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 >> 

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Final_20150529.pptx >> 
Summary	of	Interagency	Working	Comments	on	Draft	Language	under

EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Review.

1

Reviewers	are	requesting	clarification	on	the	following	information	to	facilitate	the	

interagency	review:	

Equivalence and Leakage:

1.											 How	do	states	demonstrate	equivalence	on	a	one‐rate	and	two‐rate	basis?	Is	there		

a	specific	formula	that	is	required	or	recommended?	

2.												Does	the	notion	of	equivalency	incorporate	language	regarding	leakage?	

a.												How	is,	or	would,	leakage	be	defined?	

b.												What	are	potential	leakage	scenarios	that	equivalence	seeks	to	avoid?	

3.												Is	equivalence	evaluated	on	a	purely	arithmetic	ground	or	is	there	a	mechanism	for	

identifying	leakage	to	distinguish	between	scenarios	where	the	calculated	emissions	rates	

are	arithmetically	the	same	but	generation	levels	are	difference	because	of	state	policies?	

4.												Will	Leakage	risks	be	considered	in	evaluation	of	state	plans?		

5.												As	the	number	of	ERC	created	by	an	NGCC	is	based	on	whether	the	generator	is	

above	or	below	its	2012	generation	and	will	result	in	a	bid	price	that	will	be	lower	for	

higher	amounts	of	generation,	how	does	this	interact	with	the	wholesale	power	market?	

6.													How	has	leakage	through	electricity	trade	been	considered?	For	example,	how	

does	a	state	that	selects	one	rate	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	electricity	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	generation	and	produces	an	ERC	that	is	used	by	a	steam	unit	

that	is	added	to	the	denominator,	does	that	NGCC	subtract	the	ERC	from	its	denominator	or	

are	the	ERC	kept	in	the	denominator	for	both	the	NGCC	and	the	steam	unit?		If	the	latter,	

how	could	achieving	individual	unit	emissions	rate	limits	in	a	state	achieve	equivalence	

with	a	state‐wide	target?	

2.												Due	to	potential	displacement	of	NGCC	utilization	by	RE	and	that	ERC	are	only	

generated	if	the	NGCC	is	generating	at	levels	above	their	2012	generation	levels,	how	

would	EPA	ensure	that	enough	ERC	are	generated	to	ensure	compliance?	
Summary	of	Interagency	Working	Comments	on	Draft	Language	under

EO12866/13563	Interagency	Review.		Subject	to	Further	Policy	Review.

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	potential	economic	incentives,	from	

denominator	credits	being	solely	created	by	the	ERC	formula?	

c.													Is	there	a	potential	to	generate	ERCs	without	abatement	by	shifting	generation	

among	generators	with	different	2012	levels	of	generation?	

Interstate Trading:

1.												Are	states	required	or	allowed	to	use	an	effective‐rate	formula	that	converts	rates	

from	differing	states	with	potentially	different	values	for	those	rates	into	a	form	that	could	

decrease	potential	leakage? Such	a	requirement	could	significantly	reduce	or	eliminate	

emissions	leakage	between	states	with	different	rates	for	affected	EGUs.	

2.												Could	the	effective‐rate	for	an	ERC	for	RE	be	the	nationwide	blended	emission	rate?	

3.												Is	trading	among	two‐rate	and	one‐rate	states	permitted?	

4.												Could	limits	on	interstate	trading	depending	on	the	type	of	state	plan	create	a	

situation	where	there	are	not	enough	ERC	developed	to	show	compliance?	

5.												What	inspection	process	would	be	used	to	ensure	that	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	there	to	sell	ERCs	for	those	who	generate	them?	

2.												If	a	steam	EGU	shutdown	after	2012,	but	before	the	finalization	of	this	rule,	how	

would	that	shuttered	plant	be	treated?		Would	the	steam	EGU	need	to	show	what	displaced	

the	power?	If	so,	what	obligations	would	be	required	to	be	shown	to	earn	those	credits?	

3.												Is	only	existing	NGCC	generation	above	the	2012	generation	levels	used	to	displace	

fossil	steam	part	of	Building	Block	2?	

4.												Technology	specific	performance	rates	versus	blended	rates	provide	different	

relative	incentives	for	steam	EGUs	and	combustion	turbine	EGUs.	Has	this	been	

considered?		
Deliberative draft—Not for distribution 1

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—Not for distribution 2

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—Not for distribution 3

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 CO2, 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—Not for distribution 4

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—Not for distribution 5

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 CPPcovered 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—Not for distribution 6

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 massbased 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—Not for distribution 7

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.