Regional Greenhouse Gas Initiative

Stakeholder Group Meeting

Albany, New YorkFebruary 10, 2006

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• Background & Context• Events Since Last Meeting• Memorandum of Understanding• Model Rule Schedule• Focus on Offsets • Discussion

Overview of Presentation

• Groundwork– Data Assembly– Impacts Analysis– Stakeholder

Process

• Policy Research & Deliberation

Two-Year+ Effort

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• Staff Working Group Agency Heads Governors

• Unprecedented Collaboration betweenEnergy & Environmental Agencies

• Expert Input from ISOs, Environmental & Energy Think Tanks, et al.

• Extensive Stakeholder Input

Observations on the Process

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RGGI Program Components

• Start Date of 2009.

• Covers Power Plants 25 Megawatts+

• Two-Phase Cap—Stabilize Emissions through 2015; Reduce 10% by 2019.

• Comprehensive Review of Program in 2012.

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RGGI Program Components

• Allocations:– 25% for Consumer Benefit and/or

Strategic Energy Purpose

– Remaining 75% of the allocations left to each state to allocate

• 3-Year Compliance Period

• Banking Allowed

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RGGI Program Components

• Offsets—project-based reductions:– Types:

• Natural Gas, Propane, Heating Oil Efficiency• Land to Forest• Landfill Gas Capture & Combustion• Methane Capture from Animal Operations

• SF6 Leak Prevention

• Leak Detection in Natural Gas Distribution

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RGGI Program Components

• Offsets—project-based reductions:– Geographic Extent:

• Anywhere in the United States• Offsets from Outside RGGI States 2:1 Discount

– Limit on Use: • Each Source may “cover” up to 3.3% of its total

reported emissions

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• Allowance Price Safety Valves– $7.00 Trigger

• Limit on offset use increased to 5% of a source’s reported emissions

• Anywhere in North America• Offsets from Outside RGGI States 1:1

RGGI Program Components

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RGGI Program Components

• Allowance Price Safety Valves (Cont’d)– $10.00 Trigger

• Compliance Period extended for 1 year for up to 3 years (Maximum 6-year compliance period).

– $10.00 Trigger—2 Consecutive Years• Limit on use of offsets increased to 20% of a source’s

reported emissions• Offsets may come from anywhere in North America, or

from recognized international trading regimes.

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RGGI Program Components

• Imports & Leakage Working Group– Representatives from each Energy &

Environmental Agency– Energy Regulatory Leads– Explore utilization of existing stakeholder

group and resource panel, with some changes to reflect different subject matter

– Explore using professional facilitator

• Dec 20, 2005: MOU signed by 7 states• Feb 10, 2006: MOU overview and discussion for stakeholders• Feb 21, 2006: Share initial draft of model rule with agency heads• Mar 23, 2006: Draft model rule to be released to stakeholders• Mar 28, 2006: Stakeholder meeting in NYC to present model rule• Mar 28 - May 22, 2006: Outreach in individual RGGI states may

take place on a state-to-state basis as needed• May 22, 2006: Stakeholder and public comments due by this

date• July 6, 2006: Complete revisions to the model rule based on

feedback

Model Rule Timeline

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• Review of design approach

• Overview of model rule components, administration

• Process for stakeholder input

Offsets Update

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RGGI Offset Design Approach

• Guidance from agency heads and stakeholders to pursue a benchmark/performance standard approach to additionality

• Allows project developers and interested stakeholders to understand program requirements up-front – sets a transparent standard for project evaluation

• Avoids administrative case law approach (CDM), which increases insurance of environmental integrity and reduces transaction costs

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Additionality: What do we mean?

• Additionality requires projects to be beyond “business as usual” as defined by the program– Actions taken are "additional" to those that would have

otherwise been undertaken, or that would have been undertaken but at some future date

• Is the action being undertaken as part of current standard market practice? If so, the action is likely not additional.

• Is offset revenue likely driving investment in a project beyond standard market practice, or is a project unlikely to occur without significant incentives? If so, the action is likely additional.

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Additionality: Why do we care?

• Additionality is key criteria for ensuring that projects result in “real” emissions reductions– Incremental environmental benefits are being achieved due

to the offset mechanism

– Since offsets allow an additional ton of CO2 to be emitted from sources subject to RGGI for each ton of emission reduction achieved through offsets, offsets projects must provide reasonable assurance that they are achieving emissions reductions that would not otherwise have occurred

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Additionality: Why do we care?

• Offsets mechanisms without additionality criteria would simply involve quantification of emissions reductions achieved through typical market activities, such as:– Normal capital stock turnover due to replacement of old

equipment

– Actions undertaken to meet other non-GHG regulatory requirements

– Actions undertaken as the result of other market transformation incentives

– Improvement of production efficiency to meet competitiveness goals

– Building remodels, retrofits

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Operationalizing Additionality: How do you accomplish?

• Two levels of additionality:– Regulatory additionality: is the project required by law or

regulation? • Simple yes/no test.

– Financial additionality: does the project present an attractive investment alternative in the current market?

• Requires a counterfactual assessment--knowledge of a future scenario that will not actually take place

• Involves development of a business-as-usual baseline• Tests to determine investment attractiveness, such as market barrier

evaluation, financial analysis (IRR or NPV for proposed offset project with and without expected offset allowance revenue, as compared to baseline project scenario)

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Operationalizing Additionality: How do you accomplish?

• Case-by-case evaluation of financial additionality has been widely criticized

• Process is cumbersome, selection of case-specific scenarios and variables is critical to outcome

• Subject to gaming: “tell me a good story”• Very difficult to accurately gauge the investment

calculus of individual investors– Threshold investment decisions, such as IRR benchmarks

vary among investors

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Operationalizing Additionality: What are the alternatives?

• Use benchmarks and/or performance standards as proxies to infer financial additionality

• Examples:– Benchmark: qualitative eligibility criteria for a project that

reasonably ensures that project is unlikely under standard market practice

• For example, prohibition of receipt of both offset allowances and other attribute credits (or ability to receive both only under certain limited conditions)

– Performance standard: projects that exceed the standard qualify as additional

• Emission rate• Energy efficiency criteria• Market penetration rate

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Overview of Model Rule Offsets Components

• Each eligible offset type will have a project standard in the model rule, outlining in detail the following:– Eligibility (includes additionality provisions)– Project description– Emissions baseline determination– Calculation of emissions reductions (or net carbon

sequestered)– Monitoring and verification requirements

– While proposed regulatory language will be fairly detailed, there will be the need for the development of guidance documents to elaborate some regulatory requirements

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Overview of Model Rule Offsets Components

• Two-step application process– Consistency determination (made by regulatory agency):

• Project eligibility• Certification of monitoring and verification plan• Emissions baseline determination, as appropriate

– Submittal of monitoring and verification reports:• Must receive consistency determination prior to submittal of first

M&V report• Offsets allowances issued based on emissions reductions

demonstrated per approved M&V reports (decision to issue made by regulatory agency)

– Both steps of the process require independent certification component by accredited certifiers

Discussion