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Scope for Draft SGEIS on the Proposed Amendments to the CO2 Budget Trading Program

Prepared by the NYSDEC Division Air Resources - April 3, 2013

1.0 Description of the Action & Environmental Setting

The New York State Department of Environmental Conservation (DEC) proposes to amend the regulations that implement the Regional Greenhouse Gas Initiative (RGGI), "CO2 Budget Trading Program" (Program) Part 242 of Title 6 of the Official Compilation of Codes, Rules and Regulations of the State of New York (NYCRR) and "General Provisions" 6 NYCRR Part 200; and the New York State Energy Research and Development Authority (NYSERDA) proposes to amend the "CO2 Allowance Auction Program" 21 NYCRR Part 507. The principal purpose of these amendments is to implement a reduction in the carbon dioxide (CO2) emission cap and to strengthen the flexibility provisions of this market-based cap and trade program.

As lead agency, DEC determined that the CO2 emission cap reduction, which forms the basis for this action, will have a positive impact on the environment and is not likely to have any significant adverse environmental impacts. Notwithstanding this fact, given the importance of these regulations and to ensure maximum public participation in the adoption process, DEC will prepare an SGEIS as a means to: describe the objectives and rationale for the proposed amendments; address any impact the proposed amendments may have on the single issue identified in the Final GEIS for the initial promulgation of the RGGI regulations, accepted on August 13, 2008, that could potentially adversely impact the environment, namely "emissions leakage"; present alternatives; and provide the opportunity for additional public participation.

Since DEC believes that the proposed amendments will result in positive impacts to the environment, the SGEIS will address the single potential issue of "emissions leakage." Emissions leakage refers to the potential for the Program to cause a shift of electricity generation from capped sources subject to the Program to higher-emitting sources not subject to the Program, in and out of the RGGI region. The SGEIS will analyze the potential shift in generation to sources not covered by the cap and whether this could result in a potential increase of greenhouse gas emissions that could offset reductions from the Program. In addition, the SGEIS will consider the potential for increases in other pollutants, such as oxides of nitrogen, sulfur dioxide and mercury that could have an adverse impact on the environment.

Significantly, the RGGI Electricity Monitoring Group (Group), comprised of representatives from each RGGI Participating State, has studied this issue over the past few years and has found no evidence of emissions leakage due to Program implementation. The Group will develop a work plan over the next year to outline monitoring efforts. While DEC does not anticipate that the proposed cap reduction and other Program amendments will in fact result in emissions leakage or have a significant adverse environmental impact, the SGEIS will examine the potential impacts of emissions leakage and the mitigation options available should emissions leakage be determined to occur due to the Program.

2.0 Summary of Proposed Amendments to 6 NYCRR Parts 200 and 242 and 21 NYCRR Part 507

  • Reduction of the cap
    • The current New York State annual base budget under the Program is approximately 64 million tons of CO2, which represents the State's proportion of the current RGGI annual regional emissions cap of approximately 165 million tons of CO2. The proposed amendments will include the New York State percentage of the reduced RGGI regional emissions cap, which is proposed to be reduced in 2014 to 91 million tons. 6 NYCRR Part 242 will include language that maintains the original 2.5% per year reduction in the cap for the years 2015 through 2020.
  • Cost containment reserve
    • The creation and use of a cost containment reserve (CCR) will provide flexibility and cost containment for the Program. The CCR will consist of a fixed quantity of allowances, in addition to the cap, that would be held in reserve and made available for sale if allowance prices exceed predefined price triggers. The proposed amendments will include a fixed quantity of allowances equal to New York State's proportion of the RGGI regional quantity of 5 million allowances in 2014, and 10 million allowances in the years 2015 through 2020.
    • CCR Triggers Prices: $4 in 2014, $6 in 2015, $8 in 2016, and $10 in 2017. Each year after 2017, the CCR trigger price will increase by 2.5%.
  • Interim Control Period
    • 6 NYCRR Part 242 will contain Interim Control Periods, which are defined as each of the first two calendar years of each three-year control period. The proposed amendments require sources to hold allowances to cover 50% of emissions for each Interim Control Period, subject to the existing true-up process. Final compliance true-up at the end of the three-year control period will continue to require sources to hold allowances to cover 100% of the emissions for the three year control period. The allowances already deducted to meet each of the two annual Interim Control Period obligations will be subtracted from the three-year compliance true-up obligation.
  • Budget adjustments
    • In order to help create a binding cap, the First Control Period Interim Adjustment for Banked Allowances (First Adjustment) will reduce the budget for 100 percent of the first control period private bank of allowances (vintages 2009, 2010, & 2011) held or banked by market participants, as of the end of the first control period, that are in addition to the total quantity of first control period emissions. The First Adjustment timing and algorithm will be set forth in 6 NYCRR Part 242 and made over the 7 year period 2014-2020.
    • In order to further help create a binding cap, the Second Control Period Interim Adjustment for Banked Allowances (Second Adjustment) will reduce the budget for 100 percent of the 2012 and 2013 vintage allowances held or banked by market participants, as of the end of 2013, that are in addition to the total quantity of 2012 and 2013 emissions. The Second Adjustment timing and algorithm will be set forth in 6 NYCRR Part 242 and made over the 6 year period 2015-2020, after the actual size of the 2012 and 2013 vintage private bank is determined.

3.0 Discussion of Proposed Changes and Alternatives

RGGI is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont (Participating States) to reduce greenhouse gas emissions from power plants in the region through a flexible, market-based cap-and-trade program. The regulatory revisions to 6 NYCRR Parts 200 and 242 and 21 NYCRR Part 507 represent a critical step to combat the significant challenges presented by climate change and to advance sound energy policies that foster energy efficiency and energy independence. Since its inception, the Program has placed a mandatory emissions cap on the electric generating sector and provided for emissions trading. This market based approach requires each affected source to have enough CO2 allowances to cover its emissions for the each interim control period and three year control period, as specified in the proposed amendments. As designed and implemented, the Program also achieves significant additional reductions outside of the power sector through reinvestment of auction proceeds for end-use energy efficiency and greenhouse gas emission reduction projects.

The proposed Program revisions will cap regional emissions at 91 million tons annually beginning in 2014 and will reduce that level by 2.5 percent each year through 2020. After 2020, the cap will remain at 78 million tons annually. Further, in order to account for the existing private bank of CO2 emissions allowances already acquired at auction, and in order to help create a binding cap, the proposed Program amendments provide two distinct budget adjustments. The First Control Period Interim Adjustment for Banked Allowances will reduce the budget for 100 percent of the first control period private bank of allowances (vintages 2009, 2010, & 2011) held by market participants as of the end of the first control period. The first adjustment will reduce each State's budget (the annual cap) by its portion of the regional cap in each allocation year over the seven year period 2014-2020. The Second Control Period Interim Adjustment for Banked Allowances will reduce the budget for 100 percent of the 2012 and 2013 vintage allowances held by market participants as of the end of 2013. The second adjustment will reduce each State's budget (the annual cap) by its portion of the regional cap in each allocation year over the six year period 2015-2020.

The proposed Program amendments also create an additional flexibility mechanism called the Cost Containment Reserve (CCR). The CCR allowances will be triggered and released at auctions at $4/ton in 2014, $6/ton in 2015, $8/ton in 2016, and $10/ton in 2017 and thereafter. If the trigger price is reached, up to 10 million additional CCR allowances will be available for purchase at auction, except in 2014, when the reserve will be limited to 5 million allowances. The existing price triggers for expanding use of offsets and the one year compliance period extension will be eliminated in favor of the CCR.

Another proposed Program amendment is the creation of an interim compliance obligation. In addition to demonstrating full compliance at the end of each three-year compliance period, regulated entities must demonstrate that they are holding allowances equal to at least 50% of their emissions at end of the first two years in each three year compliance period. The proposed Program amendments contain other minor revisions such as setting the reserve price at $ 2.00 in 2014, to rise at 2.5% per year in subsequent years, updating all references, and the deletion of the early reduction allowance provisions.

The majority of the proceeds from the sale of New York's allowances will be dedicated to strategic energy or consumer benefits, such as energy efficiency and clean energy technologies. The funds generated from these sales will be used for beneficial energy programs.

Objectives and Rationale

The objective of this action is to further reduce CO2 emissions from power plants in the region through a flexible, market-based cap-and-trade program. The regulatory revisions to 6 NYCRR Parts 200 and 242 and 21 NYCRR Part 507 represent a critical step to combat the significant challenges presented by climate change and to advance sound energy policies that foster energy efficiency and energy independence. The proposed amendments support the State's commitment to strengthen the CO2 emission cap in New York and to reduce greenhouse gas emissions that contribute to climate change and devastating weather events. New York is compounding its return on emission reductions by investing CO2 auction proceeds in renewable energy, energy efficiency, and carbon reduction technologies.

Potential Impacts

The single issue identified in the Final GEIS for the initial promulgation of the RGGI regulations is the potential for "emissions leakage" which refers to the potential for the Program to cause a shift of electricity generation from capped sources subject to the Program to higher-emitting sources not subject to the Program, in and out of the RGGI region. To complete this review and to highlight the Monitoring Reports that have been conducted to date (see Underlying Studies and Reports Section below), the SGEIS will analyze the potential shift in generation to sources not covered by the cap and whether, if it occurred, this could result in a potential increase of greenhouse gas emissions that could offset reductions from the Program. In addition, the SGEIS will consider the potential for increases in other pollutants, such as oxides of nitrogen, sulfur dioxide and mercury that could have an adverse impact on the environment.

The Group has studied this issue since the inception of the Program (see Underlying Studies and Reports Section below) and has found no evidence of emissions leakage due to Program implementation. The Group will develop a work plan over the next year to outline monitoring efforts and will finalize the 2011 Monitoring Report in the near term. While DEC does not anticipate that the proposed cap reduction and other Program amendments will in fact result in emissions leakage or have a significant adverse environmental impact, the SGEIS will examine the potential impacts of emissions leakage and the mitigation options available should emissions leakage be determined to occur due to the Program.

Alternatives

The "no action" alternative would retain current 6 NYCRR Part 200 and 242, and 21 NYCRR Part 507 and result in a regional emissions cap of 165 million tons. Since the current level of 2012 regional emissions is approximately 92 million tons, the current emission cap is not binding on affected sources and is significantly over allocated. By reducing the cap to current emissions and reducing the levels by 2.5 percent each year thereafter, the Program will create a binding emissions cap and will have a positive impact on the environment. Since no evidence of emissions leakage was found due to the promulgation of the Program, DEC believes that the proposed amendments will similarly not result in any emissions leakage.

Other alternatives that have been considered include a reduction of the regional emissions cap to a level higher than 91 million tons. These alternatives were considered as part of the 2012 RGGI Program Review, and included extensive electricity modeling to project CO2 emission levels under various scenarios. This effort revealed that a cap level higher than 91 million tons may not result in a binding emissions cap or sufficient CO2 emission reductions.

List of Underlying Studies and Reports

  • Final GEIS for the RGGI regulations, accepted on August 13, 2008 indicated that the single issue that may adversely impact the environment was emissions leakage. The Final GEIS can be found at: http://www.dec.ny.gov/permits/89881.html
  • Potential Emissions Leakage and the Regional Greenhouse Gas Initiative. Final Report of the RGGI Emissions Leakage Multi-State Staff Working Group to the RGGI Agency Heads, March 2008. This report provides Participating State staffs' conclusions and final recommendations with respect to: 1) modification of tracking systems in the three ISO regions to monitor potential emissions leakage; 2) the current political momentum toward a national cap-and-trade program; and 3) leakage mitigation policy options that should be prioritized for implementation. Staffs' conclusions and final recommendations are based upon, in part, additional feedback from Agency Heads, independent experts, the regional ISOs, and stakeholders. The report can be found at: http://rggi.org/docs/20080331leakage.pdf.
  • CO2 Emissions from Electricity Generation and Imports in the 10-State Regional Greenhouse Gas Initiative: 2009 Monitoring Report, September 14, 2011. The report concluded that the observed trends in electricity demand, net electricity imports, electricity generation from multiple categories of generation sources (including electricity imports), showed no increase in CO2 emissions or the CO2 emission rate (pounds of CO2 per megawatt hour or lb CO2/MWh) from non-RGGI electric generation serving load in the ten-state RGGI region in the first year of the RGGI program operation, 2009. The Report can be found at: http://rggi.org/docs/Elec_monitoring_report_11_09_14.pdf.
  • CO2 Emissions from Electricity Generation and Imports in the Regional Greenhouse Gas Initiative: 2010 Monitoring Report, August 6, 2012. The report concluded that the observed trends in electricity demand, net electricity imports, electricity generation from multiple categories of generation sources (including electricity imports), showed no increase in CO2 emissions or the CO2 emission rate (pounds of CO2 per megawatt hour or lb CO2/MWh) from non-RGGI electric generation serving load in the ten-state RGGI region in the first year of the RGGI program operation, 2009 and 2010. The report can be found at: http://rggi.org/docs/Market/Elec_Monitoring_Report_12_07_30_Final.pdf.

DEC is seeking written comment on this approach. Comments will be accepted by DEC through close of business on May 6, 2013. The Positive Declaration and DRAFT Scoping document as well as the Final GEIS for the RGGI program can be found on the Department's website at: http://www.dec.ny.gov/permits/89881.html

All written comments can be directed to:

Michael P. Sheehan, P.E.
NYSDEC Division of Air Resources
625 Broadway
Albany NY 12233-3251
518 402-8396
E-mail 242co2btp@gw.dec.state.ny.us