6 NYCRR Part 242, CO2 Budget Trading Program, 21 NYCRR Part 507, CO2 Allowance Auction Program Assessment of Public Comments Summary
Comments Received from May 7, 2008 to June 23, 2008
The New York State Department of Environmental Conservation (Department) is proposing to establish 6 NYCRR Part 242, CO2 Budget Trading Program, which is designed to stabilize and then reduce anthropogenic emissions of carbon dioxide (CO2), a greenhouse gas (GHG), from CO2 budget sources in an economically efficient manner. The New York State Energy Research and Development Authority (Authority) is proposing to establish 21 NYCRR Part 507, CO2 Allowance Auction Program, which implements essential segments of the CO2 Budget Trading Program.
The Department and the Authority proposed Parts 242 and 507 on October 24, 2007. Public hearings were held during the week of December 10, 2007 and the public comment period closed at 5:00 p.m. on December 24, 2007. Based on an assessment of the public comments, the Department and the Authority proposed revised Parts 242 and 507 on May 7, 2008. Hearings were held in Albany, NY and in Stony Brook, NY on June 9, 2008. The comment period closed on June 23, 2008. The Department and the Authority received written and oral comments from 539 commentors on the proposed revised regulations. All of these comments have been reviewed, summarized, and responded to by the Department and the Authority.
Commentors generally support the Department's and the Authority's adoption of the CO2 Budget Trading Program and CO2 Allowance Auction Program (collectively "the Program"), although many, primarily electric generators and those affiliated with the energy industry, are opposed to the Program for various reasons. Comments address legal issues, proposed revisions to the regulations, implementation, and the potential benefits and impacts of the Program.
Several commentors challenge the Department's and the Authority's statutory authority to establish the Program. Specifically, it is asserted that the Department and the Authority cannot establish the Program without legislative expression of a statewide policy addressing global climate change. In response, the Department and the Authority cite extensive statutory authority which overwhelmingly supports the Department's and the Authority's statutory authority to establish the Program. Principally, the Department has the authority to enact the Program pursuant to New York State Environmental Conservation Law (ECL) Sections 19-0103 and 19-0301. The Department's broad authority to develop regulatory programs derives primarily from its obligation to prevent and control air pollution, as set out in the 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. Further, the Department's obligation to preserve and protect natural resources and public health in the State as it relates to climate change also extends beyond the control of air pollution, 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 and the Energy Law Sections 3-101 and 3-103.
Similarly, the general powers of the Authority that are relevant to the Program's ability to sell allowances in an auction are set forth in the Public Authorities Law (PAL) Sections 1851, 1854 and 1855. Under the Program, the Authority's activities would include the conduct of allowance auctions and the administration of the Energy Efficiency and Clean Energy Technology Account (Account). The statutory provision relevant to the Authority's statutory authority to accept the allowances allocated to it by the Department is PAL Section 1855, subsections 10, 14 and 17.
Commentors also argue that the Legislature has never authorized the Authority to issue or sell regulatory licenses/permits and the Program purports to empower the Authority to auction allowances, which constitute licenses/permits under New York State law. The Department and the Authority disagree with this contention and believe that the allowances themselves are not permits or licenses under New York Law. Rather, an allowance is a condition of an operating permit that constitutes a limited authorization to emit up to one ton of CO2.
Another significant comment states that the Program constitutes taxation in contravention of the New York State Constitution. Alternatively, commentors argue that if the Program does not impose a tax, the Program is ultra vires because the Department and the Authority lack the statutory authority to create fees.
The Department and the Authority do not believe that the Program constitutes a tax. The primary purpose of this measure is to discourage the emissions of CO2. The sale and auction of allowances will help create CO2 allowance price signals at a level sufficient to cause investment in technologies and strategies that would reduce or avoid emissions of CO2. Similarly, the Program does not implement a fee. Rather, the Department is requiring owners and operators of each CO2 budget unit at the source to acquire allowances either at an auction or in the secondary market.
Regarding reliability, many commentors suggest that the Program might have an impact on electric system reliability; some further allege that the modeling conducted to assess potential impacts on reliability is inadequate. Notwithstanding this, the New York Independent System Operator (NYISO), ICS Consulting, and the Department of Public Service (DPS) each concluded that reliability would not be impacted. Based on their research, these entities all found that no generating facility would be forced to retire as a result of the Program.
Several commentors expressed concern over the potential for leakage. Concerns regarding cost effectiveness, price increases for energy in Regional Greenhouse Gas Initiative (RGGI) states, utility diminishment, and importation of energy from non-RGGI states are also expressed. In response, the Department submitted a final report of the RGGI Emissions Leakage Workgroup dated March 31, 2008. Among other things, the report includes: 1) information about the tracking of potential leakage, 2) a number of possible leakage mitigation policies, and 3) information about the current political momentum towards a national cap-and-trade program.
Comments were also received requesting additional offset categories. The Department responded that it will not deviate from the five categories included in the original proposal, but it will work with the other RGGI states to determine additional categories in the future.
In addition to the offset comments, several comments regarding the auction component of the Program were received which center on the structure of the auction system, the transparency of its operation, the pricing and allocation of allowances and the implementation of the Account. Many comments are directed at the perceived potential for manipulating the auction process, and the need for a "robust" oversight and monitoring system. The Department and the Authority responded that the revisions to the rule provide for an independent monitor to observe the conduct and outcome of each auction and activity among and between the allowance accounts looking for collusion, price manipulation or unfair market power.
Concern is also voiced about the use of a reserve price in the auctions. Several comments expressed concern that allowances not sold would be taken out of the market or have their market entry delayed. Others said that a reserve price creates an artificial floor. The Department's and the Authority's decision to use a reserve price was based upon extensive analysis by the Authority's research team with stakeholder input. Both the Authority and the Department agree that the reserve price protects against the possibility of collusion and provides a price signal that supports a minimum rate of investment in technologies and strategies that reduce CO2 emissions.
Several comments are directed at the structure and implementation of the Account. Furthermore, while many support the Authority as the appropriate manager of auction proceeds and suggest that an oversight committee to assist with distribution issues would also be appropriate, some make specific requests that the auction proceeds flow back to certain entities or for specific purposes, including rate payer relief.
The Authority responded that the proceeds raised through the sale of allowances will be used to promote and implement programs for energy efficiency, renewable or non-carbon emitting technologies, and innovative carbon emissions abatement technologies with significant carbon reduction potential. The Authority will periodically convene an advisory group of stakeholders representing a broad array of energy and environmental interests to advise it on how to best utilize the funds to achieve the goals of the Account. As part of initial program development, the Authority will outline draft program guidelines and funding criteria for the Account. Stakeholders will have an opportunity to provide input and comment on these guidelines through the stakeholder advisory group and open public comment. Subsequently, a draft multi-year operating plan will be presented to the stakeholder advisory group for comment. An annual program evaluation and progress report will be prepared and shared with the stakeholder advisory group and the public.
A number of comments voiced support for a regional auction that uses a uniform price auction formula. Accordingly, revised Part 507 provides that participation in a multi state auction is the preferred approach. New York State will not take part in the first scheduled auction in September, but plans to participate in the December multi state auction.
Concerns regarding the potential participation of eligible companies in the auction were also expressed. The proposed revised regulations allow the Authority to limit the participation of any applicant or bidder found to have violated any rule, regulation or law associated with any commodity market. The Authority also may limit eligibility to participate in any auction to the level of security provided. The Program as revised also requires public disclosure of auction related results.
Apart from the auctions, some commentors allege that the Department and the Authority did not comply with the requirements of the State Environmental Quality Review Act (SEQRA). The Department and the Authority clearly believe that the Supplemental DGEIS and the Final DGEIS addressed these concerns. A Findings Statement will also be prepared.
Some commentors are concerned about the possible costs of the Program to both regulated facilities and electricity consumers. They oppose the decision to auction nearly 100 percent of the allowances, rather than allocate the allowances for free; they also claim that a price cap is needed in order to protect consumers. The Department and the Authority responded that a price cap would have no impact on the cost to consumers because it would not affect the price of allowances on the secondary market. Moreover, the investment of auction proceeds in energy efficiency will reduce electricity demand and thus lessen any increase in cost to consumers caused by the Program.
Most comments received regarding the voluntary renewable set-aside support this provision, while a small number oppose it. In particular, commentors addressed the 700,000 ton amount of the set-aside. Adjustments to the amount of the set-aside can be made through amendments to the regulation if the set-aside is determined to be over or under subscribed based on a review of applications during the implementation of the Program.
A number of commentors recommend that a sunset provision be included that is contingent upon the enactment of a Federal cap and trade or other climate change program. The Department and the Authority anticipate that they will repeal or amend the regulations to comport with a Federal program, in the event such a program is established.
Several comments address the Department's inclusion of a Long-term Contract (LTC) set-aside of 1.5 million allowances. The vast majority of these comments are opposed to the set-aside, while a small number of commentors urged an increase in the size of the set-aside. The Department created the set-aside to accommodate the small number of generators able to demonstrate a financial hardship created by having to purchase allowances.
The majority of comments received expressed support for the Program and New York's participation and leadership in RGGI. Commentors also expressed support for timely implementation of the Program. The Department acknowledged that adequately addressing climate change issues will eventually require economy-wide regulation.
Some commentors suggest that the emissions cap is set too high and request that the Department consider re-evaluating the numbers to reflect the reduction in emissions since 2005. Other commentors note that if the cap is too high in 2009, an artificially low market would be created. The Department maintains that the base budget will be used and will not be revisited at this time; however, there will be annual updates that may be used to adjust the cap if necessary. There were also concerns over the award of Early Reduction Allowances (ERAs) and how the addition of these allowances would further exacerbate the potential of an inflated cap. The Department responded that the ERA provision was created to reward CO2 budget sources that made changes to reduce CO2 emissions in contemplation of the development of RGGI and the Program, and that it will use appropriate discretion when assessing applications for ERAs.
Finally, many comments were received that provided specific recommendations for changes to or clarifications of the regulatory language, such as definitions and permitting requirements. In each instance, the Department and the Authority explained the reasoning behind the inclusion of the particular language. Any further changes will be considered, in consultations with the Participating States, in the event amendments to the proposed revised regulations are made.
