6 NYCRR Part 242, CO2 Budget Trading Program Revised Regulatory Impact Statement Summary
On December 20, 2005, New York State entered into a historic regional agreement to reduce greenhouse gas (GHG) emissions from power plants, an important step to protect our environment and meet the significant challenge of climate change. Under the agreement, the governors of 10 Northeastern and Mid-Atlantic states have committed to propose the Regional Greenhouse Gas Initiative (RGGI), a program to cap and reduce carbon dioxide (CO2) emissions from power plants in the region by 10 percent by 2019, for adoption in their states.1 In order to carry out the State's commitment, the Department of Environmental Conservation (the Department) is proposing to establish the CO2 Budget Trading Program (the Program) by promulgating 6 NYCRR Part 242, and to revise 6 NYCRR Part 200, General Provisions.
The statutory authority to promulgate Part 242 in the State derives primarily from the Department's obligation to prevent and control air pollution, as set out in the Environmental Conservation Law (ECL) at Sections 1-0101, 1-0303, 3-0301, 19-0103, 19-0105, 19-0107, 19-0301, 19-0303, 19-0305, 71-2103, 71-2105. The Department's obligation to preserve and protect the other natural resources and public health in the State as it relates to climate change extends beyond the control of air pollution, however, as set out in ECL Sections 11-0303, 11-0305, 11-0535, 13-0105, 15-0109, 15-1903, 16-0111, 17-0303, 24-0103, 25-0102, 34-0108, and 49-0309. The promulgation of the Program is also consistent with the Department's obligations under Energy Law 3-101 and Energy Law 3-103. The general powers of the New York State Energy Research and Development Authority (NYSERDA) that are relevant to the Program's ability to sell allowances in a transparent auction are set forth in the Public Authorities Law Sections 1850, 1851, 1854 and 1855.
Mitigating the impacts of New York's warming climate represents one of the most pressing environmental challenges for the State, the nation and the world. Extensive scientific work demonstrates the need for immediate world-wide action to reduce emissions from burning fossil fuels, as well as the great benefits that will accrue if the emissions are reduced through programs like RGGI. This section outlines the Department's analysis of the needs and the considerable benefits of the Program.
A naturally occurring greenhouse effect has regulated the earth's climate system for millions of years. Solar energy from the sun that reaches the surface of the earth is radiated back out into the atmosphere as long wave or infrared radiation. CO2 and other naturally occurring GHGs trap heat in our atmosphere, maintaining the average temperature of the planet approximately 50 degrees Fahrenheit (°F) above what it would be otherwise. An enhanced greenhouse effect, and associated climate change, results as large quantities of anthropogenic GHGs, especially CO2 from the burning of fossil fuels, are added to the atmosphere.
Atmospheric concentrations of CO2 and other GHGs have substantially increased since the mid-1700s due to human activities. In addition, ice core samples spanning thousands of years have proven that CO2 concentrations far exceed pre-industrial values. These global increases in CO2 concentration are due primarily to fossil fuel use and land-use change. 2
While there is strong evidence that the climate is warming, there is also clear scientific consensus that anthropogenic emissions of CO2 from the burning of fossil fuels are contributing to observed warming of the planet. The evidence comes from direct measurements of rising surface air and subsurface ocean temperatures, increases in sea levels, retreating glaciers and changes to many physical and biological systems.
Scientists have already observed significant warming in New York's climate due in part to increased concentrations of GHGs in the atmosphere.3 Since 1970, the Northeast United States has been warming at a rate of 0.5°F per decade. Winter temperatures have risen even faster, at a rate of 1.3°F per decade from 1970 to 2000. Temperature increases in the coastal areas of the state have been more dramatic. In summary, scientists have concluded that the New York climate has already begun migrating south, taking on the characteristics of the climate formerly found in the states south of New York.4
Scientific literature confirms that reducing emissions of GHGs like CO2 will help to mitigate the impacts of climate change. It is clear that these projections about New York's potential future will have adverse impacts on New York's environment and human health. It is also clear that reducing GHG emissions will reduce those impacts. More intense and prolonged periods of summertime heat can result in increased mortality and heat illnesses, especially in cities that experience the heat island effect. The term "heat island" refers to urban air and surface temperatures that are higher than nearby rural areas. Many U.S. cities and suburbs have air temperatures up to 10°F warmer than the surrounding natural land cover.5 The United States Environmental Protection Agency (EPA) reports that a one degree Fahrenheit increase in average temperature could more than double heat related fatalities in New York City from 300 to 700 per year.6 Increased GHG emissions contribute to conditions that enhance the formation of ground-level ozone, specifically by increasing temperature through global climate change. Increased temperature and precipitation levels also produce conditions favorable to the introduction or spread of vector-borne illnesses such as Lyme Disease, Equine Encephalitis, West Nile Virus, and other diseases spread by mosquitoes, ticks, and wild rodents.7
New York has approximately 2,625 miles of coastline including barrier islands, coastal wetlands, and bays that could also be affected by a warming climate.8 The major contributor to sea level rise is thermal expansion and melting of glaciers and ice sheets. In New York City for example, sea level has risen 0.27 cm/year on average over the last hundred years and is expected to increase over the next century to an average of approximately 0.60 cm/year.9 Accelerated sea level rise due to global climate change is expected to increase the frequency and magnitude of storms such as the 100 year storm, which would result in increased flood damage. The return period of the resulting 100 year flood could be reduced to once every 50 years by the 2080s, and as often as once every four years in worst case scenarios.10
New York's public water supply could also be stressed by changes in temperature and precipitation. The majority of drinking water is obtained from surface flow, which can be highly variable. The New York City water supply comes from a 2,000 square mile watershed area in upstate New York that is greatly influenced by temperature and precipitation levels.11 Lake Erie and Lake Ontario are critical water sources to New York State which would also be threatened by global climate change. New York relies on these Great Lakes for drinking water, hydroelectric power, commercial shipping, and recreation, including boating and fishing. New York State has approximately 331 miles of shoreline along Lake Ontario and approximately 77 miles along Lake Erie.12
Agriculture and forests in New York will also be affected by global climate change. The majority of crops grown in New York may be able to withstand a warmer climate with the exception of cold weather crops which include apples, potatoes, and others which would shift to the north or have reduced growing seasons. Dairy farmers would also be impacted since milk production is maximized under cooler conditions ranging from 41°F to 68°F.13 Global climate change could also affect the current forest mix in New York. New York State's Adirondack Park is the largest forested area east of the Mississippi and it consists of six million acres including 2.6 million acres of state-owned forest preserve.14 Climate change would also negatively impact New York's maple syrup industry since specific temperature conditions are required in order for the sugar maples to produce sap. As forest species change, the dulling of fall foliage will likely have a negative impact on regional tourism.15 Distribution of wildlife is also likely to change due to increased temperature and changes in precipitation. As a result, cold-water salmon and trout fisheries and migratory birds could be adversely impacted due to loss or changes in habitat.
The global community must reduce its GHG emissions well below 1990 levels within a few decades if we are to stabilize atmospheric concentrations of CO2 at acceptable levels. The burning of fossil fuels in power plants in New York is a major contributor to increased atmospheric concentrations of CO2. In 2005, power plants in New York burned fossil fuels to produce approximately 61 million tons of CO2 and significant amounts of other harmful pollutants that impact the health and welfare of New Yorkers. This represents approximately one-quarter of the State's total GHG emissions. Any effort to curb the State's contribution to atmospheric concentrations of CO2, therefore, must address CO2 pollution from power plants.
Offsets are an integral part of RGGI and the Program. An "offset" is a project-based GHG reduction (or sequestration) occurring at sources that are not subject to the Program that may be used by regulated sources for the purpose of compliance with the Program. Offsets not only provide flexibility for regulated sources, but also provide significant environmental and or economic co-benefits. Offsets allowed under the Program are from: Landfill Gas; SF6: reduction of fugitive emissions from electricity transmission and distribution infrastructure; Afforestation; Agricultural methane; and Natural gas and oil/ end-use energy efficiency. The Program also incorporates an energy efficiency and clean energy technology allocation (the "EE & CET Allocation"). The EE & CET Allocation will be administered by NYSERDA and allowances in the account will be sold in a transparent allowance auction or auctions. This will better achieve the emissions reduction goals of the Program by promoting or rewarding investments in energy efficiency, renewable or non-carbon-emitting technologies, innovative carbon emissions abatement technologies with significant carbon reduction potential, and/or the administration of the Program.
The allowance auctions will include a Reserve Price. The Reserve Price represents the price below which no allowances will be sold at the auction. Its use is important for mitigating the potential for auction prices to clear significantly below current market prices, due to tacit or explicit collusion, weak competition, or to maintain a minimum rate of progress in reducing emissions below business as usual. Setting a Reserve Price can be accomplished in a variety of ways, including mechanisms that are, or are not, directly linked to current market prices.
NYSERDA currently administers similar energy efficiency and clean energy technology programs, and the addition of the EE & CET Allocation, should be readily accomplished. The EE & CET Allocation will increase the emissions reduction benefits of the Program while simultaneously reducing impacts on consumers. The Department will also include a voluntary renewable energy market and long term contract set-aside allocation. Accordingly, the Department shall allocate 700,000 and 1,500,000 tons to the voluntary renewable energy market and long term contract set-aside accounts, respectively, from the CO2 Budget Trading Program annual base budget.
The Department sought input from NYSERDA and the New York State Department of Public Service (DPS) with respect to the costs and other impacts associated with compliance of the Program. The analysis provided by NYSERDA includes modeling of the electricity sector showing the impacts of RGGI. ICF International (ICF) was contracted by NYSERDA to perform the modeling analysis. ICF utilized the Integrated Planning Model (IPM®), a nationally recognized modeling tool that is used by the EPA, state energy and environmental agencies, and private sector firms such as utilities and generation companies. The Department also analyzed the costs associated with state and local governments' compliance with the Program and considered analysis of the impacts the program may have on the state economy.16
CO2 allowance prices (the cost of complying with RGGI) are projected to increase from approximately $2/ton in 2009 to about $3.00/ton in 2015 and about $4.45/ton in 2021. Under the Program, New York's wholesale electricity prices (including both energy and capacity costs) are projected to be $1.04/MWh higher in 2015 and $1.51/MWh higher in 2021. RGGI is projected to increase wholesale electricity prices by about 1.6 percent in 2015 and 2.4 percent in 2021. For a typical New York residential customer (using 750 KWh per month), the projected increase in wholesale electricity prices in 2015 (1.6 percent) translates into a monthly retail bill increase of about 0.7 percent or $0.78. In 2021, the projected increase in wholesale electricity prices (2.4 percent) translates into a monthly residential retail bill increase of about 1.0 percent or $1.13. For commercial customers, the projected retail price impact of RGGI is about 0.9 percent in 2015 and 1.2 percent in 2021. For industrial customers, the projected retail price impact of RGGI is about 1.7 percent in 2015 and 2.4 percent in 2021.17 A macro-economic impact study of the Program was also conducted at the direction of the RGGI state agencies through the Massachusetts Division of Energy Resources to estimate the potential impact of the Program on the economies of participating states.18 The study used a computer model called the Regional Economic Models, Inc. (REMI) model. The study concluded that the economic impacts of RGGI on the economies of the participating states, including New York, were very small and generally positive.
There will also be costs associated with the administration of the Program. First and foremost, the Department will incur costs associated with the implementation of the Program. The Department estimates that between five and eight person years (the full time equivalent of working 100 percent on a project for a full work year expressed as 220 days) will be required to implement all aspects of the Program at a cost of $110,000 per person year or up to $880,000 annually. The Department will also need to reimburse its agent for its costs in administering the emission and allowance tracking and reporting system. Based on contractor costs associated with the administration of the Acid Deposition Reduction Program (ADRP) under Parts 237 and 238, the Department estimates that the capital start up costs for designing and implementing a regional system for tracking CO2 allowance transactions will be between $500,000 and $950,000. The Department is currently contracting with an agent to administer the ADRP program and the annual operating costs for the administration of the emission and allowance tracking and reporting system under that program are approximately $160,000. The Department estimates that administration of a regional system will be between $150,000 and $300,000.
The owners and operators of each source subject to the Program and each unit at the source shall keep each of the following documents for a period of 10 years from the date the document is created: account certificate of representation form; all emissions monitoring information; copies of all reports, compliance certifications, and other submissions and all records made or required under the Program; copies of all documents used to complete a permit application and any other submission under the Program or to demonstrate compliance with the Program; copies of all documents used to complete a consistency application and monitoring and verification report to demonstrate compliance with the offset provisions of the Program.
For each control period in which one or more units at a source are subject to the CO2 budget emission limitation, the CO2 authorized account representative of the source shall submit to the Department, a compliance certification report for each source covering all such units. This must be submitted by the March 1st following the relevant control for the units subject to the Program.
The Department examined the alternative of an emission rate based program for CO2 to the cap-and-trade structure of the Program that could conceivably be used to achieve equivalent emissions reductions. This alternative is a command-and-control regulatory structure which the Department concluded is less cost-effective and more difficult for sources to implement than the Program. The Department also determined that an emission rate program would be no more protective of the public health and the environment.
The Department also considered a number of variations of the emissions cap-and-trade construct that could share many or most of the features of the Program as proposed. These alternatives included: (1) a New York only trading program; (2) allocating allowances to generators at no cost; and (3) applicability to smaller sources.
In carrying out its statutory obligation to assess all relevant factors in developing an appropriate control program that is most cost-effective, the Department determined that emissions cap-and-trade programs are the most appropriate programs for the control of CO2 emissions from the subject sources.
There are currently no Federal standards that limit CO2 emissions from the electricity generating sector. The Program will reduce CO2 emission from electric generating sources to 10 percent below current levels by 2018. In response to the need to reduce GHG and the lack of a national program, the Department has determined that fossil fuel-fired electricity generators will have to reduce emissions of CO2.
The Program will require affected sources and units to comply with the emission limitations of the Program beginning with the first three year control period (2009, 2010 and 2011). In order to meet the necessary permit requirements, the CO2 authorized account representative of the source must submit to the Department by the March 1st following the relevant control period, a compliance certification report for each source covering all such units. Each year, the owners and operators of each source subject to the Program shall hold a number of CO2 allowances available for compliance deductions, as of the CO2 allowance transfer deadline not less than the total tons of CO2 emissions for the control period. A unit is subject to this requirement starting on the later of January 1, 2009 or date the unit commences operation.
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1 In addition to New York, the other states participating in RGGI are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, and Vermont.
2 IPCC WGI Fourth Assessment Report, Climate Change 2007: The Physical Science Basis, February 2007, and available at: http://www.ipcc.ch
3 Climate Change in the U.S. Northeast, A Report of the Northeast Climate Impacts Assessment (2006), available at: http://www.climatechoices.org/ne/resources_ne/jump.jsp?path=/assets/documents/climatechoices/NECIA_climate_report_final.pdf.
4 Id.
5 http://www.epa.gov/hiri/about/index.html
6 United States Environmental Protection Agency. "Climate Change and New York." September 1997. Page 3.
7 National Assessment Synthesis Team (NAST), 2001: Climate Change Impacts On The United States, The Potential Consequences of Climate Variability and Change. Page 450.
8 National Oceanic and Atmospheric Administration (NOAA). Treasure Our New York Coasts and Estuaries. June 2003. Page 1.
9 Goddard Institute for Space Studies Institute on Climate and Planets (GISS ICP). Climate Impacts in New York City: Sea Level Rise and Coastal Floods. 2002. Page 3.
10 GISS ICP. Rising Seas: A View From New York City. August 2000. Page 2.
11 NAST. Page 123.
12 Michigan Department of Environmental Quality: Shorelines of the Great Lakes. http://www.michigan.gov/deq/0,1607,7-135-3313_3677-15959B,00.html
13 Garcia, Alvaro. Dealing With Heat Stress In Dairy Cows. South Dakota Cooperative Extension Service. September, 2002. Page 1.
14 New York State Adirondack Park Agency (APA). http://www.apa.state.ny.us/About_Park
15 NAST. Page 125.
16 "REMI Impacts for RGGI Policies based on the Std REF & Hi-Emission REF" by the Economic Development Research Group, dated November 17, 2005.
17 Typical customer usage numbers from U.S. Department of Energy, Energy Information Administration (EIA). Average electricity prices from NYSERDA, Patterns and Trends (December 2005).
18 "REMI Impacts for RGGI Policies based on the Std REF & Hi-Emission REF", by the Economic Development Research Group, dated November 17, 2005.
