California’s offsets, economy-wide program come into focus as Clean Power Plan enters Federal Register

Last Wednesday, the US Environmental Protection Agency (EPA) formally published its proposal to regulate greenhouse gas emissions from stationary electrical generating units (the ‘Clean Power Plan’) in the federal register. This marks the opening of an extended 120-day public comment period, during which EPA will also hold four public hearings in the week of July 28, in Atlanta, Pittsburgh, Denver, and Washington D.C. Comments will have to be submitted before the window closes on October 16.

The proposal to regulate EGUs under section 111 (d) of the Clean Air Act was first presented on June 2. Broadly, emissions across the country w ill be mandated to decrease 30 percent from their 2005 levels by 2030, with the majority of these reductions coming before 2020, since in fact many states have improved markedly on their emissions rates since 2005. The focus on emissions intensity, rather than absolute emissions, also means that as many as eight states may in reality get to increase their actual emissions while remaining in compliance, according to this BNEF study.

While, as we originally reported, EPA has left the door open for states to choose cap and trade as their preferred regulatory solution, this does not necessarily mean that California’s program will be approved without changes to its current construction. California has an economy-wide program, whereas the Clean Power Plan requires emission reductions to come specifically from the power sector. It is expected that the Air Resources Board (ARB), who regulate the cap-and-trade program, will be assessing what, if any, potential adjustments and modifications to propose in their written submission. These submissions are not due for at least another two years, so the 120-day public comment period is really just the beginning of public discussion and policy dialogue.

One potential solution which observers in the market are already touting as a likely compromise is a two-part cap-and-trade system, with entities needing to fulfill EPA obligations receiving their allowances for the relevant emissions from one pot, and all other emissions accounted for by allowances from a second pot. While allowances from the first pot could be surrendered against emissions from outside the power sector, power sector emissions cannot be accounted for by allowances from the second pot, thus allowing ARB to separately control the emissions of the power sector.

A second distinction between power and non-power obligations in such a scenario would relate to the option of using offsets. Presently, facilities regulated under California’s cap-and-trade program can surrender offset credits in place of up to eight percent of the allowances needed to account for their emissions. If EPA insists that no out-of-sector reductions are used to meet their targets, then the use of offsets would be restricted to emissions obligations outside the power sector, unless California can prove that allowing power sector companies to use offsets does not cause them to reduce fewer emissions than the Clean Power Plan would require them to. Tom Lawler of Lawler Strategies, who also represents the International Emissions Trading Association (IETA), explains, ‘I interpreted EPA’s response to the question regarding offsets as that EPA w ill not make a value judgement on California’s offsets. It is up to California to show what the power sector emissions are going to be, and if they are going to meet EPA’s state-wide goal.’

Even so, the prospect that the Clean Power Plan might reduce the amount of offsets California compliance entities are able to use, or make it more challenging for such entities to manage their use of offsets, is not something which stakeholders w ho have invested considerably in the offset program are necessarily prepared to countenance. ‘The EPA rule should include and respect all facets of regional programs that are already in place. We don’t think it’s reasonable to cherry-pick parts of the program, and the original efforts to combat climate change should be entirely recognized as reasonable and complete substitutes,’ said Derek Six of Environmental Credit Corp (ECC), ‘California’s compliance program should be taken prima facie. We should simply say that if a program exceeds the standards that w e need to obtain, then we accept the program, and I would say the same thing about RGGI.’ ECC is an offset developer which has generated ARB offset credits for ten projects split between the livestock and ODS project types, including eight early action projects, which highlight its long-standing commitment to the 6/24/2014 California’s offsets, economy-wide program come into focus as Clean Power Plan enters Federal Register compliance offset program.

Stakeholders are also keen for the Clean Pow er Plan to help encourage the development of offset programs in states which choose cap and trade. ‘Our understanding is that offsets could be allowable if the power issue is addressed, and we believe there is room for offsets and cap and trade in all of these states,’ said Dick Kempka of the non-profit the Climate Trust, ‘Certainly in Washington and Oregon we feel there is an opportunity for offsets to be part of the solution, but it’s a very complex issue and it w ill take time for clarity to emerge on possible solutions.’ Were offset programs to emerge in other states, it is possible that they may seek to link with California’s offset program, or work towards the goal of making their projects and credits fungible between their program and California’s. This may increase market size for offset developers invested in the California program.

Much attention w ill be paid to discussions regarding possible solutions in the coming months. At present, reactions have been tentative as many stakeholders feel they are still getting to grips with the nuances of the proposed EPA regulation. It is expected that clear positions will begin to develop up to and beyond the formal publication of the Clean Power Plan by EPA, scheduled to occur in June 2015.