By Sheldon Zakreski, The Climate Trust
As published by EnergyCentral – July 9, 2014
The U.S. Environmental Protection Agency (EPA) recently issued a proposal for the first-ever national protections from dangerous carbon pollution from existing power plants. The EPA plans to utilize section 111(d) of the Clean Air Act to regulate the electricity sector’s abundant greenhouse gas emissions and effectively set a nationwide carbon cap. This is an ambitious tactic and the § 111(d) clause has generated much discussion on the flexibility mechanisms singled out as options for plants’ compliance strategies. Options within the regulation include: energy efficiency, shifting from coal to natural gas, investing in renewable energy and making power plant upgrades.
One of many promising flexibility mechanisms is the ability for states to join existing systems, such as RGGI or the California’s Cap-and-Trade Program; which would in essence, include carbon offsets as part of their § 111(d) compliance plan. Despite some policy uncertainty, it is important to note that Congress has not forbidden the EPA from considering the use of offsets under § 111(d). The Clean Air Act has recognized offsets as a compliance option since 1977, and this mass-based compliance approach has the potential to facilitate emissions trading.
With that in mind, the Oregon Carbon Dioxide Standard, the first U.S. law aimed at reducing levels of carbon dioxide, offers a potentially attractive model for states to pursue individually or as part of a multi-state strategy.
What is the Oregon Standard?
In 1997, the State of Oregon took a bold step when it passed the first legislation in the nation to curb carbon dioxide emissions. The Oregon Carbon Dioxide Standard requires new power plants to reduce their net carbon dioxide emissions to 17 percent below the level of the best existing gas combustion-turbine plant anywhere in the United States.
Facilities can comply with the Oregon Standard by adopting carbon-mitigating technologies and practices onsite; directly managing (or retaining a third party to manage) a portfolio of offset projects; or providing funding to a state-recognized nonprofit responsible for selecting and managing pollution reduction projects on their behalf. This third option, resulted in the creation of The Climate Trust, which remains the only organization qualified to administer the Oregon Standard. To date, all regulated utilities have chosen to mitigate their carbon pollution through The Climate Trust, entrusting the organization with approximately $30.8M for projects that avoid, sequester, or displace carbon dioxide on their behalf. This highly successful model has been replicated on various levels in Massachusetts, Montana, and Washington State.
Oregon’s approach to giving its new electric facilities flexibility in mitigating carbon emissions is something that has stood the test of time when you consider the many international, federal, regional and state efforts on carbon that have come and gone in the last 17 years.
Why Offsets Matter?
Before getting into how the Oregon Standard could be used to meet potential § 111(d) performance standards, it’s worthwhile to share why offsets are a key consideration in climate policy. The most compelling reason for including offsets as part of any climate policy is cost containment. This was recognized by the EPA when it analyzed comprehensive cap and trade legislation introduced to Congress in 2009. The EPA’s evaluation of the American Clean Energy and Security Act of 2009 estimated that there would be approximately 325 million metric tons of CO2 domestic offsets available annually, at prices less than $15 per metric ton of CO2. This price point compares favorably against the suite of facility source reductions, such as fuel switching and carbon capture and storage, which cost several times as much per metric ton of CO2 reduced.
The ability to generate cost savings while reducing CO2 emissions is one of the reasons why the State of Kentucky has been advocating for offsets as an option for all states in complying with a § 111(d) imposed performance standard.
How it could work
Despite the cost advantages, offsets as a compliance mechanism often generate apprehensiveness among policymakers. This is due to the need for regulators to confront a host of offset-specific issues such as additionality, and quantification; concepts that are well outside their areas of expertise. While it is undeniable that offsets add an element of complexity to any carbon trading program, third party standards such as the American Carbon Registry, Climate Action Reserve, and Verified Carbon Standard, have done an extraordinary job at providing the market a transparent and standardized way for select sectors to generate net emission reductions. The efforts of these Standards and the California Air Resources Board (which oversees compliance offset protocol development for the California Compliance Market) offer a useful foundation for informing how credible emission reductions could be derived from eligible offset sectors; sectors such as forest protection, improved fertilizer application practices, and livestock manure management.
Under the new rules, it will become crucial for states to demonstrate the feasibility of using offsets to meet the obligations for their electric generating units (EGU). California and RGGI both allow offsets for a portion of compliance, so if states join these systems as part of an emissions reduction strategy, it will usher in the potential for offsets as a price containment and compliance approach. The guidelines suggest that out-of-sector, project-based emission offsets in a trading program, “may be used to cover a portion of the compliance obligation of affected sources.” It would be remarkable to see innovation in reducing land use and agricultural waste management emissions as part of a state’s design plan for compliance.
While the inclusion of offsets in climate policy would create an abundance of environmental and cost benefits, it would also create challenges for compliance industries. Tasking energy companies that concentrate exclusively on building and operating power plants with carrying out due diligence on highly specialized sectors such as livestock manure management and forest sequestration could constrain the penetration of cost-effective and high-quality offsets into a potential § 111(d) market. This challenge may be amplified when you consider the broad range of power generation companies expected to become subject to § 111(d); ranging from rural electric co-ops to international investor-owned utilities.
State regulators should seriously consider the Oregon Legislature’s approach to giving power companies flexibility in meeting CO2 requirements. Pooling compliance funds from multiple facilities, and allowing those funds to be managed by a nonprofit organization specializing in offset acquisitions, can offer several advantages. This “fund” model, could not only lower transaction costs, but also allow more access to the offset market; particularly among smaller regulated entities unable to procure offsets due to lack of expertise and financial constraints.
Overall, incorporating systematic flexibility could achieve several laudable policy goals—from cost containment and assurance of offset quality, to expanding the accessibility of offsets as a compliance option across the power sector.
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