CAIR Assessment of Public Comments Summary
6 NYCRR Part 243, CAIR NOx Ozone Season Trading Program, 6 NYCRR Part 244, CAIR NOx Annual Trading Program, 6 NYCRR Part 245, CAIR SO2 Trading Program
Introduction
The Department is proposing three regulations to comply with EPA's Clean Air Interstate Rule (CAIR) that will establish cap-and-trade programs designed to mitigate interstate transport of nitrogen oxides (NOx) and sulfur dioxide (SO2) to help reduce ozone and fine particulate formation in CAIR states located in the eastern U.S. These rules consist of Part 243, CAIR NOx Ozone Season Trading Program; Part 244, CAIR NOx Annual Trading Program; and Part 245, CAIR SO2 Trading Program. As part of this rulemaking, Part 200 will be amended to update cross references in section 200.9, Referenced Material.
The Department proposed Parts 243, 244, and 245 on March 27, 2007. Hearings were held in Avon on May 15, 2007, in Long Island City on May 16, 2007, and in Albany on May 17, 2007. The comment period closed at 5:00 P.M. on May 24, 2007. The Department received written comments on the proposed rules from 15 interested parties. These comments are summarized and responded to in this document.
Comments were received on a number of sections in the regulations, some in support and some in opposition. While a few commenters offered support for the proposal, the majority of commenters offered recommended additions, changes and deletions to the regulations.
The Environmental Protection Agency (EPA) provided many comments which addressed inconsistencies and deviations from EPA's model CAIR rule language, and suggested clarification of the Department's intent in certain areas of the regulations. The Department has incorporated most of EPA's suggested revisions into the CAIR rules.
A number of comments address the Department's allocation to the energy efficiency and renewable energy technology account (EERET Account). Some commenters requested that if the Department and/or New York State Energy Research and Development Authority (NYSERDA) take the position that they have legislative authority to raise revenue in the manner described in proposed 6 NYCRR Parts 243 and 244, that the Department and/or NYSERDA specify where such authority is derived within the Environmental Conservation Law (ECL). The commenters also suggest that the sale of emissions allowances for revenue raising purposes constitutes a tax and that under the state constitution, however, only the legislature may create a tax. The comments also state that an administrative agency, such as the Department, cannot establish a tax without unambiguous legislative authority. Because the legislature has not authorized the revenue raising/taxing measures included in the proposed CAIR NOx Trading Program, the commenters believe that NYSDEC's proposed rules are unconstitutional and 'ultra vires'.
The Department's response to those comments is that the allocation of the CAIR NOx ozone season allowances and CAIR NOx allowances (hereinafter simply "allowances") to the EERET Accounts under proposed Parts 243 and 244 is an exercise of the Department's regulatory or police power under the Environmental Conservation and the State Energy Law. This power is consistent with the policy of the State as expressed in section 4 of Article XIV of the New York State Constitution. Pursuant to Energy Law Section 3-103 the Department is obligated to conduct its affairs so as to conform to the State's energy policy that is set forth in Energy Law Section 3-101. Energy Law Section 3-101 provides that it is the energy policy of the State to obtain and maintain an adequate and continuous supply of safe, dependable and economical energy for the people of the State and to accelerate development and use within the State of renewable energy sources, in order to, among other things, protect its environmental values and husband its resources for future generations. Also, ECL Section 3-0301 empowers the Department to coordinate and develop programs to carry out the environmental policy of New York State set forth in ECL Section 1-0101 which includes the prevention of air pollution and promoting technology that minimizes adverse impacts to the environment. Section 3-0301 also specifically empowers the Department to provide for the prevention and abatement of air pollution; encourage and undertake scientific investigation and research on pollution prevention and abatement; and assess new and changing technology to identify long-range implications for the environment and encourage alternatives that minimize adverse impact. In carrying out its powers and duties, ECL Section 3-0301 also provides that the Department is to consult and cooperate with officials of other State agencies having duties and responsibilities concerning the environment as well as officials and representatives of any public benefit corporation.
The Department's response also states that the EERET Account allocation is not tantamount to the imposition of a tax. The air is a public resource. As such, the air belongs to no one. Pursuant to ECL Sections 1-0101, 3-0301, 19-0103, and 19-0105, the Department is responsible for preserving this public resource by regulating sources that send pollution into the air. ECL Section 1-0101 provides that it is the responsibility of the State government to act as trustee of the environment, including the air resource, for present and future generations.
The Department's decision on how to allocate allowances inescapably involves the transfer of some value or wealth. In the absence of a statutory directive to transfer this wealth to pollution sources for free, the Department believes the value should be retained for the benefit of the environment and the public welfare in a manner that is within the authority granted to the Department. By allocating allowances to NYSERDA, the Department has created a mechanism by which the value of the allowances may be used to promote Energy Efficiency and Renewable Energy (EE/RE) technologies to reduce air pollution. NYSERDA is the entity created by the State Legislature that is most qualified and equipped to achieve this environmental protection goal in this way.
The establishment of the EERET Account allocation and NYSERDA's possible use of the value resulting from allowance sales amounts to an adjustment in the way New York State government is addressing the problem of air pollution. By beginning the shift of allocating allowance values from polluting industries to EE/RE measures, the Department is acting within its statutory authority to protect and preserve the air resource for present and future generations. For two reasons, the Department has chosen to allocate only 10 percent of both the CAIR NOx Ozone Season Trading Program Budget and the CAIR NOx Annual Trading Program Budget to the EERET account at the present time. First, the proposed rules represent the first time the Department will allocate allowances in this manner and the Department wished to learn from the experience before providing for any larger EERET Account allocation.1 Second, by signaling the Department's direction with respect to NOx allowance allocations with this relatively small EERET Account allocation, the Department anticipates that regulated sources will be given sufficient time to adjust to the new position this type of allocation will mean for them financially. Regulated sources will benefit by having this advance notice of a possibly much larger sale of allowances in the future.
NYSERDA's statutory authority springs from Title 9 of the Public Authorities Law (PAL). In enacting Title 9, the legislature declared, in relevant part, that the purpose of NYSERDA is, among other things, to promote the development and utilization of "safe, dependable, renewable and economic energy sources and the conservation of energy and energy resources." PAL Section 1850-a. The statute directs NYSERDA to develop and implement [these] new energy technologies and energy conservation technologies in a manner consistent with economic, social and environmental objectives. PAL Sections 1851(10) and (11); 1854. In exercising its statutory powers, NYSERDA is directed to cooperate and act in conjunction with various entities, including State agencies, in exercising its powers, and is authorized to provide services to State agencies in furtherance of its corporate purposes. PAL Section 1854(2). Pursuant to PAL Section 1855, NYSERDA is specifically empowered to accept from any State agency the grant of any aid in any form and to comply, subject to the relevant provisions of NYSERDA's enabling legislation, with the terms and conditions of the grant of the aid. PAL Section 1855 also provides that NYSERDA may receive, acquire, sell, and dispose of any personal property,2 and may "enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes." PAL Sections 1855(5) and (10). Finally, the statute provides NYSERDA with the authority "to do all things necessary or convenient to carry out its corporate purposes and exercise the powers given and granted by this title." PAL Section 1855(17).
Given the numerous references and express emphasis in NYSERDA's enabling statutes on the development of energy conservation and renewable energy resources, as central to NYSERDA's purpose, NYSERDA's establishment of the EERET Account and use of allowance sale revenues for the purposes stated in the EERET Account definition would clearly fall within the authority granted to NYSERDA by Title 9 of the PAL.
Any funds generated by NYSERDA by the sale of allowances would be kept and used by NYSERDA. None of the funds would come to the Department or support Department operations. However, the value of the allowances would be used for measures aimed at air pollution control. These measures would include the development and deployment of technologies that could address a number of different air pollutants that are emitted by various types of sources in New York State. These types of sources may be found in any stationary or mobile source emissions sector and may combust any type of fuel.
In light of the proposed allocation to the EERET Account, some commenters assert that the proposed CAIR NOx Trading Program is more stringent than the underlying and corresponding federal EPA requirements. The Department disagrees with this perspective. The Department is making available all of the CAIR NOx allowances that EPA budgeted for New York State (40 CFR Part 51.123(e)(2) and (q)(2)). Creating an EERET Account does not make New York's portion of CAIR any more stringent than EPA's requirements. In fact, Parts 243 and 244 do not limit NOx emissions from any CAIR NOx source or CAIR NOx Ozone Season source in New York State based on the number of allowances that the Department allocates to the units that are included in that source. The Department's allocation methodologies in the proposed regulations merely determine how the allowances are distributed. The allocation methodologies do not lower any emission limit or reduce the size of the budget. Therefore, the EERET Account which will offer for sale the allowances allocated to it is not more stringent than the federal requirements.
The Department also notes that EPA acknowledges that each State may reserve a portion of its allowance budget for an auction. Proceeds from the auction would be fully retained by the State to be used as they see fit. While EPA has provided a description of some of the different allocation options open to States and outlined some of their key features, EPA has stated that the State's policy choice on allocations does not impact the environmental goals of the CAIR program. EPA allows the States to choose policies that best match their particular needs and circumstances. 'Corrected Response To Significant Public Comments On The Proposed Clean Air Interstate Rule'; Docket Number OAR-2003-0053 (April 2005) <www.epa.gov/interstateairquality/pdfs/cair-rtc.pdf>.
Some commenters indicate that the proposed increase in the quantity of allowances for use in support of energy efficiency and renewable energy represents an unnecessary and significant impact on the State's fossil generation sources and ultimately upon the rate payers and the business climate in New York. The commenters also state that since the State's CAIR NOx budget is already so small, any expansion of set-asides is unwarranted and will have deleterious impacts to the State. The Department responds that allocations to the EERET Accounts constitute a small portion (less than 0.4 percent) of the regional NOx emissions budgets under the CAIR NOx Ozone Season Trading Program and the CAIR NOx Trading Program. These allocations will not reduce the regional or New York trading program budgets. The Department does not believe that expanding the EERET Account allocations will have any significant or detrimental impact on the trading programs or on the emissions of individual sources.
Some commenters state that the allocation of allowances to larger set-asides, and the future consideration of auctions as an allocation method for CAIR, diminishes rather than enhances incentives for the installation of emissions controls. They state that for the CAIR pollutants, back-end controls are available and the sale of excess allowances generated by installation of those emissions controls provides financial incentives for this equipment. The commenters argue that larger set-asides and auctions reduce the number of excess allowances that can be generated by the emissions control systems and thus reduce those incentives. Also, sources affected by these regulations derive no net asset benefit because it is very likely that they will be obliged to surrender more allowances than they have been allocated. If larger set-aside auctions reduce or eliminate the incentives for over-compliance, this will place the emphasis for pollutant reduction on the expenditure of auction revenues, not abatements produced by market forces. The commenters also state that the Department has yet to show how much of a pollution reduction can be expected by the EERET program. The Department responds that the savings associated with reduced emissions are the same regardless of whether the owner of an affected unit gets to sell an allowance that was given to them for free or if that owner saves the same amount because she does not have to purchase allowances in order to comply with the program - the incentive to control emissions is the same because the cost of an allowance is saved either way. Affected sources (as a whole) that are in the CAIR NOx programs will continue to emit NOx to the levels of the caps regardless of how or where reductions are achieved. It will be less expensive for certain units to purchase allowances to comply with the CAIR regulations than to reduce emissions by installing control equipment.
A commenter pointed out that the exemption for units that have accepted permit conditions to limit the unit's potential NOx mass emissions during the control period to 25 tons or less under current Part 204 (Section 204-1.4(b)) was not included in the proposed Part 243. The Department agrees with this comment and will include the exemption for facilities accepting enforceable limits on potential to emit in Part 243. The Department always intended to include all of the non-EGU and Portland cement kiln sources that were subject to Part 204 in the CAIR NOx Ozone Season Trading Program as provided for under 40 CFR Part 51.123(aa). This exemption allows sources that have been exempt under Part 204 to continue that exemption under Part 243.
Some commenters suggest that instead of establishing an EERET Account, the procedures established under existing allowance allocation rules in Part 204-5.3(f), Part 237-5.3(c) and Part 238-5.3(d) should be continued. The Department's experience with the previously established EE/RE set-asides programs has been that they have been under-subscribed and have had no significant encouraging effect on the development of EE/RE projects. This experience appears to have been shared by other States. As a general matter, it appears that the under-subscription of the EE/RE set-asides is due to the fact that allowance prices have not been sufficiently high to provide an adequate incentive to undertake EE/RE projects. EE/RE projects individually account for very minor amounts of NOx or SO2 reductions so that numerous projects need to be aggregated for even one allowance to be awarded. This need for aggregation, often spread over multiple project owners, along with the requirement for project sponsors to engage in complicated single pollutant emissions reduction accounting procedures, imposes very significant transaction costs on top of the other substantial development costs for these projects. Furthermore, the extent that project sponsors can realistically rely on future allowance sales in order to secure initial project financing is not great. Before an EE/RE project sponsor may be awarded allowances from an EE/RE set-aside, the project must be complete and have been in operation long enough to generate operating data that would be used to demonstrate the emissions reductions (through assumed electrical power demand displacement) for which the allowances may be awarded. The long time delays and lack of certainty concerning such awards make the EE/RE set-asides have relatively little appeal for potential project sponsors.
Commenters who support allocating allowances to the EERET Account, argue that selling or distributing a mere 10 percent of allowances to support energy efficiency and renewable energy is insufficient to protect the environment and public health at the least cost to consumers. These commenters believe programs to curb air pollutant emissions should encourage investment in clean energy technologies, which they say are the long-term solution to air pollution and climate change. These commenters support providing allowances to clean energy projects or using funds from the auction of such allowances for investments in clean energy generation and energy efficiency and urge New York State to consider the impact on clean energy options when finalizing the rules for NOx and SO2 allocations. In particular, the commenters state, New York State must ensure clean, non-emitting energy resources can appropriately make avoided emissions claims, and New York State must ensure any funds raised via auctions are used for truly sustainable practices. Generation from renewable resources displaces power from other sources and therefore can help lower the cost of allowances sold in market transactions including auctions. The commenters believe clean generation should continue to have the opportunity to correctly make claims based on avoided emissions. The Department appreciates the comment supporting the concept of the EERET Account allocation. The Department will consider expanding the sale of allowances under the CAIR programs as a possible rule revision in the future. The Department is proposing to allocate 10 percent of the trading program budgets to the EERET Accounts from which NYSERDA may sell or distribute the allowances to encourage the development of energy efficiency and renewable energy projects. The EERET Account allocation is a successor mechanism to the EE/RE set-aside allocations. Having gained the experience with the EE/RE set-asides, the Department thinks the EERET Account allocation will avoid the problems found with the administration of the EE/RE set-asides.
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1 On December 5, 2006, the Department released for comment a draft of 6 NYCRR Part 242, CO2 Budget Trading Program, which is currently undergoing pre-proposal development. The allocation of CO2 allowances to a similar account under the future Part 242 will occur later and will be done through an auction format that is currently being studied and developed on a separate administrative track.
The CO2 Budget Trading Program will differ from the CAIR NOx cap-and-trade programs in the following significant ways: most allowances in the CO2 Budget Trading Program will likely be auctioned; the compliance period is at least three times longer than in the CAIR programs so the initial allowance allocation under the CO2 Budget Trading Program may take place later but still be more than three years in advance of the first allowance transfer deadline; the CO2 Budget Trading Program is not subject to SIP deadlines for approval so auction development may take longer; and there is no history of allocation of CO2 allowances (much less any free allocation) that might have been relied on by sources in making past business decisions.
2 Allowances have some of the attributes of property, including transferability and the capacity to be the subject of sale and purchase agreements. Thus, an allowance would fall within the meaning of "personal property" under PAL §1855 although the allowance lacks any attendant property "right" that would give an allowance holder an entitlement to compensation should the allowance be devalued or terminated by the government.
