Session 3: The Federal Question: Setting a Good Precedent & Positioning California for Competitive Advantage

California Public Utilities Commission

Greenhouse Gas Cap & Trade Systems: Symposium on Linking

San Francisco, CAApril 19, 2007

Derek K. MurrowDirector of Policy AnalysisEnvironment Northeast

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Environment Northeast

Who We Are: Environment Northeast is a nonprofit research and advocacy organization focusing on the Northeastern United States and Eastern Canada. Our mission is to address large-scale environmental challenges that threaten regional ecosystems, human health, or the management of significant natural resources. We use policy analysis, collaborative problem solving, and advocacy to advance the environmental and economic sustainability of the region.

Where We Are: Rockport, ME / Portland, ME Boston, MA / Providence, RI / Hartford, CT New Haven, CT

Primary Project Areas: energy & climate policy in New England and Eastern Canada

Cap & Trade Experience: one of 24 RGGI stakeholders, actively engaged in regional negotiation and program design as well as New England implementation

Development of Comprehensive Policy Recommendations: see Climate Change Roadmap for New England and Eastern Canada for recent policy work

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

What Happens if a Federal Cap & Trade Program is Implemented?

Not a question of if, but when, and how will it be structured? Recommendations for CA and other leadership states to

consider: Set a good precedent for a national program

Lead by example and create a model for a federal program Key elements: aggressive cap, allocation with a consumer focus,

rigorous and limited offsets, and only price controls that assist with market stability but do not blow up the cap

Set aggressive targets and demand similar federal targets - CA regulated entities should be advocating for a strong federal program

Position the State for Competitive Advantage: Create a program with an allocation scheme that rewards efficient

and clean commitments and ask for the same at the federal level Recognize the benefits of efficiency and clean energy supply in

terms of long-term costs under a federal program

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Source Based vs. Load Based: Sending the Right Signals to DC

The federal program will likely be source based – due to inertia and experience at the federal level

The load based system may in the end go away – but that doesn’t mean you shouldn’t do it, as long as it has environmental integrity

A load based system can highlight and support: Consumer interests – through allocation or auction choices A focus on energy efficiency as a resource to reduce emissions and

costs (system benefits are higher under a carbon cap) Contracting for supply resources that are lower emitting and provide a

hedge against higher fuel prices and future national carbon costs An overall need for electric system planning to address environmental

and economic goals – markets may not solve all problems A solution to addressing emissions associated with imports (leakage) Put the state at a competitive advantage (see subsequent discussion)

Setting a Good Precedent: Cap Level and Rate of Cap Decline

Number 1 issue – cap level & trajectory - environmental outcome Send a long-term signal to developers and investors Initial cap level is important but setting a trajectory towards long-term goals

(on track for ~80% by mid-century) is critical

Setting a Good Precedent: Allocation of Allowances

Allowances are a new commodity that puts a value on a public good Load or source

based – you have to decide how to allocate or auction allowances

Many options from population to energy consumption to emissions

This decision will always have winners and losers – think about the message to the Feds – get to the right metric over time if necessary

RGGI States – Different Metrics for Apportioning the Regional Cap

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Setting a Good Precedent: Allocation of Allowances

- Green is non-emitting

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Setting a Good Precedent: Allocation of Allowances

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Setting a Good Precedent: Offsets & Price Controls

Rigorous Offsets that are Limited in Quantity Offsets must be equal to an on-system emissions reduction Set clear criteria that will be emulated federally: real, surplus

(additional), verifiable, permanent, and enforceable More on this issue tomorrow – limit the quantity to ensure

change in emissions and investments in the electric sector

Avoid Price Controls Use only price controls that assist with market stability but do not

blow up the cap (avoid increased emissions) The price point matters: are you setting the market price

(<$20/ton) or avoiding price spikes and speculation (>$100/ton) More on this issue tomorrow – avoid price controls and look to

existing market experience

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Competitive Advantage:Clean Energy Choices

No matter what happens in terms of design of a federal program, CA’s investment choices today will create benefits that carry over into the future

There are two solutions to reducing emissions: Use less energy through efficiency investments (end-use, T&D) Supply energy with less emissions (renewables, high efficiency

generation, and carbon capture and sequestration) California’s programs will do both:

Demand: loading order to capture all cost effective efficiency Supply: carbon cap and trade program, along with RPS,

DG/CHP incentives, and other policies Both put the state on the right trajectory for a load or source

based program

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Competitive Advantage:Federal Program Costs

Demand and Energy Efficiency A load based cap continues to increase the focus on energy

efficiency by regulating the DISCO, which has planning and procurement authority over energy efficiency, and further encourages reduced use of energy

Cost = Price (w/ carbon costs) X Consumption (EE reduces) Supply Costs

The cost of electric supply under a carbon cap will be driven by the emissions and costs of the plants on the margin

Emissions Rate X Allowance price = Increase in Electric Price Natural Gas: ~0.5 tons/MWh X $10/ton = $5/MWh Coal: ~1.0 tons/MWh X $10/ton = $10/MWh

Clean supply choices now, with long-term contracts, yield lower costs in all carbon constrained futures

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Competitive Advantage:Efficiency Benefits

Efficiency Costs Less: Efficiency vs. Supply Costs

Efficiency Reduces C&T Costs:RGGI w/ and without 2X Efficiency

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Competitive Advantage:Supply Benefits

Contracts and construction of additional low or non-emitting generation will keep CA’s supply costs low in relation to the nation once a federal program is developed

New contracts for incremental generation should only be with clean sources

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Summary

There is significant uncertainty about the timing and design of a federal program

California should: Move ahead with a rigorous GHG C&T program for

the electric sector If load based, think through the transition Set a good example for the nation in terms of key

design choices – in particular the cap level Highlight the competitive advantage of clean and

efficient choices today Advocate for an equally aggressive national program

before any CA program goes away

CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007

Contact Information

Derek K. MurrowDirector of Policy Analysis

101 Whitney Ave.New Haven, CT 06510

(203) 495-8224dmurrow@env-ne.org

Environment NortheastRockport, ME / Portland, ME / Boston, MA

Providence, RI / Hartford, CT / New Haven, CTwww.env-ne.org