While the debate over federal climate change regulation continues, several US states and regions have enacted their own programs. One of the first to act was Massachusetts, which in 2001 promulgated carbon limitations applicable to six existing power plants. Those regulations established an emission limit of 1,800 pounds of carbon per MWh and sharply limited the use of many types of carbon credits to meet the specified carbon targets. The regulations also allowed Massachusetts Department of Environmental Protection (“DEP”) to invoke a “safety value” if DEP determined that the Massachusetts requirements could not otherwise be achieved. Earlier this month, DEP determined just that and opened up its carbon markets. Although this individual action affects only a few sources and only for emissions generated in 2008, it is indicative of some of the regulatory flexibility that will be needed as regulators and regulated sources begin to grapple with the practicalities of climate change regulation. Most interested observers believe that climate change regulation will only continue to increase, but precisely how that process will unfold remains to be seen.
Massachusetts’ Greenhouse Gas Program and DEP’s Decision
In Massachusetts, 310 CMR 7.29 (Emissions Standards for Power Plants) controls emissions of carbon dioxide and other pollutants from six of the largest regulated electric generating facilities. By September 1, 2009, the six facilities must demonstrate that they did not exceed historical actual emissions in 2008 and did not exceed 1,800 lbs of emission per MWh. If a facility does exceed those standards, it can come into compliance either by either making payments into the Greenhouse Gas (GHG) Expendable Trust or by purchasing an equivalent number of GHG Credits, which are offsets created by the reduction or sequestration of emissions by another source under a DEP-approved project.
On June 1, 2008, the DEP determined that plants regulated under 310 CMR 7.29 could also to apply to use European Union Emission Trading System (EU ETS) Phase II Allowances and Clean Development Mechanism (CDM) projects' Certified Emission Reductions (CER) credits which are eligible for use under Phase II of the EU ETS. The DEP’s determination is available here. The DEP found that the uncertainty regarding the supply of GHG Credits needed for facilities to meet their compliance obligations under 310 CMR 7.29(5)(a)5 was enough to conclude that there will be insufficient GHG Credits available for purchase at or below the offset trigger price of $6.90 per ton of CO2 equivalent. As a consequence, affected facilities may now use international allowances and credits to demonstrate compliance under the Massachusetts regulations. The use of these CERs and Phase II Allowances is not limited in any way, except that an application to verify and use the credits must be for 20,000 tons or more of CO2 equivalent.
The specific DEP decision will have a relatively limited impact because the regulatory regime established in 310 CMR 7.29 will not apply to emissions that occur after December 31, 2008. Those emissions will be regulated under the Regional Greenhouse Gas Initiative (RGGI) when that program takes effect on January 1, 2009. GHG credits created under 301 CMR 7.29 are eligible for exchange with RGGI credits (known in the regulations as “CO2 Budget Trading Program Allowances”), but EU ETS allowances or CERs will not be eligible for exchange.
In its statement outlining this determination, the DEP noted that given the imminent transition from 310 CMR 7.29 to RGGI and the uncertainty of available GHG Credits, DEP believes that it is in the best interest of the Commonwealth to allow affected facilities to use this expanded set of allowances to meet their CO2 emission compliance obligations under 310 CMR 7.29. DEP believes that this determination supports the evolution of a credible, consistent, and coordinated system for evaluating international offset projects, which could play an important role in future climate change mitigation strategies.
Background on EU Emission Trading System (EU ETS) Phase II Allowances and Certified Emission Reductions (CER) credits
The EU ETS is presently the largest multi-national, emissions trading scheme in the world, and a major pillar of EU climate policy. The ETS currently covers more than 10,000 installations in the energy and industrial sectors which are collectively responsible for nearly half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions. Currently, affected facilities are given a certain allocation without cost from the EU member states governments. If a facility can reduce its emissions, it may sell the excess allowances to anyone. Phase II of the EU ETS program began in January, 2008, and will run through December 2012. (see European Union publication, Questions and Answers on Emissions Trading and National Allocation Plans for 2008 to 2012, available here (.pdf).)
Certain certificates from CDM projects can also be redeemed as EU ETS Phase II Allowances. These Certified Emission Reductions (CERs) can be obtained by implementing emission reduction projects in developing nations that ratified or acceded to the Kyoto Protocol. The CDM Executive Board of the United Nations Framework Convention on Climate Change (UNFCCC) oversees the program and documents the authenticity of these credits. The UNFCCC website listing documentation for every CDM project is available here. The UNFCCC recently announced the registration of its 1,000th CDM project, and estimates that over 2.7 billion CERs could be delivered by 2012, view announcement (.pdf).
The larger picture
Although the recent announcement from the DEP does not directly apply to RGGI, it signals the need and willingness of DEP and other regulators to adapt to changing conditions, in this instance to allow for the use of international-scale solutions. It also highlights the importance that emerging carbon markets will play in the future, as the international exchange of cap-and-trade credits and offset credits becomes more commonplace. The value of global carbon emissions trading has multiplied six-fold since 2005, and was valued at $64 billion in 2007. (World Bank, State and Trends of the Carbon Market, 2008: available here (.pdf).) Given the size of these markets and the economic benefits which informed participants may derive, proactive involvement with regulators in the shaping and monitoring of these markets will be essential for all potential buyers and sellers.