From: Frey, Nathan J. < Nathan_J._Frey@omb.eop.gov > Sent: Thursday, June 11, 2015 10:20 AM To: Owens, Nicole; Elman, Barry; Culligan, Kevin; Vasu, Amy; Harvey, Reid Subject: Summary of Interagency Comments Under EO 12866 and 13563: Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units

Attached please find summaries of interagency comments under EOs 12866 and 13563 regarding the Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units draft final rule. Thanks and please let me know if you have any questions. Nathan
<< SummaryofinteragencycommentsunderEO12866_13563_EO 12866_CPP 2060 AR33 Final_20150529.docx >> << SummaryofinteragencycommentsunderEO12866_13563_EO 12866_CPP 2060 AR33 Final_20150529.pptx >>Summary	of	Interagency	Working	Com ments	on	Draft	Language	under EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Re view.

1 Reviewers	are	requesting	clarification	on	the	following	informa tion	to	facilitate	the interagency	review: Equivalence and Leakage: 1. How	do	states	demonstrate	equiva lence	on	a	one‐rate	and	two‐rat e	basis?	Is	there a	specific	formula	that	is	required	or	recommended? 2.												Does	the	notion	of	equivalency	incorporate	langua ge	regarding	leakage? a.												How	is,	or	would,	leakage	be	defined? b.												What	are	potential	leak age	scenarios	that	equival ence	seeks	to	avoid? 3.												Is	equivalence	evaluate d	on	a	purely	arithmetic	g round	or	is	there	a	mechanism	for identifying	leakage	to	distingui sh	between	scenarios	where	the calculated	emissions	rates are	arithmetically	the	same	but	generation	levels	are	differenc e	because	of	state	policies? 4.												Will	Leakage	risks	be	c onsidered	in	evaluation	of state	plans? 5.												As	the	number	of	ERC	cr eated	by	an	NGCC	is	based on	whether	the	generator	is above	or	below	its	2012	generati on	and	will	result	in	a	bid	pri ce	that	will	be	lower	for higher	amounts	of	generation,	how	does	this	interact	with	the	w holesale	power	market? 6.													How	has	leakage	through electricity	trade	been	c onsidered?	For	example,	how does	a	state	that	selects	one	ra te	for	all	EGUs	prevent	leakage from	electricity	trade	to	a neighboring	state	that	selects	another	higher	rate	for	all	EGUs ?	Or,	what	happens	when	a mass	state	shifts	electricity	generation	to	a	neighboring	rate state?	Could	additional	ERCS be	required	from	rate	states	that	increase	the	share	of	electri city	exports	relative	to	2012? 7. How	are	rate	adjustments	made	for	acquisitions?	For	example,	If states	can	select any	rate	for	any	group	of	EGUs, what	happens	when	a	firm	with	a high	rate	purchases	EGUs from	a	firm	with	a	low	rate? Formula: 1.												If	a	NGCC	increases	gene ration	and	produces	an	ER C	that	is	used	by	a	steam	unit that	is	added	to	the	denominator ,	does	that	NGCC	subtract	the	E RC	from	its	denominator	or are	the	ERC	kept	in	the	denomina tor	for	both	the	NGCC	and	the	s team	unit?		If	the	latter, how	could	achieving	individual	u nit	emissions	rate	limits	in	a state	achieve	equivalence with	a	state‐wide	target? 2.												Due	to	potential	displa cement	of	NGCC	utilization by	RE	and	that	ERC	are	only generated	if	the	NGCC	is	gener ating	at	levels	above	their	2012 generation	levels,	how would	EPA	ensure	that	enough	ERC are	generated	to	ensure	compli ance?Summary	of	Interagency	Working	Com ments	on	Draft	Language	under EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Re view.

2 3.												What	limits	the	creation	of	“denominator	credits” so	that	emissions	performance	is not	eroded	and	how	does	this	differ	among	state	programs? a.												Are	there	limits	on	trading? b.												What	are	the	potential	impacts,	including	potenti al	economic	incentives,	from denominator	credits	being	solely	created	by	the	ERC	formula? c.													Is	there	a	potential	to generate	ERCs	without	ab atement	by	shifting	generation among	generators	with	differe nt	2012	levels	of	generation? Interstate Trading: 1.												Are	states	required	or allowed	to	use	an	effectiv e‐rate	formula	that	converts	rates from	differing	states	with	poten tially	different	values	for	tho se	rates	into	a	form	that	could decrease	potential	leakage? Such	a	requirement	could	signi ficantly	reduce	or	eliminate emissions	leakage	between	states	with	different	rates	for	affec ted	EGUs. 2.												Could	the	effective‐rat e	for	an	ERC	fo r	RE	be	the nationwide	blended	emission	rate? 3.												Is	trading	among	two‐rate	and	one‐rate	states	per mitted? 4.												Could	limits	on	interst ate	trading	depending	on	t he	type	of	state	plan	create	a situation	where	there	are	not	en ough	ERC	developed	to	show	comp liance? 5.												What	inspection	process	would	be	used	to	ensure	t hat	ERC	supplied	from	a	mass‐ based	state	is	displacing	generation	in	a	rate‐based	state? 6.												Are	there	any	legal	or technical	restrictions	to a	framework	that	trades	in	effective‐ rate	rather	than	in	MWh? Other Issues: 1.												What	requirements	are	t here	to	sell	ERCs	for	thos e	who	generate	them? 2.												If	a	steam	EGU	shutdown after	2012,	but	before	th e	finalization	of	this	rule,	how would	that	shuttered	plant	be	tre ated?		Would	the	steam	EGU	nee d	to	show	what	displaced the	power?	If	so,	what	obligatio ns	would	be	required	to	be	show n	to	earn	those	credits? 3.												Is	only	existing	NGCC	ge neration	above	the	2012	g eneration	levels	used	to	displace fossil	steam	part	of	Building	Block	2? 4.												Technology	specific	per formance	rates	versus	blen ded	rates	provide	different relative	incentives	for	steam	EG Us	and	combustion	turbine	EGUs. Has	this	been considered?Deliberative draft

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# Rate < - > Rate ERC Trading

– Interstate and intrastate leakage from ERC trading between entities with different reference rates Mass - > Rate ERC trading

– Leakage issues (double counting) with ERCs trading from mass state to rate state Rate - > Mass trading

– ERC/allowance trading prohibited in draft final rule Mass < - > Mass allowance trading

– Prohibitions of trade between states with different program coverage (937, 969 ) Rate < - > Rate/Mass electricity trading

– Leakage from generation shifts 

# Overview of Possible Leakage Issues

Any differentiation in target rates imposed on entities creates potential for generation and/or ERCs to shift to entities with the highest target rate, increasing system - wide emissions. This applies to entities in different states as well as between entities within a state. Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.Deliberative draft

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# Rate

- Rate Credit Trading

– Potential for Emissions Leakage Plan Issue Emissions Leakage. Draft language allows trading of Emissions Reduction Credits (ERCs) (1 MWh of zero emissions generation) across state lines (pg. 922

- 23). Under this accounting system, fossil EGUs operating under high rate targets will value ERCs more because they can run longer for each ERC, which will cause ERCs to flow to entities with higher rates and increase emissions from the same national level of generation (or EE savings). Partial Solution. For certain low emitting sources, the draft utilizes a “ reference rate” for generating ERCs from incremental gas ( pgs. 979

- 982) and CHP (955), which could correct for leakage from those sources if reference rates are uniform across EGUs. However, no “reference rate” is applied for ERCs from zero

- emitting sources (EE/RE). 

## Possible Solution Modeling finding: Adjust ERCs based on exporting entity’s rate and importing entity’s rate. If ERC needs to match BSER: Adjust ERCs based on uniform reference rate, such as the regional reference rate, and the rate goal of entity claiming credit. This would be similar to the process used for low emitting sources (incremental gas, new CHP). Adjustment ensures that no matter where an ERC is claimed, the level of additional emissions it allows remains constant. Using regional reference rate helps harmonize compliance method with BSER. 

## Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.Deliberative draft

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# Example of Rate

- Rate Emissions Leakage Issue: Two steam EGUs, each with facility emissions rate of 2,000 lbs / MWh

. Located in different states in same grid region: State A with blended rate target of 1290 lbs / MWh , State B with blended rate target of 900 lbs / MWh

. 1 ERC is available on the market. Steam EGU in State A Adding ERC to denominator would allow additional 1290 lbs. of emissions, allowing plant to run for 1.82 hours. Steam EGU in State B Adding ERC to denominator would allow additional 900 lbs. of emissions, allowing plant to run for 0.82 hours. 

### EGUs in State A will be willing to pay more than twice as much for an ERC than EGUs in State B (assuming they receive the same price for electricity), which will enable EGUs in State A to provide more electricity to the grid at an emissions rate of 1290 lbs / MWh

. Possible Solution: ERC is from grid region (or, from modeling findings, a state) with reference rate of 1,000 lbs /

MWh

. Claiming entity must adjust ERC by ratio of the rate of ERC’s original grid region and the claiming entity’s target rate: Steam EGU in State A Buying ERC would allow 1000/1290 = .78 MWh to be added to the denominator, allowing additional 1,000 lbs. of emissions. Steam EGU in State B Buying ERC would allow 1000/900 = 1.11 MWh to be added to the denominator, allowing additional 1,000 lbs. of emissions. 

### EGUs in both states value ERCs equally because an ERC enables them to emit the same number of tons of CO 2 

### , operate an equal amount of time, and thus prevents leakage. 

## Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.Deliberative draft

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# Plan Issue Double Counting. If mass states generate clean electricity that is consumed inside the state but sell the ERCs to another state, that clean electricity is double counted: 1) to reduce demand for allowances in the mass state and 2) to offset fossil generation in the rate state. Partial Solution (for RE) . To prevent double counting for RE, entities would be required to prove the RE electricity is contracted for use in a rate target state.
EE Unresolved. It is unclear how EE savings could be certified as offsetting emissions in rate target states, ensuring that double counting does not take place. 

# Possible Solution

EE: Require EE savings in a mass state to create certified ERCs only as a result of demonstrating an amount of MWh avoided from EGUs in rate states. 

# Mass

- Rate ERC Trading

– Double Counting Emission Reductions Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.Deliberative draft

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## Plan Issue Limits on Trading. Draft language appears to state that mass

- based allowances from programs that include sources not covered by the CPP will have no value in states that adopt mass - based policies that apply to only CPP

covered EGUs (pgs. 760

- 762).
This barrier to trade could deter states from choosing a mass target, or from covering a broader range of sources as part of a new policy. Also, state measures plans cannot trade with emissions standards plans. 

# Mass

- Mass Allowance Trading

– Scope of Coverage

Possible Solution Clarify that states will not be penalized for pursuing cost

- effectiveness through trading allowances. Allow for demonstrations in state plans that include a mass based policy to let allowances from all mass based programs be traded freely, with proper documentation. Also, proper backstop requirement that total stack emissions from mass states do not exceed the aggregate mass target of trading states. 

## Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.Deliberative draft

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# Plan Issues
Generation Incentive. Fossil generation requires fewer ERCs to operate when owned by entities with a high rate compared to entities with a low rate. That creates an incentive for high

- rate entities to generate electricity and trade the electricity. Mass/Rate Gaming. Mass states currently have no compliance obligation for imported electricity and thus have an incentive to shift generation outside of the state to reduce the cost of compliance within the state. 

# Possible Solutions
Ideal: States are only allowed to select mass

based options (eliminates both issues).
All entities within a state have the same rate (eliminates intrastate generation incentive but not interstate incentive) & State plans must retire ERCs each year proportional to the amount that net exports as a share of total state generation in that year exceeds net exports as a share total generation in 2012, plus a small threshold. 

# Rate

- Rate/Mass Interstate Leakage from Electricity Trade Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.Deliberative draft

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### States A and B share a grid region, but in 2012, net trade of electricity was zero. Due to assignment of different rate targets, some generation shifts from the low rate state to the high rate state. 

## State A State B Total 2012 Gen ( MWh ) 1000 1000 2000 2030 Rate ( lbs / MWh ) 1200 800

-- Expected 2030 Emissions with no Gen shift (tons) 600 400 1000

2030 Gen

– with 250 MWh shift to higher rate state ( MWh ) 1250 750 2000
2030 emissions with generation shift (tons) 750 300 1050 (5% ↑) 

# Example

– Interstate Leakage through Electricity Trade

Because generation has shifted to the state with a higher target rate, overall emissions reductions are lost compared to a case with no generation shifting. 

## Summary of Interagency Working Comments on Draft Language under EO12866/13563 Interagency Review. Subject to Further Policy Review.