Draft 10/7/2014

1 A Mass

- based Approach with Voluntary Trading for States Implementing Section 111(d)

Franz T. Litz

To date discussions around implementation of federal 111(d) standards have tended to focus on a handful of implementation mechanisms that have been used in the past, or that resemble approaches that have been used in the past in other contexts

. M ass

- based approaches are attractive to states and stakeholders because mass

- based approaches are easier to implement and capture all emissions reductions no matter how those reductions occur. While trading of emissions reductions among regulated entities and across st ate lines is generally seen as the most cost

- effective approach, some states may be reluctant to embrace a mandatory trading pr ogram. This pa per proposes an emissions budget approach

with optional trading that can be implemented by a single state or as a multi

- state approach.

The approach outlined here borrows from two other mass

- based approaches under consideration by states a nd stakeholders: the utility budget approach and emissions budget with trading approach . Under both of these mass

- based approaches, the aim is to provide flexibility for owners and operators of covered power plants (“affected units” in EPA’s parlance) to achieve emissions reductions in a least

- cost manner

. The proposal is essentially a “ utility ” portfolio approach with voluntary trading . O wners of affected units

would choose whether they opt in to trading with other owners of affected units that likewise opt in

. States

— ideally with EPA assistance

— could create the infrastructure for trading t o occur across state lines

.

The approach can be summarized in the following steps:

1. EPA issues the final 111(d) guidelines to states, including the state goals an d the timeline for achieving those goals.

2. The state converts the rate

- based state goal to emissions budgets for each year.

3. The state allocates shares of its state emissions budget to each utility or other owners

of affected units . In deregulated states the owners will be merchant owners

.

4. Owners of affected units are required to measure, monitor and report their carbon

emissions. Emissions for each affected unit are tracked in an emissions tracking system that states can create

— ideally with EPA assistance.

5. Because the budget is allocated to the utility or other owner entity, it covers the utility ’ s fleet

. T he utility can manage its portfolio to determine the optimal approach to reducing emissions, whether through a ch ange in dispatch, heat rate improvements, a shift to low or zero carbon generation, investments in end

- use energy effici ency, or any other that has the effect of reducing emissions across its entire portfolio.Draft 10/7/2014

2 6. At the end of the prescribed time period

— often referred to as the compliance period

— the owner of the affected units must dem onstrate that the aggreg ate emissions from

all of its affected units remains at or below its emissions budget for those units. If the emissions are less than the prescribed budget, the state can allow the owner to carry any “unspent” allowances forward to subsequent year s

— i.e., allow the unused tons to

be “banked”.

7. If an owner’s affected units emit more carbon emissions than the prescribed budget, then the owner is out of compliance and subject to enforcement by the state (and ultimately EPA or a citizen’s group if the s tate fails to enforce).

8. Owners that do not opt into the trading mechanism cannot transfer unused tons to other owners, nor can they purchase unused tons from others and use them for compliance.

9. If the owner of affected units opts into a trading mechani sm, then:

9.1. The state issues the owner emissions allowances in an amount equal to the number of tons in its emissions budget for each year. Allowances are deposited by the state into the owner’s allowance account , which is part of the allowance tracking sy stem

.

9.2. At the end of each compliance period, the owner of the affected units must surrender enough allowances to cover its emissions during the compliance period. The state extinguishes the surrendered allowances from the owner’s

account in the allowance t racking system. This is handled electronically.

9.3. Allowances that are not surrendered are bankable and can be saved for future compliance periods. Or those allowances may be transferred to other owners of affected units that need those allowances (or to o ther entities with accounts in the allowance tracking system).

10. States will erect the voluntary trading mechanism, which consists of an emissions and allowance tracking system, or EPA could erect a national system that states and their

affected units can o pt into.

11. Each individual state can choose to allow its affected units to surrender allowances from other states. Allowances could be accepted from states with a voluntary or mandatory trading mechanism, so long as EPA has approved the emissions budgets for those states and the systems in the other states are approved as having integrity. A system has integrity if there is no “printing” of unauthorized allowances, and the tracking of allowances occurs in a manner that prevents no double counting or doubl e surrender of the same allowance.