# Allocation and Assurance in the

Final Transport Rule OMB Briefing EPA May 20, 2011

# Outline • Allowance Allocation

– States’ new unit set-asides

– Indian country new unit set-asides

– Existing unit FIP allocations

– CAIR NO X 

## allowances and Title IV SO 2 

## allowances

– Pathways to state - determined allocations 

# • Assurance Provisions

– Variability limits

– Assurance penalty assessment 05/20/201 1 2 Deliberative – Do Not Cite or Quote

# States’ New Unit Set-Asides
• “New unit” is any unit not online by January 1, 2010 • Each state’s new unit set-aside equals:

– Basic amount of 2% of total state budget; plus

– Projected amount of emissions from committed units in that state (for example, committed units in Illinois are projected to emit 3% of the state’s SO 2 budget and 6% of the state’s annual NO X and ozone -season NO X budgets) 

## • New units may receive allocations during their first year of operation • Retiring units’ allocations are redistributed to the new unit set-asides • If unallocated, set-asides are redistributed to unretired existing units before the compliance deadline Deliberative - Do Not Cite or Quote 3 05/20/201 1

# Indian Country New Unit Set-Asides
• Allowances to new units locating in Indian Country would be allocated by EPA from an Indian Country new unit set-aside. • EPA would continue to allocate such allowances even if a state submits a SIP to replace the FIP. • EPA is reserving 5% of basic amount of each state’s new unit set-aside for new units in Indian country within that state

– 5% of the basic 2% new unit set-aside equals 0.1% of total budget 

# • Unallocated allowances are returned to the state’s new unit set-aside Deliberative - Do Not Cite or Quote 4 05/20/201 1

# Existing Unit FIP Allocations
• The final rule allocates allowances to existing units based on share of state’s heat input, but a unit’s allocation is not allowed to exceed its maximum historic emissions

– Uses highest three of the last five years for each unit to establish heat input baseline

– Constrains unit- level allocations not to exceed maximum emissions during 2003 - 2010

Deliberative - Do Not Cite or Quote 5 Demonstration of Existing Unit Allocations in a Three- Unit State With an 80 Ton State Budget Initial Historic Heat I nput- based Allocation Maximum Historic Baseline Emissions Final Allocation Unit A 20 16 16 Unit B 30 50 32 Unit C 30 50 32 05/20/201 1

# Allocation Pattern by Primary Fuel 2014 Emissions and Allocations by Primary Fuel Type

Deliberative - Do Not Cite or Quote 6 05/20/201 1

# No Carryover of CAIR Allowance Programs

• EPA alerted CAIR participants that the Court’s remand undermined the long-term value of CAIR allowances 2012 Allowance Po ols Anticipated Remaining CAIR Allowances Transport Rule

Budgets Remaining CAIR Allowances as

Pe rcent of Transport Rule Budgets Annual NOX 460,000 1,245,869 37% Ozo ne-Season NOX 440,000 580,172 76%
• EPA alerted CAIR participants that the Court’s remand undermined the long-term value of CAIR allowances

– “EPA's continued recording of CAIR NO X allowances does not guarantee or imply that any allowances will continue to be usable for compliance after a replacement rule is finalized or that they will continue to have value in the future.” • Proposed Transport Rule further underscored Court- imposed challenges to carryover • Carryover preserves beneficial or adverse effects on sources of EPA’s use of “fuel factors”, which were rejected by Court with regard to state budgets • Not all remaining CAIR NO X allowances represent overcompliance ; many are due to “compliance supplement pools” and subsequent NSR actions that freed up allowances • Conversion of CAIR allowances into TR allowances would introduce new complexities and delay sizable portions of allowance allocations beyond the start of the programs

– CAIR compliance for 2011 will not be completed until mid - 2012

– CAIR allowances may be held by sources or parties not covered by the Transport Rule
• EPA does not see a legal way to use title IV SO 2 allowances in the Transport Rule programs. Deliberative - Do Not Cite or Quote 7 05/20/201 1

# Pathways to State- Determined Allocations
• States may replace existing unit FIP allocations as early as 2013 by submitting a simple table of units and allocations • States may submit SIPs to determine allocations for 2014 and later with a lot of flexibility while respecting certain bounds aimed at sound program structure

– Total allocations for a year cannot exceed state budget (without variability) minus the Indian country new unit set-aside, which EPA continues to administer

– Existing and new unit allocations must be submitted by specified deadlines to EPA for recording in allowance accounts

– No other changes can be made to trading program provisions

– States may choose to SIP solely for allocation purposes for one or more Transport Rule programs, and they are free to allocate how they see fit (i.e., including set-asides and auctions) Deliberative - Do Not Cite or Quote 8 05/20/201 1

# Variability Limits
• Transport Rule budgets reflect EGU operations in an “average year”

– Interconnected nature of power sector creates inherent year-to-year variability in state - level EGU operations 

## • EPA analyzed historic state - level heat input variability from 2002 - 2008 (as a EPA analyzed historic state heat input variability from 2002 proxy for emissions variability assuming constant emission rates)

– Most states’ historic variability levels were within 10%; a few approached 15% and three approached 20%

– Final rule establishes annual variability limits on each state budget at whichever level (10%, 15%, 20%) minimizes variability while covering historical level in that state 

## • State’s budget plus variability limit equals state’s “assurance level” • Assurance provisions go into effect in 2012 Deliberative - Do Not Cite or Quote 9 05/20/201 1

# Assurance Penalty Assessment

• If a state exceeds its “assurance level” in a given year, an assurance penalty is assessed on the excess tons

– Final rule imposes a 2:1 penalty; each excess ton must be met with 1 allowance for normal compliance plus 2 additional allowances to satisfy the penalty 

### • Excess tons at the state level must be apportioned to the source level to assess penalties

tons at the state level must be apportioned to the source to assess penalties

– Proposed rule apportioned by ownership; final rule apportions by designated representative

– A group of sources’ share of state’s excess tons is based on group’s emissions exceeding group’s allocations plus its share of the state variability limit. • Assuming a 10% variability limit, a group’s emissions beyond 110% of its allocations would be used to calculate its share of state’s excess emissions if state assurance level is exceeded 

### • EPA analysis shows that state exceedances of assurance levels would be uneconomic (and thus exceedingly unlikely to occur) • Penalty is designed to deter state - level emissions from exceeding assurance levels; there is no limit to the degree of interstate trading of allowances Deliberative - Do Not Cite or Quote 10 05/20/201 1

# Assurance Provision Penalty Examples Number of Allowances Allocated Allocation plus share

of variability limit (“Penalty Position”) Total

Emitted Number of Allowances

above Penalty Position Share of Exceedance (%) Penalty

(Allowances ) DR1 60 66 75 9 35% 17 DR2 20 22 35 13 50% 25

Deliberative - Do Not Cite or Quote 11 05/20/201 1 • DR1, DR2, DR3, and DR4 are all in the same state. • State budget plus 10% variability limit is 110 tons (100 + 10 = 110). • State exceeded its assurance level by 25 tons (135 - 110 = 25). • Penalty is 50 allowances (2 x 25 = 50). • Some numbers may not add up due to rounding • If state had not exceeded its assurance level (i.e., if DR1 had emitted 50 tons rather than 75 tons), no penalties would have been incurred by any source. DR3 10 11 15 4 15% 8 DR4 10 11 10 - - 0 TOTAL 100 110 135 25 100% 50