators in general and wind energy in particular. Interviews with wind project developers and 

state regulators identified several possible reasons why participation has been limited: 

Conflict with State RPS Programs. In some states that have both allowance set-asides and 

renewable energy mandates, there can be a conflict between the provisions of the two programs 

that explicitly or implicitly requires developers to choose one or the other program. If the value 

of RECs under the RPS is higher than the value of the NOx allowances, developers are likely to 

choose the RPS rather than the NOx program. 

 

u

 Montgomery County in Maryland is purchasing some wind power, for which a number of allowances will be 

retired; however, this was negotiated outside of the set-aside program. 

 22
 

For example, in New York, wind generators sell to the New York State Energy Research and 

Development Agency (NYSERDA) their rights to claim environmentally beneficial attributes of 

their electricity, as well as the right to transfer that right. Under this program, NYSERDA 

requires generators to include all emission credits with the sale; however, there is no explicit 

price adder for the allowances. Since there is no value placed on the allowances in this market, 

there is no incentive for wind developers to go to the effort of acquiring the NOx allowances and 

therefore none have done so. However, there could be value to acquiring allowances for wind 

generators selling to the voluntary (non-RPS) market. In addition, if there were surplus 

renewable generation beyond what is required to satisfy the RPS, there could be a value in 

acquiring NOx allowances so that environmental attributes of renewable generation could be sold 

outside the RPS. For the present, however, the structure of the RPS is effectively discouraging 

generators from participating in the NOx allowance program because the RPS policy is intended 

to reduce emissions. This in turn has caused some environmental regulators to believe that there 

is little interest in the set-aside program. 

In some cases in other states where RPS and set-aside requirements were not in conflict, 

regulators or developers were under the false impression that they were. Air regulators, energy 

officials, and renewable energy developers do not consistently have a clear understanding of 

each others’ regulations and contractual requirements. Confusion between regulatory 

requirements and contractual requirements further complicates understandings among these 

parties. Language establishing requirements is also unclear in some cases. 

Rule Complexity and Delays. Most states have established their allowance set-aside programs 

and have received at least some applications. However, the process can be administratively slow 

and burdensome. A wind developer in Maryland reported that an application has been pending 

for several years as the state considers the appropriate treatment and pursues a rulemaking to 

establish the application procedure. It was reported that this process has also been slowed by 

pressure from incumbent utilities that are reluctant to see allowances diverted from the main 

allocation pool. Similarly, in New York, while the set-aside has been established for several 

years, the state is in the process of developing guidance and formal application documents and is 

not yet able to allocate the allowances. 

Perceived Value of Allowance Set-Asides. At current allowance prices and allocation rates, 

NOx allowance set-asides are worth about $1.50/MWh ($0.0015/kWh) for renewable generators. 

While not inconsequential, this is not a large amount on a per-MWh basis, and may be 

insufficient to motivate applications. However, others noted that allowances can have a 

significant value as an aggregate amount over the life of the project and in combination with 

other incentives. Some wind developers viewed this as a temporary market condition, rather than 

a fundamental reason not to participate in a set-aside program. Many wind developers are 

looking forward to the expected higher value of CO2 allowances under possible future CO2

trading programs. They hope that set-asides under NOx programs will establish a precedent for 

such future programs. 

Lack of Developer Knowledge of the Set-Aside Program. Some wind developers interviewed 

were unaware of potential eligibility of their projects for NOx allowance set-asides. As nonemitting generators, some developers do not think about the applicability and potential benefits 

of participating in an emission reduction program. 

 23
Despite these problems, there seems to be growing interest in NOx set-aside programs (perhaps 

due to increasing awareness among wind developers). Although the set-aside in Missouri does 

not begin until 2007, a wind facility under development there plans to apply to the program. In 

Ohio, a wind facility is receiving two allowances, and its managers are happy with the EE/RE 

set-aside program. Their main concern is the potential tightening of the program, under which 

eligibility may be limited to facilities that began operation within the past 2 years. If this occurs, 

the wind facility in Ohio will no longer be eligible. 

In general, the NOx EE/RE set-asides have not provided significant value to wind generators. 

Although one facility in Ohio is receiving allowances, the others contacted remain frustrated or 

even unaware of the set-aside program. Conflicting regulations, inadequate allowances, facility 

age constraints, lengthy application processes, or lack of awareness are reasons that wind 

generators have not pursued EE/RE set-asides. 

4.2 Direct Output-Based Allocation to Renewable Energy 

Another near-term alternative to allocating allowances to wind generators through a set-aside is 

to directly allocate them based on relative quantity of electricity generation as part of the primary 

allocation pool. That is, if the main pool of allowances is allocated based on electric output, 

renewable generators can receive their allocations on the same basis as other generators. 

In a recent Clean Energy-Environment Guide to Action, the U.S. EPA highlights the benefits of 

output-based environmental regulations. Section 5.3 of the document states: 

The goal of output-based environmental regulations is to encourage the use of 

fuel conversion efficiency and renewable energy as air pollution control 

measures...States utilize output-based environmental regulations to encourage 

efficient energy generation by leveling the playing field for fuel conversion 

efficiency and renewable energy as air pollution control measures. Historically, 

environmental regulations have been input-based, which does not account for the 

pollution prevention benefits of process efficiency, which encourages the use of 

more efficient generation approaches [14]. 

Shifting from a heat input- to a generation-output-based allocation system facilitates a cap and 

trade program including all generators on a neutral basis, regardless of fuel and emissions, which 

can provide a greater incentive for investment in both clean and efficient energy sources. 

4.2.1 Design of Output-Based Allocation to Wind Generators 

Design issues for output-based allocation to renewable generators include: 

• Eligible technologies, size, and vintage 

• Basis for allocation 

• Timing of allocations 

• New source set-aside. 

 24
 

Definition of Eligible Technologies and Projects 

A cap and trade program for emission reductions can allocate the allowances based on output 

generation (MWh) and specify the units eligible to participate. Instead of including only fossilfuel-fired units, as has been the case under previous cap and trade programs, eligible units can be 

expanded to include both fossil-fuel-fired and renewable energy electric generating units. State 

regulators will likely wish to define specific renewable energy sources to reflect their state’s 

goals and resources. This process is essentially the same as for a renewable energy set-aside (see 

Section 4.1). Chapter 5 includes regulatory language for output-based allocation to wind 

generators under the CAIR. 

Basis for Allocation 

The allocation method will differ slightly depending on whether a pure output-based allocation is 

used or an allocation factor based on output. In the case of a pure output-based allocation to all 

sources, generating units can receive allowances based on their proportion of output, as 

calculated during a baseline period, which then may be updated. An alternative is to use an 

allocation factor, in pounds of emissions per MWh or kWh. If the same allocation factor is used 

for all energy sources and allocations are prorated to achieve the cap, then the effective 

allocation will be the same as under a pure output-based allocation. 

Timing of Allocations 

Most cap and trade programs reallocate allowances periodically to bring new generators into the 

program. The timing of reallocation can range from every year to every 10 years. A 3- to 5-year 

reallocation is common. The allowances are typically allocated several years in advance to 

provide certainty to generators. 

New Source Set-Aside 

A new unit entering the program typically must establish several years of baseline operating 

data. It will then receive an allocation for an allowance vintage several years in the future. Thus 

there can be a lag of 5 or more years between initial commercial operation and the time that a 

unit actually receives allowances. Most programs fill this gap with a “new source set-aside.” 

These allowances are based on the operation in the year immediately prior or are based on 

expected operation and prorated for actual operation at the end of the year. Under a direct outputbased allocation to wind generators, the wind generators would need to be included under the 

new source set-aside to receive allowances during their early years of operation.

4.2.2 Advantages of Direct Output-Based Allocation to Wind Generators 

If output is selected as the basis for allocation of the main allowance pool, directly allocating 

allowances to new renewable energy generation including wind generation units provides clear 

support for new development of renewable resources. An output-based allocation method has the 

following advantages: 

• Provides a more stable and consistent allocation stream for renewable sources, relative to 

a set-aside. 

• Simplifies the allocation process and reduces administrative burden 

 25
• Establishes a basis for allocation (output) that is neutral with respect to fuels and energy 

source 

Output-based allocation is more stable and consistent than a fixed set-aside because new wind 

generators receive allocations from the main allowance pool, along with other generators. 

Therefore, renewable energy sources do not compete directly against each other for a fixed 

number of set-aside allowances. This provides greater certainty that allocations will be consistent 

over time, which increases the financial value of the allowances under output-based allocation 

relative to a set-aside. 

Overall, an output-based method simplifies the allocation process for renewable energy 

compared to a set-aside. Generation data are easily collected as generators already track the 

information and state agencies already collect such data for other purposes. An output-based 

approach also eases the administrative process because all generators are allocated allowances 

using a single source of data. An output-based approach eliminates the need for regulating 

agencies to determine either a direct emission displacement rate or an allocation factor. 

Finally, generation output is a unit of measure that is neutral for all generating units. Under an 

output-based allocation system that gives allowances to all generators at the rate per kWh, there 

is no bias for or against any specific energy source based on vintage or fuel. An output-based 

system encourages development of the most fuel efficient energy sources, as well as renewable 

energy sources. 

 4.2.3 Disadvantages of Direct Output-Based Allocation to Wind Generators 

The approach of output-based allocation to wind generators has not been implemented as part of 

the primary allocation under previous emission reduction cap and trade programs, so the lack of 

operational experience is a disadvantage. Also, because such a program could allocate more 

allowances to renewable generators than a set-aside, some incumbent conventional generators 

oppose output-based allocation, complicating its implementation.v

Output-based allocation as a design choice overall is subject to the criticism, from a theoretical 

economic standpoint, that it subsidizes and therefore encourages output. Economic modeling 

studies have shown results consistent with theory, that updating output-based allocation can 

increase generation. However, if output-based allocation has been selected for the main 

allowance pool, this potential disadvantage is separate from the decision of whether to include 

renewable generators in the main allocation. 

On a more programmatic level, a full output-based program requires tracking of electricity 

output from all regulated sources. It may also include more, smaller renewable generators in the 

broader trading program, which may add complexity. 

 

v

 Opponents of other non-emitting generating technologies also may oppose any increased use of output-based 

allocation, and proponents of those technologies may seek to be included in output-based allocation that is open to 

all generators. 

 26
 

In this section, we have identified the primary methods for including wind generation in cap and 

trade programs and explored their advantages and disadvantages. Next, we turn to the specific 

regulatory changes needed to incorporate wind generation into a particular program: the CAIR. 

 27
5. Incorporating Renewable Energy into the Clean Air Interstate 

Rule 

In March 2005, the U.S. EPA promulgated the Clean Air Interstate Rule (CAIR) (70 FR 25162, 

5/21/05), which caps emissions in the 28 eastern states and the District of Columbia to 

significantly reduce the negative health and environmental impacts from nitrogen oxides (NOx) 

and sulfur dioxide (SO2). The program will be implemented in two phases and is expected to 

reduce NOx emissions by 60% and SO2 emissions by 70% below 2003 levels at full 

implementation in 2015. States may be eligible to participate in an annual SO2, an annual NOx

and/or ozone season NOx trading program (Figure 1), depending on whether the state needs to 

address PM2.5 nonattainment, ozone nonattainment, or both. 

Figure 1. States affected by the Clean Air Interstate Rule (U.S. EPA) 

Regulated states have the option of implementing the reductions through a regional trading 

program or through individual state emission reduction programs. If states choose to participate 

in the trading program, they must adopt a model rule issued by the U.S. EPA that lays out the 

basic structure of the program (70 FR 25162, 5/21/05). While most of the components of the 

model rule are fixed to ensure smooth administration of the trading program, states are free to 

determine the method of allocating NOx allowances to regulated entities. SO2 allowances 

continue to be allocated consistent with Title IV of the Clean Air Act Amendments of 1990, so 

states do not have discretion on their distribution, and renewable energy cannot receive them at 

this time. 

The CAIR model rule does not include renewable energy in the program. However, the EPA 

does acknowledge the inclusion of renewable energy and energy efficiency as additional 

mechanisms to achieve the program’s emission reduction goals. EPA has provided guidance on 

including renewable energy and other emission reduction mechanisms in cap and trade programs 

[24]. 

 28
 

The state response to CAIR can include any of the methods for incorporating renewable energy 

sources discussed in this report. Model CAIR language for alternative allocation methods, 

including the methods discussed in this paper, is provided in the August 2005 State and 

Territorial Air Pollution Program Administrators and the Association of Local Air Pollution 

Control Officials (STAPPA/ALAPCO) document, Alternative NO Allowance Allocation 

Language for the Clean Air Interstate Rule [27]. This document simplifies the process of altering 

the model state rule under CAIR for states that wish to include renewable energy sources and 

provides the exact wording for multiple alternative allocation methods under the CAIR.

x

This 

section provides background on the CAIR allocation approach and the options for including 

wind generators provided by the STAPPA/ALAPCO document. 

5.1 The EPA Model Rule 

The EPA model rule allocates allowances to existing sources on an input basis, and to new 

sources on a modified output basis. The allocation methodology for the annual NOx program is 

described in subpart EE section 96.142 of the model rule, and the allocation for the seasonal NOx

program is described in subpart EEEE, section 96.342. The provisions of the two sections are 

essentially identical in construction, so the provisions of the sections are referred to jointly in this 

document (for example, as 96.x40 where x can be 1 or 3, meaning section 96.140 or 96.340). 

Section 96.x40 establishes the size of the state trading budgets. Section 96.x41 establishes the 

overall timing of the allocation programs, with the initial allocation in 2006 for the first 6 years 

of the program (2009-2014) and annual allocations thereafter. It also establishes procedures in 

case a state does not submit allocation data to the EPA. Section 96.x42 is the NOx allocation 

methodology itself. Within section 96.x42: 

• paragraph (a) describes how the heat input baseline is calculated for different types of 

units; 

• paragraph (b) establishes the number of allowances to be allocated and describes the 

allocation calculation; 

• paragraph (c) describes the new source set-aside; and 

• paragraph (d) governs the redistribution of unused allowances from the new source setaside. 

The model rule allocates allowances based on their historic (baseline) heat input. The first step in 

the allocation process is to calculate the baseline heat input for each unit. Each unit then receives 

allowances proportional to its share of the total baseline heat input in the state. The units are 

dealt with in two categories for the calculation of the baseline heat input: 

1. For older units (those that commenced commercial operation prior to 2001), the EPA 

approach is a fuel-weighted, heat input-based allocation. The baseline heat input for 

each unit is the three highest years of weighted heat input from 2000-2004. The heat 

input is weighted by 1.0 for coal-fired units, 0.6 for oil-fired units and 0.4 for other 

affected units. The allowances are allocated based on the weighted heat input. 

 29
2. For units that went online starting in 2001, the model allocation rule uses a modified 

output-based approach with credit for CHP. The baseline heat input for these is based 

on electric output converted to heat input. The converted heat input is the average of 

the unit’s three highest years of gross electric output for the first 5 years of operation 

converted to heat input using a heat rate of 7,900 British Thermal Units per kilowatthour (Btu/kWh) for coal units and 6,675 Btu/kWh for other fuels. This converted heat 

input (not adjusted by fuel) is used to allocate allowances for the 2001 and later units 

from the same pool as the pre-2001 units. 

Once the baseline heat input is calculated for all of the affected units, the allowances are 

allocated based on each unit’s share of the total heat input. The allowances available for 

allocation to these units are the portion of the state electric generating unit (EGU) budget minus 

the new source set-aside. 

The initial allocation is in 2006 for the years 2009-2014. For the allocation in 2009 and each 

allocation thereafter, the allowances are reallocated for the year 6 years later. However, each 

unit’s baseline heat input, once established, does not change. Each unit’s allocation will also be 

reduced slightly as new plants come into the system and receive a share of the available 

allowances. 

There is a new source set-aside that provides allowances for new units until they have 

established their 5 years of baseline data. The set-aside for NOx is 5% per year for 2009 through 

2014 and 3% in 2015 and thereafter.w A new unit can request allowances equal to its actual 

emissions from the prior year. The allocation may need to be prorated to stay within the set-aside 

if it is oversubscribed. As new plants establish their 5 years of baseline data, they begin to get 

allowances in the regular reallocation. Since 5 years of data are required for the baseline and the 

initial allocation in 2006 covers 2009-2014, most units that begin commercial operation after 

January 1, 2001 will not have enough data for the initial allocation in 2006 and will not be able 

to receive allowances in the regular allocation process until 2015. 

5.2 Renewable Energy Set-Aside 

A renewable energy set-aside can be incorporated into the CAIR by defining eligible renewable 

energy sources in the initial section and adding a section that establishes both the amount of the 

set-aside and a method for allocation to renewable energy sources. 

Development of state-specific definitions of which renewable energy sources and what size 

projects are eligible, including specific definition of each eligible renewable resource, can avoid 

potential confusion on which sources are eligible for the set-aside. As discussed in the earlier 

section on renewable energy set-asides, placing a limit on size of eligible generators will 

decrease the administrative burden for the regulating agency but will exclude small projects from 

the set-aside allowance pool. Aggregation of small projects opens the opportunity for such 

projects and can be accomplished by including an additional definition. 

 

w The EPA model rule erroneously lists these dates as “2009-2013” and “2014 and thereafter” in Section 96.x42 

(c)(1). These dates should be corrected to “2009-2014” and “2015 and thereafter,” independent of other changes. 

 30
 

Definitions - Section 96.x02 

Renewable energy unit means an electric generator or renewable energy project, equal 

or greater than 10 MWx

, which began commercial operation after January 1, 2001 and 

is powered by wind, solar, ocean thermal, wave, geothermal, or hydroelectric energy. y

Renewable energy project means a group of renewable energy units that, in aggregate, 

equal at least 10 MW of rated capacity. 

The operation date of January 1, 2001 reflects the cutoff date for new sources in the CAIR. The 

renewable energy set-aside operation date can be altered to include existing renewable energy 

capacity or goals for renewable energy growth. If the date is set later, there is a larger portion of 

set-aside allowances for new renewable energy sources, creating a stronger incentive for 

development of new renewable energy sources. Conversely, a later date excludes existing 

renewable energy sources. Setting an operation date cutoff will require making tradeoffs between 

new and existing renewable energy generation. 

Once eligible units are properly defined, the set-aside language must identify the size of the 

renewable energy set-aside, how renewable energy units apply for allowances, how allowances 

are distributed among applicants, and how undersubscribed or oversubscribed allowances are 

handled. The STAPPA/ALAPCO language is based on other set-aside language in the model 

rule. The size of the renewable set-aside is typically 3% to 5% of the total allowance pool [26]; 

however, individual states will need to adapt this to their expectations of renewable generation 

and other state-specific considerations. The STAPPA/ALAPCO language bases the allowance 

allocation on an output-based emission factor. This is a simple approach that can be related back 

to the allocation in the main program. If the renewable set-aside is oversubscribed, the 

allocations are prorated based on generation. Any unused allowances from the set-aside are 

reallocated to the main allowance pool. The specific set-aside language follows. 

NOX Allowance Allocations – § 96.x42 

(d) For each control period in 2009 and thereafter, the permitting authority will 

allocate CAIR NOx allowances to qualifying renewable energy units in the State, in 

accordance with the following procedures: 

(1) The permitting authority will establish a separate renewable energy set-aside for 

each control period. Each new renewable set-aside will be allocated CAIR NOx

allowances equal to 5% of the amount of tons of NOx emissions in the State trading 

budget under § 96.x40. 

 

x

 The size cut-off was set lower than the main program’s 25 MW limit to include more projects. 

y

 The choice to include other renewable energy sources that emit NOx requires additional consideration and action 

by the state to properly define eligible units and evaluate the impact on overall emissions. 

 31
(2) The CAIR designated representative of such a renewable energy unit may submit to 

the permitting authority a request, in a format specified by the permitting authority, to 

be allocated CAIR NOx allowances, starting with the later of the control period in 2009 

or the first control period after the control period in which the energy efficiency or 

renewable unit commences commercial operation. The CAIR NOx allowance allocation 

request must be submitted on or before July 1 of the first control period for which the 

CAIR NOx allowances are requested and after the date on which the renewable unit 

commences commercial operation. 

(3) In a CAIR NOx allowance allocation request under paragraph (d)(2) of this section, 

the CAIR-designated representative may request for a control period CAIR NOx

allowances in an amount not exceeding: 

(i) For a renewable energy unit, the control period gross electrical output of the facility 

during the calendar year immediately before such control period multiplied by 1.5 

lb/MWh for the years 2009-2014, or 1.25 lb/MWh for 2015and thereafter and divided 

by 2000 and rounded to nearest whole allowance as appropriate. 

(4) The permitting authority will review each CAIR NOx allowance allocation request 

under paragraph (d)(2) of this section and will allocate CAIR NOx allowances for each 

control period pursuant to such request as follows: 

(i) The permitting authority will accept an allowance allocation request only if the 

request meets, or is adjusted by the permitting authority as necessary to meet, the 

requirements of paragraphs (d)(2) and (3) of this section. 

(ii) On or after July 1 of the control period, the permitting authority will determine the 

sum of the CAIR NOx allowances requested (as adjusted under paragraph (d)(4)(i) of 

this section) in all allowance allocation requests accepted under paragraph (d)(4)(i) of 

this section for the control period. 

(iii) If the amount of CAIR NOx allowances in the renewable set-aside for the control 

period is greater than or equal to the sum under paragraph (d)(4)(ii) of this section, 

then the permitting authority will allocate the amount of CAIR NOx allowances 

requested (as adjusted under paragraph (d)(4)(i) of this section) to each CAIR NOx unit 

covered by an allowance allocation request accepted under paragraph (d)(4)(i) of this 

section. 

(iv) If the amount of CAIR NOx allowances in the new unit set-aside for the control 

period is less than the sum under paragraph (d)(4)(ii) of this section, then the 

permitting authority will allocate to each CAIR NOx unit covered by an allowance 

allocation request accepted under paragraph (d)(4)(i) of this section the amount of the 

CAIR NOx allowances requested (as adjusted under paragraph (d)(4)(i) of this section), 

multiplied by the amount of CAIR NOx allowances in the new unit set-aside for the 

control period, divided by the sum determined under paragraph (d)(4)(ii) of this 

section, and rounded to the nearest whole allowance as appropriate. 

 32
 

(v) The permitting authority will notify each CAIR-designated representative that 

submitted an allowance allocation request of the amount of CAIR NOx allowances (if 

any) allocated for the control period to the renewable unit covered by the request. 

Finally, the set-aside must be deducted from the main allowance pool for existing conventional 

units. In the CAIR model rule, the main allowance pool is 95% of total allowances from 2009 

until 2014, and 97% thereafter. This reflects the suggested set-aside for new sources of 5% and 

3% respectively. Once a renewable energy set-aside amount is determined, the main allowance 

pool percents should be adjusted accordingly. 

NOX Allowance Allocations – § 96.x42 

(b)(1) For each control period in 2009 and thereafter, the permitting authority will 

allocate to all CAIR NOx units in the State that have a baseline heat input (as 

determined under paragraph (a) of this section) a total amount of CAIR NOx

allowances equal to 95% for a control period during 2009 through 2014, and 97% for a 

control period during 2015 and thereafter, of the tons of NOx emissions in the State 

trading budget under § 96.x40 (except as provided in paragraph (d) of this section). 

5.3 Direct Allocation to Renewable Energy 

While renewable energy set-asides have been used in the past, existing emission reduction cap 

and trade programs to date have not included an output-based allocation to renewable generators. 

However, the CAIR model rule already allocates allowances for new sources based on output, so 

it is easy to allocate allowances to new sources of renewable energy on an output basis. This can 

be accomplished by re-defining units eligible for new source allocations to include renewable 

energy sources. Once included in the definition, renewable sources can be allocated allowances 

from the main allowance pool at the same rate as other new units, where renewable energy 

generation output is multiplied by 6,675 Btu/kWh, the rate used for other fuels besides coal. An 

eligible unit for new source allocations can be defined as: 

Definitions - Section 96.x02 

Covered unit means a CAIR NOx unit, or a non-emitting electric generator or project 

with a nameplate capacity greater than [25 MW] that began commercial operation 

after January 1, 2001 and is powered by [wind, solar, ocean thermal, wave, 

geothermal, or hydroelectric energy]. 

The eligibility of various renewable energy technologies and capacity size would be determined 

by each state depending on its market for renewable energy sources. Non-polluting renewable 

energy sources provide the greatest emission reductions. This revised definition is then used as 

the basis for allocating allowances under Section 96.x42: 

(A)(1)(ii) For [covered units] commencing operation on or after January 1, 2001: 

 33
5.3.1 Full Output-Based Allocation System 

While the existing CAIR model rule is a hybrid of heat input and output-based allocation 

systems, allocating the entire allowance pool under the CAIR based on generation output 

provides the strongest and most stable incentive for investment in clean, renewable energy and 

efficient conventional generators. A full output-based allocation would allow both existing and 

new renewable energy sources to receive allowances and realize their value through the market 

or through emission reduction claims. A full output-based system can be adopted under the 

CAIR by replacing the separate allocation for new and old units with one, consistent outputbased allocation approach for all units. 

§ 96.x42 CAIR NOx allowance allocations. 

(a)(1) The baseline generation (in MWh) used with respect to CAIR NOx allowance 

allocations under paragraph (b) of this section will be: 

(i) For each CAIR NOx [covered] unit that has operated each calendar year during a 

period of 5 or more consecutive calendar years, the average of the 3 highest amounts of 

the unit’s control period gross electrical output over the 5 years prior to the allocation 

year, provided that if a generator is served by 2 or more units, then the gross electrical 

output of the generator will be attributed to each unit in proportion to the unit’s share 

of the total control period heat input of such units for the year;... 

The definition of “covered” unit would be as discussed above. 

5.3.2 New Source Set-Aside 

The previous changes account for allocation to new sources, renewable and conventional, once 

they are eligible for allocations from the main allowance pool. However, new sources must 

establish a 5-year data baseline before they are eligible for allocation. Once the baseline is 

established, allowances are allocated for the year 6 years following the allocation. Thus there is a 

lag of approximately 12 years between the start-up of a new facility and the point at which it 

receives allowances under the primary allocation program. Under the current CAIR model rule, 

new sources are allocated allowances from a new source set-aside until they establish their 

baseline and start to receive regular allocations. 

The model rule suggests a new source set-aside equal to 5% of the total allowance pool from 

2009- 2014, and 3% thereafter. While receiving allowances from this set-aside, conventional 

generators can apply for allowances not greater than their emissions for the previous year. The 

set-aside allocation is designed to make conventional generators “whole” until they are able to 

receive allowances from the main allowance pool and does not require a reduction in emissions. 

If renewable generators receive allocations from a renewable energy set-aside, they can apply for 

those allowances as soon as they start to operate. If they are receiving allocations through a 

direct output-based allocation, however, they will be subject to the same 12-year lag as 

conventional generators and so would also need to be included in the new sources set-aside to 

receive any benefit during that time. 

 34
 

Non-emitting renewable energy generators cannot apply for allowances based on historic 

emissions, so the allocation can be based on a standard allocation factor until the new renewable 

energy sources meet the baseline period for direct allowance allocation from the main allowance 

pool. 

The required change is to modify the new source set-aside as follows: 

Section 96.x42 

(c)(2) The CAIR-designated representative of such a covered unit may submit to the 

permitting authority a request, in a format specified by the permitting authority, to be 

allocated CAIR NOx allowances, starting with the later of the control period in 2009 or 

the first control period after the control period in which the CAIR NOx unit commences 

commercial operation and until the first control period for which the unit is allocated 

CAIR NOx allowances under paragraph (b) of this section. The CAIR NOx allowance 

allocation request must be submitted on or before July 1 of the first control period for 

which the CAIR NOx allowances are requested and after the date on which the CAIR 

NOx unit commences commercial operation. 

(3) In a CAIR NOx allowance allocation request under paragraph (c)(2) of this section, 

the CAIR-designated representative may request for a control period CAIR NOx

allowances in an amount not exceeding: 

(i) for CAIR NOx unit, the total tons of NOx emissions during the calendar year 

immediately before such control period. 

(ii) for a covered renewable generator, the control period gross electrical output of the 

facility during the calendar year immediately before such control period multiplied by 

1.5 lb/MWh for the years 2009-2014, or 1.25 lb/MWh for 2015 and thereafter and 

divided by 2000 and rounded to nearest whole allowance as appropriate. 

Even though the suggested set-aside is 5%, states can alter this amount to accurately reflect the 

expected growth of generation in their state. Inclusion of renewable generators in the new source 

set-aside may require states to increase the size of the set-aside. 

5.4 Decrease Lag Time for Allocations 

As noted above, there is an extensive lag time between receiving allocations from the new source 

set-aside and receiving allocations from the main allowance pool under the proposed allocation 

schedule for the EPA model CAIR. This time lag decreases the value of the allowance allocation 

to new conventional and renewable energy generators because of the potential that the new 

source set-aside would not be large enough to cover all applicants. This provides less incentive 

for new wind development. There are various methods to decrease the lag time in the CAIR, 

which would incorporate new sources into the main allowance pool more quickly and provide 

greater certainty of the allowance value to new non-emitting renewable energy sources. One 

method is to shorten the baseline period of generation for new sources from the suggested 5 

years to 3 years. This can be accomplished by adding the following section: 

 35
Section 96.x42 

(a)(1)(ii)(A) For units operating each calendar year during a period of at least 3 but 

less than 5 consecutive calendar years, the average of the 3 highest amounts of the 

unit’s total converted control period heat input over the consecutive years of operation. 

This will allow existing units in operation after January 1, 2001, as well as units that commence 

operation after the initial allocation, to move into the main allowance pool more quickly. The 

allocation period and the lag between allocation and allowance use can also be shortened (e.g., 

allocate allowances for the year 3 years after the allocation period rather than 6 years after). 

Appropriate wording for a shortened lag time can be found in the STAPPA/ALAPCO document 

[27]. 

 36
 

6. Summary and Conclusions 

Cap and trade programs are one of the leading policy choices to reduce emissions from 

electricity generation in the United States. Cap and trade programs use market-based trading of 

emission allowances to minimize compliance cost and provide flexibility to affected entities. 

Citing expected environmental and economic benefits, some programs include renewable 

generation. However, to date these programs have had little participation of renewable 

generators, including wind generation. As a non-emitting, increasingly competitive technology 

with growing generation capacity, wind is of particular interest because of its eligibility 

regardless of emissions or vintage restrictions of some programs, and the potential that the cap 

and trade incentive could make a difference in capacity expansion. 

If policymakers include renewable energy in cap and trade programs, there are several 

mechanisms by which wind generators can gain value from participating in the program: 

• If they receive an allocation of emission allowances and then sell them to emitting 

generators; 

• If they receive allowances and use them to enhance their participation in voluntary retail 

renewable energy markets; or 

• If they use them to make creditable emission reduction claims. 

• If the program design distributes allowances by auction instead of by free allocation, 

policymakers would need to decide how to spend auction proceeds and could choose to 

use them to benefit wind generators among others. 

Renewable generators, such as wind generation, can be incorporated in generation-based cap and 

trade programs in a manner that provides the strongest incentive, with minimal additional 

complexity, to achieve greatest overall benefits. There are two methods of accomplishing 

allocation of allowances to wind generators that are now in use or under consideration: 

• A renewable energy set-aside establishes a pool of allowances that can be allocated to 

wind generators, usually based on their generation output. Renewable set-asides have been 

established in several emission trading programs to date. They provide certainty to market 

participants on the amount of allowances that will be available for renewable generators. 

Two primary drawbacks of this approach reduce its effectiveness and its financial value as 

an incentive for wind project development: the set-aside may be too small to provide 

consistent value to all new wind generators in the long term, and the administrative costs 

for regulators and affected generators may exceed desired levels. 

• Direct output-based allocation to renewable generators allocates allowances to wind 

generators from the main allowance pool based on their generation output. This makes the 

generators part of the main allocation process and avoids additional administrative costs 

for regulators and affected entities. It also avoids the establishment of a fixed limit on 

allocations to wind generators. Drawbacks to this approach are that it has not been applied 

 37
in emission trading programs to date and that it faces greater political opposition than setasides because it could reduce the number of allowances that will be allocated to existing 

conventional generators in the long term. 

Sample regulatory language to allocate allowances to wind generators is straightforward and 

available. The CAIR represents the most immediate opportunity to apply this approach. Future 

trading programs, especially for CO2, may present similar opportunities. 

Experience to date suggests that participation of wind generators in cap and trade program is 

highly sensitive to transaction costs and regulatory issues. Continued evaluation of “best 

practices” for incorporating wind generation can improve design and implementation of these 

programs to increase their benefits. 

 38
 

Appendix A. Resources 

Cap and Trade Programs 

Acid Rain Program:

Ellerman, A.D.; Schmalensee, R.; Joskow, P.L.; Montero, J.P.; Bailey, E.M. “Emission Trading 

Under the U.S. Acid Rain Program: Evaluation of Compliance Costs and Allowance Market 

Performance.” Center for Energy and Environmental Policy Research. Massachusetts Institute of 

Technology. http://web.mit.edu/ceepr/www/napap.pdf 

Ellerman, A.D. “Lessons from Phase 2 Compliance with the U.S. Acid Rain Program.” Center 

for Energy and Environmental Policy Research, Massachusetts Institute of Technology, May 

2003. http://web.mit.edu/ceepr/www/2003-009.pdf 

U.S. Environmental Protection Agency. “Acid Rain Program, 2004 Progress Report.” Office of 

Air and Radiation, April 2004. http://www.epa.gov/airmarkets/cmprpt/arp04/2004report.pdf 

NOX Budget Program: 

Output-Based Allocation

Fischer, C.; Fox, A. (December 2004). “Output-Based Allocations of Emission Permits.” 

Washington, DC: Resources for the Future. http://www.rff.org/Documents/RFF-DP-04-37.pdf

ERG; Energy and Environmental Analysis, Inc. “Output-Based Regulations: A Handbook for 

Air Regulators.” http://www.epa.gov/chp/pdf/OBR_final_9-1-05.pdf

U.S. EPA. “Developing and Updating Output-Based NOx Allowance Allocations.” May 8, 2000. 

http://www.epa.gov/airmarkets/fednox/april00/finaloutputguidanc.pdf

Energy and Environmental Analysis, Inc. “Analysis of Output-Based Allocation of Emission 

Trading Allowances.” http://uschpa.admgt.com/AllocationFinal.pdf

Alternative Allocations for Renewable Energy 

Wooley, D.R.; Morrs, E.M. (December 2000). “The Clean Air Act Amendments of 1990: 

Opportunities for Promoting Renewable Energy.” NREL/SR-500-29448. Golden, CO: National 

Renewable Energy Laboratory. http://www.nrel.gov/docs/fy01osti/29448.pdf

State and Territorial Air Pollution Program Administrators and the Association of Local Air 

Pollution Control Officials. “Alternative NOx Allowance Allocation Language for the Clean Air 

Interstate Rule.” http://www.4cleanair.org/Bluestein-cairallocation-final.pdf. August 2005. pp. 

14-16. 

 “Improving Regional Air Quality with Wind Energy.” (May 2005.) National Renewable Energy 

Laboratory. http://www.nrel.gov/docs/fy05osti/38071.pdf

 39
Greenhouse Gases: 

Burtraw, D.; Palmer, K.L.; Kahn, D.B. (May 2005). “Allocation of CO2 Emissions Allowances 

in the Regional Greenhouse Gas Cap-and-Trade Program.” Resources for the Future.

Wind Energy 

Wind Energy Overview: 

Reeves, A. (July 2003). “Wind Energy for Electric Power: A REPP Issue Brief.” Washington, 

DC: Renewable Energy Policy Project. 

http://www.repp.org/articles/static/1/binaries/wind%20issue%20brief_FINAL.pdf 

Economic Impact: 

Wind Economic Development. U.S. DOE/NREL Wind Powering America Program. 

http://www.eere.energy.gov/windandhydro/windpoweringamerica/economics.asp 

Northwest Economic Associates for the National Wind Coordinating Committee. “Assessing the 

Economic Development Impacts of Wind Power.” February 2003. 

http://www.nationalwind.org/publications/economic/econ_final_report.pdf 

Pedden, M. “Analysis: Economic Impacts of Wind Applications in Rural Communities.” 

NREL/SR-500-39099. Golden, CO: National Renewable Energy Laboratory, January 2006. 

http://www.nrel.gov/docs/fy06osti/39099.pdf

Job Growth: 

Regional Economic Application Laboratory for the Environmental and Law Policy Center. “Job 

Jolt: The Economic Impacts of Repowering the Midwest.” 2001. 

http://www.repowermidwest.org/Job%20Jolt/JJfinal.pdf 

Hedge against Fuel Volatility and Cost Savings from Wind Energy: 

Piwko, R.; Bai, X.; Clark, K.; Jordan, G.; Miller, N.; Zimberlin, J. 2005. The Effects Of 

Integrating Wind Power On Transmission System Planning, Reliability, And Operations, Report 

On Phase 2: System Performance Evaluation. Prepared for the New York State Energy Research 

and Development Authority (NYSERDA), Albany, NY. Prepared by GE Energy, Energy 

Consulting, March 4 (See section 2.3.6). 

http://www.nyserda.org/publications/wind_integration_report.pdf 

Wiser, R.; Bolinger, M.; St. Clair, M. “Easing the Natural Gas Crisis: Reducing Natural Gas 

Prices through Increased Deployment of Renewable Energy and Energy Efficiency.” Berkeley, 

CA: Lawrence Berkeley National Laboratory, 2005. http://wwwlibrary.lbl.gov/docs/LBNL/567/56/PDF/LBNL-56756.pdf 

Energy and Environment: 

U.S. Environmental Protection Agency. (April 2006.) “The Clean Energy-Environment Guide to 

Action.” http://www.epa.gov/cleanenergy/pdf/gta/guide_action_full.pdf

 40
 

Appendix B. Resolution Supporting Emissions Allocations for 

New Clean Energy Sources 

WHEREAS, Encouraging cost-effective use of renewable energy resources has been an 

important national goal under past utility regulatory policy, including the Public Utility 

Regulatory Policies Act of 1978 and the Energy Policy Act of 1992; and 

WHEREAS, Renewable energy supply brings fuel diversity benefits and mitigates fuel 

market power in the nation's mix of energy supplies, and enhances national security, 

reduces dependence on imported fuels, and decreases environmental impacts; and 

WHEREAS, "NARUC's National Electricity Policy," adopted November 13, 2001, 

supports addressing all air emissions from all electric power generation in ways that: 1) 

minimize adverse environmental impacts; 2) are comprehensive and synchronized to 

reduce regulatory costs; 3) rely, to the extent possible, on market-based trading 

mechanisms, and 4) identify, to the extent possible, the net impact of resource decisions, 

including external factors, on public health, the environment and the economy; and 

WHEREAS, Renewable energy sources and efficient cogeneration facilities typically 

generate power with reduced air emissions, if any, compared to conventional power 

plants; and 

WHEREAS, The U.S. Environmental Protection Agency has proposed its "Clean Air 

Interstate Rule" (CAIR) which would, among other things, impose new emissions caps 

on power generating units and reserve for States the authority to allocate NOx emissions 

allowances within each State; and 

WHEREAS, Cap and trade programs traditionally do not allow a generator utilizing 

renewable energy to receive an emissions allowance allocation on the same basis as an 

equivalent fossil-fired generator; and 

WHEREAS, The exclusion of non-fossil generators from emissions allocations for new 

facilities places renewable energy sources at a disadvantage compared to fossil-fired 

resources and thereby perpetuates our nation's reliance upon finite fossil fuel resources; 

and 

WHEREAS, Under existing cap and trade programs, a generator utilizing efficient 

cogeneration technology receives no more emissions allowances than a conventional 

generator despite its superior efficiency; and 

WHEREAS, Under EPA’s new CAIR proposal, NOx allowances would be allocated to 

new generating sources based on output; now therefore be it 

RESOLVED, That the Board of Directors of the National Association of Regulatory 

Utility Commissioners (NARUC), convened in its 2004 Summer Meetings in Salt Lake 

City, Utah, urges Federal and State environmental authorities, in designing and 

implementing emissions cap and trade programs, to allocate emissions allowances in a 

manner that rewards efficient performance in new power generating facilities as EPA’s 

CAIR rule proposes; and be it further 

RESOLVED, That the NARUC further urges Federal and State environmental 

authorities to allocate emissions allowances equally to all new fossil and non-fossil 

generators, including renewables, according to their output. 

____________________________________ 

Sponsored by the Committee on Energy Resources and the Environment 

Adopted by the NARUC Board of Directors July 14, 2004

 41
Appendix C. NOx Budget Trading Program Set-Aside Rationales

Massachusetts Department of Environmental Protection: 

...to encourage and reward the development of emission-reducing energy 

technologies in the Commonwealth. Many energy efficiency and renewable 

technologies have not matured to the point where they can compete with existing 

electricity generation units on the basis of price alone. However, these 

technologies can provide significant benefits by reducing impacts on human 

health, air, water, and land from electricity generation, reducing costs to the states 

to comply with federal environmental requirements, and generating in-state 

economic benefits associated with expenditures in local energy efficiency and 

renewable energy industries.z

Indiana Department of Environmental Management: 

IDEM believes that the inclusion of a set-aside specifically for EE/RE projects 

will provide several benefits. By providing EE/RE projects with allowances that 

can be sold into the NOx allowance trading system, the set-aside will help to 

improve air quality by providing incentives to produce energy using low or zeroemitting technologies and to prevent NOx emissions by increasing the efficiency 

of energy generation or use. Besides improving air quality, a set-aside that 

provides incentives for a variety of highly efficient or low emitting technologies 

will also diversify energy production in Indiana and provide greater system 

reliability.aa

New York State Energy Plan: 

The Set-Aside Program recognizes that emission reductions needed to meet air 

quality objectives can be achieved by implementing end-use electric energy 

efficiency measures and renewable energy projects as well as by installing control 

devices on fossil fuel-fired electricity generation sources. Ancillary environmental 

benefits of the program include year-round reductions of NOX emissions, thereby 

contributing to reducing acid deposition in the sensitive receptor areas of the 

Adirondacks, as well as reducing eutrophication (i.e., nutrient-loading) of water 

bodies such as the Long Island Sound. Furthermore, energy efficiency measures 

and renewable energy projects contribute to reducing emissions of carbon 

dioxide, the primary greenhouse gas, thereby providing long-term climate change 

benefits.bb

Elsewhere, the New York State Energy Research and Development Authority has studied the 

effects of renewable electricity generation and noted potential economic benefits. cc 

 

z http://www.mass.gov/dep/air/community/728rtc.pdf. SUMMARY OF COMMENTS AND RESPONSE TO COMMENTS 

FROM PUBLIC HEARINGS ON PROPOSED REVISIONS TO THE STATE IMPLEMENTATION PLAN FOR OZONE, 

INCLUDING PROPOSED 310 CMR 7.28 Held: Monday, August 3, 1999 in Springfield, Massachusetts Tuesday, August 4, 

1999 in Boston, Massachusetts Thursday, October 28, 1999 in Boston, MA. 

aa http://www.in.gov/idem/programs/air/sip/guide.pdf 

bb http://www.nyserda.org/Energy_Information/energy_state_plan.asp

http://www.nyserda.org/sep/sepsection2-3.pdf, June 2002, The 2002 State Energy Plan and Final Environmental Impact 

Statement (Energy Plan) cc http://www.nyserda.org/sep/EE&ERpotentialVolume1.pdf

 42
 

Glossary of Abbreviations and Acronyms 

Btu British Thermal Unit 

CAIR Clean Air Interstate Rule 

CHP combined heat and power 

CO2 carbon dioxide 

EE/RE Energy Efficiency and Renewable Energy 

EGU Electric Generating Unit 

GHG greenhouse gas 

kW kilowatt 

kWh kilowatt-hour 

lbs pounds 

MW megawatt 

MWh megawatt-hour 

NOX nitrogen oxides 

PM2.5 particulate matter 

REC Renewable Energy Certificate 

RGGI Regional Greenhouse Gas Initiative 

RPS Renewable Portfolio Standard 

SIP State Implementation Plan 

SO2 sulfur dioxide

 43
References 

1. U.S. EPA, Office of Air and Radiation, Tools of the Trade: A Guide to Designing and Operation 

a Cap and Trade Program for Pollution Control, EPA 430-B-03-002, June 2003. 

http://www.epa.gov/airmarkets/international/tools.pdf

2. U.S. EPA. Cap and Trade: Essentials. 

http://www.epa.gov/airmarkets/capandtrade/ctessentials.pdf. Accessed June 14, 2006. 

3. U.S. EPA. Office of Air and Radiation. Clean Air Act Overview. 

http://www.epa.gov/oar/caa/overview.txt Accessed April 27, 2006. 

4. U.S. EPA Clean Air Markets. Programs and Regulations. NOX Trading Programs. Overview of 

NOx Trading Program. http://www.epa.gov/airmarkets/progsregs/noxview.html. Accessed June 

14, 2006. 

5. U.S. EPA Clean Air Markets. Programs and Regulations. NOx Budget Trading Program. 

www.epa.gov/airmarkets/fednox/index.html. Accessed April 27, 2006. 

6. U.S. EPA Office of Air and Radiation. Clean Air Interstate Rule 

http://www.epa.gov/airmarkets/cair/index.html. Accessed April 27, 2006. 

7. Regional Greenhouse Gas Initiative. www.rggi.org/. Accessed April 27, 2006. 

8. U.S. EPA Clean Air Markets. Multi-Pollutant Analyses. www.epa.gov/airmarkets/mp/. 

Accessed April 27, 2006. 

9. USCHPA, 2003. This section adapted from Analysis of Output-Based Allocation of Emission 

Trading Allowances, http://uschpa.admgt.com/AllocationFinal.pdf. 

10. Ellerman, D., P. Joskow, and D. Harrison Jr. Emissions Trading in the U.S.: Experience, 

Lessons and Considerations for Greenhouse Gases. Prepared for the Pew Center on Global 

Climate Change by Massachusetts Institute of Technology and the National Economic Research 

Associates, Inc. May 2003.

11. Fischer, C. and A. Fox. Output-Based Allocations of Emission Permits. December 2004. 

Resources for the Future. RF DP 04-37. www.rff.org/Documents/RFF-DP-04-37.pdf 

12. Tools of the Trade: A Guide to Designing and Operation a Cap and Trade Program for 

Pollution Control. U.S. EPA, Office of Air and Radiation, EPA 430-B-03-002, June 2003. 

http://www.epa.gov/airmarkets/international/tools.pdf

13. Regional Greenhouse Gas Initiative. Staff Working Group Model Rule. March 23, 2006 

http://www.rggi.org/docs/public_review_draft_mr.pdf. p.40. Accessed April 27, 2006.

 44
 

14. U.S. EPA. The Clean Energy-Environment Guide to Action, February 2006. p. 409. 

http://www.epa.gov/cleanenergy/stateandlocal/guidetoaction.htm

15. NYSERDA.Energy Efficiency and Renewable Energy Resource Development Potential in New 

York State. Final Report. Volume One: Summary Report. Prepared for New York State Energy 

Research and Development Authority (NYSERDA). Prepared by Optimal Energy, Inc. Bristol, Vt. 

August 2003. http://www.nyserda.org/sep/EE&ERpotentialVolume1.pdf

16. Presentation by Bob McCarron and Jean Fenske, MPCA’s Implementation of the Clean Air 

Interstate Rule, Minnesota Pollution Control Agency, June 20, 2006. 

17. U.S. EPA. Regulatory Impact Analysis for the Final Clean Air Interstate Rule. March 2005. 

www.epa.gov/cair/technical.html. 

18. Evolutions Market, LLC. Emission Markets. SIP NOx Market Data and Reports. 

www.evomarkets.com/. Accessed April 19, 2006. 

19. DSIRE. Database of State Incentives for Renewable Energy. http://www.dsireusa.org

20. U.S. EPA. Office of Air and Radiation. Guidance on SIP Credits for Emission Reductions from 

Electric-Sector Energy Efficiency and Renewable Energy Measures. August 2004. 

www.epa.gov/ttn/oarpg/t1/memoranda/ereseerem_gd.pdf

21. Hathaway, A.; Jacobson, D.; High, C. Model State Implementation Plan Documentation for 

Wind Energy Purchase in State with Renewable Energy Set-Aside. NREL/SR-500-38075. Golden, 

CO: National Renewable Energy Laboratory, May 2005. 

www.eere.energy.gov/windandhydro/windpoweringamerica/pdfs/wpa/sips_model.pdf

22. 42 U.S.C. 7651, Section 404. United States Code, Title 42: The Public Health and Welfare. 

Chapter 85, Air Pollution Prevention and Control. Subchapter IV-A, Acid Deposition Control. 

Section 7651, Findings and Purposes. 

23. U.S. EPA (October 27, 1998). Finding of Significant Contribution and Rulemaking for Certain 

States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional 

Transport of Ozone; Rule (63 FR 57356), Washington, D.C. 

24. U.S. EPA (March 1999 and April 2000). “Guidance on Establishing an Energy Efficiency and 

Renewable Energy (EE/RE) Set-Aside in the NOx Budget Trading Program.” Volumes 1 and 2. 

http://www.epa.gov/cleanenergy/stateandlocal/guidance.htm, accessed March 1, 2006; last updated 

February 13, 2006. 

25. Wooley, D.; Morss, E. The Clean Air Act Amendments of 1990: Opportunities for Promoting 

Renewable Energy. NREL/SR-620-29448. Golden, CO: National Renewable Energy Laboratory, 

2001. 

 45
26. U.S. EPA. “State Set-Aside Programs for Energy Efficiency and Renewable Energy Projects 

Under the NOx Budget Trading Program: A Review of Programs in Indiana, Maryland, 

Massachusetts, Missouri, New Jersey, New York, and Ohio.” EPA 430-R-03-005. 

http://www.epa.gov/cleanenergy/stateandlocal/guidance.htm. Last modified February 13, 2006; 

accessed March 1, 2006. 

27. State and Territorial Air Pollution Program Administrators and the Association of Local Air 

Pollution Control Officials. Alternative NOx Allowance Allocation Language for the Clean Air 

Interstate Rule. http://www.4cleanair.org/Bluestein-cairallocation-final.pdf August 2005. pp. 14-

16. 

 46
F1146-E(12/2004) 

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July 2006 

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5a. CONTRACT NUMBER

DE-AC36-99-GO10337 

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4. TITLE AND SUBTITLE

Incorporating Wind Generation in Cap and Trade Programs 

5c. PROGRAM ELEMENT NUMBER

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NREL/TP-500-40006 

5e. TASK NUMBER

WER6.6006 

6. AUTHOR(S)

J. Bluestein, E. Salerno, L. Bird, and L. Vimmerstedt 

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National Renewable Energy Laboratory 

1617 Cole Blvd. 

Golden, CO 80401-3393 

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NREL/TP-500-40006 

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National Technical Information Service 

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13. SUPPLEMENTARY NOTES

14. ABSTRACT (Maximum 200 Words)

Cap and trade programs are increasingly being used to reduce emissions from electricity generation in the United 

States. Cap and trade programs primarily target emitting generators, but programs have also included renewable 

generators, such as wind generators. States cite several reasons why they have considered the policy option of 

including renewable generators in cap and trade programs: to provide an incentive for lower-emitting generation, to 

achieve emissions reductions in non-capped pollutants, and to gain local economic benefits associated with 

renewable energy projects. The U.S. Environmental Protection Agency also notes these rationales for considering 

this policy alternative, and the National Association of Regulatory Commissioners (NARUC) passed a resolution 

supporting the inclusion of renewable energy in cap and trade programs. This report explores why states consider 

this policy option, what participation could mean for wind generators, and how wind generation can most effectively 

be included in state, federal, and regional cap and trade programs. 

15. SUBJECT TERMS

wind energy; cap and trade program; emissions; state policy; renewable energy; renewable generators; policy; cap 

and trade; Environmental Protection Agency; Clean Air Interstate Rule; air emissions; air quality; electricity; electricity 

generation; utilities; emissions markets; carbon; NOx; emissions trading 

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