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How the Carbon Dioxide Budget Trading Program Works

Reducing CO2 Emissions

Establishing and lowering emissions caps. RGGI participating states agreed upon a cap (regional CO2 emissions budget) amounting to approximately 188 million tons of CO2. That number is the total amount of CO2 that power plants in the region were expected to emit in 2009. Beginning in 2015, this cap will be reduced by 2.5 percent each year, for a total reduction of 10 percent by 2019. This phased approach, with modest reductions, will provide predictable market signals and regulatory certainty. Electricity generators will be able to plan for and invest in lower-carbon alternatives and avoid dramatic electricity price impacts.

Supporting Clean Energy

Establishing and distributing allowances. Based primarily on previous emission history, the participating states negotiated for shares of the total CO2 emissions budget. New York, for instance, received 64.3 million tons as its CO2 emissions budget. An allowance is permission to emit one ton of CO2 (accordingly, New York will have 64.3 million allowances to distribute to its power plants). Instead of awarding these allowances directly to electric generators free of cost, the participating states agreed to sell a minimum of 25 percent of the allowances, committing the proceeds to consumer benefit and strategic energy projects. As the program has evolved, the RGGI states have decided to sell most of their allowances and provide the revenues for consumer benefit and strategic energy purposes. New York will offer 96.5 percent of its allowances at auction.

Marketing the allowances. The RGGI states will sell their emissions allowances through CO2 Allowance Auctions. Power plants that obtain more allowances than they need - or that reduce their CO2 emissions - will be able to sell their excess allowances on a secondary market. If they need additional allowances, they can obtain them either at the CO2 Allowance Auction or through the secondary market. CO2 Allowance Auctions are subject to anticollusion provisions, as well as to monitoring for fairness by an independent market monitor.

Supporting low-carbon solutions. Proceeds from the sale of allowances will fund state programs that promote energy efficiency and projects for clean renewable energy, such as solar and wind power. Selling allowances will enhance the program's effectiveness at reducing greenhouse gas emissions.

Using Offsets. An "offset" is a greenhouse gas emissions reduction or sequestration project at a source beyond the electricity sector that can help companies meet their compliance obligations. Examples of offsets include landfill gas recovery and agricultural methane recapture, which would reduce emissions of methane, a potent greenhouse gas. Electric generators may use approved offsets to comply with up to 3.3 percent of their emissions limitations. Offsets provide significant environmental and/or economic benefits for the generators, as well as flexibility for regulated sources.

How the CO2 Budget Trading Program and CO2 Allowance Auction Program Will Be Carried Out in New York

New York will cap CO2 emissions at approximately 64 million tons through 2014, before reducing them over the subsequent four years. The state's approximately 64 million allowances will be sold through CO2 Allowance Auctions, and the proceeds used to stimulate a new energy economy and boost jobs in the green collar sector.

Responsibility for implementing the CO2 Budget Trading Program and CO2 Allowance Auction Program is shared by three departments of New York State government: the Department of Public Service, the Department of Environmental Conservation (DEC) and the Energy Research and Development Authority (NYSERDA). DEC and NYSERDA have completed rulemaking to implement the program.

DEC's Role. DEC has established New York's CO2 Budget Trading Program through a new rule (6 NYCRR Part 242) and revisions to an existing rule (6 NYCRR Part 200, General Provisions). Air Facility Permits for fossil-fuel power plants larger than 25 MW (plants this size are responsible for approximately 95 percent of electric generation CO2 emissions) will be amended to require the plants to meet CO2 budget emissions limits. Other data, such as monitoring plans that define CO2 emissions and net energy output monitoring procedures will be incorporated into operating permits.

NYSERDA's Role. New York's regulations provide that almost 100 percent of the emissions allowances will be offered for sale through auction. NYSERDA will administer the auction process and the proceeds of the auctions. A rule promulgated by NYSERDA (21 NYCRR Part 507 - CO2 Allowance Auction Program) establishes the auction, specifies features for subsequent detailed design, and also sets up a dedicated account to receive the sale proceeds. The rule stipulates that the auctions must be designed to: achieve fully transparent and efficient pricing of allowances; promote a fluid allowance market (by making entry and trading as easy and low-cost as possible); facilitate participation by all eligible entities; safeguard against market manipulation; be held as frequently as is needed to achieve design objectives; avoid interference with existing allowance markets; align well with wholesale energy and capacity markets, and not act as a barrier to efficient investment in relatively clean existing or new electricity generating sources.