### From: Szabo, Aaron [ mailto:Aaron_L_Szabo@omb.eop.gov ] Sent: Friday, June 26, 2015 3:56 PM To: Vasu, Amy; Culligan, Kevin Cc: Frey, Nathan J. Subject: Additional Interagency Comments under EO 12866 & 13563 for the Clean Power Plan

Please see the attached documents as additional interagency comments for the Clean Power Plan to help inform ongoing interagency discussions. This i nformation does not represent recommendations by interagency reviewers, but is meant to provide textual information to assist in the interagency review process.

Aaron L. Szabo Policy Analyst Office of Management and Budget 202

- 395

- 3621 Aaron_L_Szabo@omb.eop.gov***E.O. 12866 Review

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## Compliance in Tons

Mechanism

It is possible for any generator to comply through the use of tons, whether it is subject to a generator

specific rate or is operating in a world of separate or blended rates. In addition, there is always a way to comply based on tons that is equ ivalent to compliance in terms of MWh. In particular, any gen erator can comply with its given rate target through the purchase of some number of tons that are then subtracted
from its numerator. In other words , a given generator is in compliance if :

EEEEEE ssss ssssss
− PPPPPPPP h aa aaaa TT
GG GG = tt

For example, if a coal plant generates at 2000 lbs/MWh and purchases 500 lbs CO 2 for each MWh generated, its effective rate is 1500 lbs/MWh.

On the other hand, if a generator has an e missions rate below its target, any excess tons can be sold to other generators. Specifically, given a level of emissions and generation, the tons available for sale
satisfies:

EEEEEE EE + TT AAAA AA AAAA ff SS
GG GG = tt

Renewable energy and energy efficiency create tons through a conversion factor equal to the weighted average of the two rates , where the weighting is determined based on the 2012 levels of generation used to allocate renewable energy gener ation as part of BSER (this is discussed in more detail below) :

TT AAAA AA AAAA ff SS = mm ∗ ( RR RR GG GG + AAAA GG GG ff EEEE )

w here,

mm = αα ss ss + αα gg gg = h aa aa tt

ss = ss tt gg = tt GG ss = 2012 ss GG gg = 2012

αα ss = GG ss GG ss + GG gg αα gg = GG gg GG ss + GG gg

These tons can then be sold to covered sources for the purposes of compliance.

Consistency with BSER

As part of building block 3 under the current BSER, generation from RE is added to the denominator of
the steam and gas targets pro

- rated based on 2012 generation:

ss = SS EEEEEE EE
SS GG + αα ss ∗ RR GG gg = GG EEEEEE EE
GG GG + αα gg ∗ RR GG***E.O. 12866 Review

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– Do Not Cite, Quote or Release During Review*** Here, steam and gas emissions and generation are what remains after displacing that generation with the RE, and αα ss and αα gg are the proportions of steam and gas generation used to distribute the RE generation to the steam and gas rates.

These equations are equivalent to:

ss = SS EEEEEE EE

− ss ∗ αα ss ∗ RR GG
SS GG gg = GG EEEEEE EE

− gg ∗ αα gg ∗ RR GG
GG GG
This shows how many tons are needed for these sources to come into compliance. T he total number of
tons is: � ss ∗ αα ss + gg ∗ αα gg � ∗ RR GG = h aa aa aa aa tt ∗ RR

In other words, the formula for the tons created by renewable energy generation given above gives

p recisely the number of tons needed for sources to come into compliance under BSER. Since the Eastern Interconnect creates the binding targets in BSER, the weighted average should be based on the values for that region.

With regards to building block 2, som e gas emissions are added into the numerator of the steam target and some gas generation is added into the denominator:

ss = EEEEEE EE + AA GG EEEEEE EE
GG + AA GG GG
(Here, Gen includes the RE gen from building block 3 and the displacement from building block 2; similarly, Emissions includes both the displacement for buildings blocks 2 and 3. ) This formula is equivalent to

ss = EEEEEE EE

− ( ss ∗ AA GG GG

− AA GG EEEEEE EE )
GG

This means that ( ss ∗ AA GG GG

− AA GG EEEEEE EE ) extra tons must be created to represent the coal

- to

- gas shift. This can be done in a similar manner a s is done for the creation of ERCs representing this shift.

These are both illustrative of the general fact that compliance in terms of additions to the denominator can always be turned into compliance via tons, ie, subtractions from the numerator. The imp ortant thing is to ensure that sufficient tons are available to enable compliance and consistency with BSER . By choosing the weighted average rate (based on the same fractions used to distribute the RE in building block 3), one ensures that these tons are available, and that the compliance system is consistent with
BSER.

### ***E.O. 12866 Review

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4 

## Example Two

- rate Compliance System

This document describes an example of how a two

- rate compliance system could work with trading in tons. Many such systems are possible. This is not an endorsement of this particular system nor is there a recommendation that it be used. Instead, it is provided as a proof

- of

- concept that may provide textual
information.

Definitions

ss = ss tt gg = tt GG ss = 2012 ss GG gg = 2012

αα ss = GG ss GG ss + GG gg αα gg = GG gg GG ss + GG gg

mm = αα ss ss + αα gg gg = h aa aa aa aa tt
In this potential implementation, tradable tons for use in offsetting emissions are created as follows:

1 MMMM h RR GG mm 1 MMMM h SS GG ( mm − ss )

1 MMMM h GG GG � mm − gg �

Note that the steam number is negative, so each MWh of steam demands additional tons beyond what
is needed to c ancel emissions in the numerator.

BSER:

Under this implementation of BSER, GG RR MWh of Renewable energy is deployed to displace steam and gas proportionally. In addition, ∆ MWh of coal

- to

- gas redispatch occurs. Let

γγ

ss = ss ii γγ gg = ii
This assumes that the additional emissions and generation from gas in the coal

- to

- gas redispatch are
added to the steam rate. Then:

ss = γγ ss ( GG ss − αα ss GG RR − ∆ ) + γγ gg ∆
GG ss gg = γγ gg � GG gg − αα gg GG RR �

GG

gg

mm = γγ ss ( GG ss − αα ss GG RR − ∆ ) + γγ gg � GG gg − αα gg GG RR + ∆ �

GG ss + GG gg
Note that, here, the MWh of coal

- to

- gas redispatch only appear in the steam rate and not in the gas rate, as opposed to appearing in both as is done in th e current draft.

Consistency with BSER :

### ***E.O. 12866 Review

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***E.O. 12866 Review

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– Do Not Cite, Quote or Release During Review*** 5 For gas to be in compliance under BSER, the following must hold:

γγ

gg � GG gg − αα gg GG RR + ∆ �

− TT
GG

gg − αα gg GG RR + ∆ = gg

Note that this does not take into account the additional tons that are created by the gas genera tion

– they are instead assumed to be part of the overall allowance supply. This can be solved to give:

TT = ∆ � γγ gg − gg � + gg αα gg GG RR
For steam to be in compliance, the following must hold:

γγ

ss ( GG ss − αα ss GG RR − ∆ )

− TT
GG ss − αα ss GG RR − ∆ = ss

Again , this does not take into account the additional tons that steam generation must purchase. This can be solved to give:

TT = ∆ � ss − γγ gg � + ss αα ss GG RR
Thus, the total demand for tons is:

∆ � ss − gg � + � gg αα gg + ss αα ss � GG RR = ∆ � ss − gg � + mm GG RR

On the other hand, the total supply of tons is:

RR GG : mm GG RR SS GG : ( mm − ss ) ( GG ss − αα ss GG RR − ∆ )

GG GG : � mm − gg � � GG gg − αα gg GG RR + ∆ �

Added together, this is:

mm GG RR + ∆ � ss − gg � + mm � GG ss + GG gg − GG RR �

− ss GG ss − gg GG gg + mm GG RR = mm GG RR + ∆ � ss − gg �

Thus, the supply and demand for tons are equal, and compliance is achieved.