Existing US cap-and-trade programmes are unlikely to get a free pass under the EPA’s proposed Clean Power Plan (CPP), analysts at ICIS said Thursday.
Final rules handed down by the EPA in August will require the administrators of the California and RGGI emissions trading schemes to alter key parts of their markets in order to comply with the overarching federal programme, the analysts said in a webinar.
California will face the biggest challenges, largely stemming from a market design that covers emissions from both transportation fuels and power generation, they said.
In order to comply with the CPP’s power-focused objectives, the California Air Resources Board (CARB) may need to create a sub-market for electricity-based emissions allowances.
But two separate markets could, in turn, create price discrepancies between the two types of allowances, which could deter speculators from participating, ICIS said.
The role of offsets in California’s market may also pose a problem since the CPP makes no stipulation for their use towards state-level caps.
Nearly 20 million CARB-approved offsets are slated to be issued during the current compliance period, with provision for up to 242 million to be made available by 2020.
While those offsets can be used for compliance in California, they will not be recognized under the CPP, the analysts said.
Another challenge for CARB is how emissions for electricity imported from other states would be treated under a multi-state system linked to California.
CARB’s current cap-and-trade rules cover out-of-state power imports as if they were generated in-state, but under a regional programme the emissions from those imports risk being double-counted in both California and the exporting state.
The ICIS analysts said that while California is expected to submit its cap-and-trade programme for compliance under the CPP, they are less certain the EPA will accept it in its current form.
RGGI, on the other hand, was seen by ICIS as facing fewer hurdles, in part because it covers only the power sector.
However, echoing views published last month by energy think-tank Acadia, the analysts warned that the programme must be extended by 10 years beyond its scheduled 2020 end to conform to the CPP.
RGGI’s cost containment reserve, which acts to limit allowance price spikes, may also be incompatible with the CPP because it effectively sets a “soft” emissions cap.
The analysts noted that RGGI could take a cue from California in redesigning how its reserve functions.
They added that while Midwest states are unlikely to set up a RGGI-style programme, they may craft something that preserves state autonomy while still allowing cooperation with other states or markets.
By Robert Mullin – news@carbon-pulse.com
