Many US electricity generators are likely to need access to the EPA-backed rate-based carbon market to meet their 2030 CO2 targets, experts say, although trading is only expected to pick up early next decade.

The final Clean Power Plan rules set targets for power plants in terms of CO2 emissions per unit of electricity produced, but high-emitting electricity generators can bring that ratio down to the required level using so-called Emission Rate Credits (ERCs) for zero-carbon power purchased from nuclear or renewable energy sources.

ERCs will be in demand as the Clean Power Plan’s targets become increasingly stringent towards 2030, creating a growing market for the new unit, according to analysts.

“Many electricity-generating units will not be able to meet their required emissions rate without the purchase of ERCs,” said Jeremy Fisher of research firm Synapse Energy Economics in a webinar about the new EPA rules.

With “model rules” for ERC trading still at the proposal stage, it is not clear whether entities other than power plants would be allowed to hold, buy and sell the new unit.

If they are, “this will certainly be a big market – there will be many players outside the power sector participating, and there will be trading of ERC derivatives”, Fisher said.

SPLIT MARKET

In creating the new tradable unit, the EPA expanded the option to use markets beyond traditional emission ‘cap-and-trade’ programs.

Without ERCs, trading was only conceivable in states that converted the rule’s target emission rates into a mass-based target (tonnes of CO2) and then created a cap-and-trade system in which entities can buy and sell emission allowances. The tradable ERC means firms in states that remain “rate-based” in terms of emission targets can still take advantage of a market approach.

However, the rate-based trading option means the US carbon market is set be divided – mass-based and rate-based states may not trade with each other, as the units are incompatible.

“EPA is pretty explicit that states must choose either a rate-based or mass-based approach – only in rate-based are firms going to be trading ERCs,” Fisher said.

That leaves generators in states with carbon cap-and-trade programs, such as the nine members of the Regional Greenhouse Gas Initiative and California, which are likely to go with a mass-based approach to take advantage of their existing market infrastructure, unable to trade with counterparts in states that set up a rate-based compliance program.

Fisher pointed out that this may not be an issue, as “groupings of who is mass-based and rate-based are likely to fall along relevant boundaries anyway” in terms of transmission constraints and power companies’ existing service areas.

POWER TRADING IMPACT

ERCs would start to be generated in 2020 at the earliest. The EPA plan’s Clean Energy Incentive Program begins then, issuing limited credits to early-action renewable energy projects and specific efficiency projects in low-income neighborhoods.

Demand for those credits – aside from potential forward trades – would follow even later, as actual compliance with the EPA targets starts in 2022.

“Nobody would need to hold ERCs for compliance until at least 2024, as that is the first ‘check in period’ to the EPA as to whether emissions rates are close to the prescribed targets,” Ari Peskoe of Harvard University Law School’s Environmental Policy Initiative told Carbon Pulse.

But the status of ERCs is relevant now, as power purchase agreements for renewables typically span 10 to 20-year timeframes, Peskoe pointed out.

“I’m sure going forward everyone is going to account for ERCs in their contracts,” Peskoe said, adding that “for existing contracts they will go back and try to figure out who owns the ERCs based on the current contract language”.

By Lisa Zelljadt – news@carbon-pulse.com