EMISSIONS

Regional Greenhouse Gas Initiatives (RGGI)

On 12/20/05, seven northeast States signed a Memorandum of Understanding (MOU) implemented the first multi-state mandated cap on CO2 emissions from power plants in the US. The program, known as the Regional Greenhouse Gas Initiative (RGGI), targets fossil-fuel fired units of 25MW or greater in CT, DE, ME, NH, NJ, NY and VT. Two other States involved in the RGGI process - MA and RI - initially declined to sign the MOU, however, both States resolved to join the program in early 2007.

PA, MD and DC participated in the process as Observer States. In April, 2006, the MD state legislature passed a bill forcing the Governor to agree to join RGGI, which would later occur in the middle of 2007.

At the end of 2011, New Jersey officially pulled out of the program.

CO2 BUDGET TRADING PROGRAM

Program Adoption

Each of the Signatory States commits to propose, for legislative and/or regulatory approval, the Program substantially as reflected in a Model Rule that will reflect the understandings and commitments of the states contained herein. The Program launch date was officially January 1, 2009.

Regional Emissions Cap

The regional base annual CO2 emissions budget is equal to 150,572,993 short tons.

State Emissions Caps

The regional base annual CO2 emissions budget has been apportioned to the States so that each state’s initial base annual CO2 emissions budget in short tons is as follows:

For the years 2009 through 2014, each state’s base annual CO2 emissions budget remains unchanged.

Scheduled Reductions

Beginning with the annual allocations for the year 2015, each state’s base annual CO2 emissions budget will decline by 2.5% per year so that each state’s base annual emissions budget for 2018 will be 10% below its initial base annual CO2 emissions budget.

Compliance Period and Safety Valve

Compliance Period

The compliance period shall be a minimum of three years, unless extended after a Safety Valve Trigger Event described below. A subject facility must have a sufficient number of allowances at the end of each compliance period to cover its emissions during that period.

Safety Valve

1. Safety Valve Trigger.
   If, after the Market Settling Period (as defined below), the average regional spot price for CO2 allowances equals or exceeds the Safety Valve Threshold (defined below) for a period of twelve months on a rolling average (a “Safety Valve Trigger Event”), then the compliance period may be extended by up to 3 one-year periods.
2. Safety Valve Threshold.
   The Safety Valve Threshold shall be equal to $10.00 (2005$), as adjusted by the Consumer Price Index (CPI) plus 2% per year beginning January 1, 2006.
3. Market Settling Period.
   The Market Settling Period is the first 14 months of each compliance period.

Offsets

The Program will provide for the award of offset allowances to sponsors of approved CO2 (or CO2 equivalent) emissions offset projects for reductions that are realized on or after the date of this MOU. Offset allowances may be used for compliance by units subject to the Program. Among the key features of the offset component of the Program are:

1. General Requirements.
   1. Minimum Eligibility Requirements. At a minimum, eligible offsets shall consist of actions that are real, surplus, verifiable, permanent and enforceable.
   2. Initial Offset Types. The initial offset project types that may be approved by a Signatory State are: landfill gas (methane) capture and combustion; sulfur hexafluoride (SF6) capture and recycling; afforestation (transition of land from non-forested to forested state); end-use efficiency for natural gas, propane and heating oil; methane capture from farming operations; and projects to reduce fugitive methane emissions from natural gas transmission and distribution. The measurement and verification protocols and certification processes will be consistent across the Signatory States and incorporated into each State’s program.
   3. Additional Offset Types. The Signatory States agree to continue to cooperate on the development of additional offset categories and types, including other types of forestry projects, and grassland revegetation projects. Additional offset types will be added to the Program upon approval of the Signatory States.
2. Initial Offsets Geography and Limits.
   1. Geographic Location of Offset Projects. Offset allowances may be awarded to projects located anywhere inside the United States, provided:
      1. allowances for projects located inside a Signatory State shall be awarded on the basis of one allowance for each CO2-equivalent ton of certified reduction; and
      2. allowances for projects located outside the Signatory States shall be awarded one allowance for every two CO2-equivalent tons of certified reduction.
   2. Limit on Offsets Use. In each compliance period, a source may cover up to 3.3% of its reported emissions with offset allowances.
3. Offsets Trigger and Reset.
   1. Offsets Trigger. If, after the Market Settling Period (defined above), the average regional spot price for CO2 allowances equals or exceeds $7.00 (2005$) per ton for a period of twelve months on a rolling average (an “Offsets Trigger Event”), then:
      1. offset allowances may be awarded to projects located anywhere in North America; and
      2. offset allowances will be awarded on the basis of one allowance for each CO2-equivalent ton of certified reduction; and
      3. the percentage of offsets that a source may use to cover its emissions shall increase to 5.0% of its reported emissions for the compliance period in which the Offsets Trigger Event occurs.
   2. Offsets Reset. After an Offset Trigger Event, the limits on geography and use of offsets set forth in Section (2) above shall once again apply commencing at the start of the subsequent compliance period.
4. Safety Valve Offsets Trigger and Reset.
   1. Safety Valve Offsets Trigger. If a Safety Valve Trigger Event has occurred twice in two consecutive 12-month periods (a “Safety Valve Offsets Trigger Event”), then:
      1. offset allowances may be awarded to projects located anywhere in North America or from international trading programs; and
      2. offset allowances may be awarded to projects located anywhere in North America or credits from international trading programs shall be awarded on the basis of one allowance for each CO2-equivalent ton of certified reduction; and
      3. the percentage of offsets that a source may use to cover its emissions shall increase to 5.0% of its reported emissions for the first three years of the compliance period and 20% of its reported emissions for the period beginning with the fourth year of the compliance period and continuing through the end of the compliance period.
   2. Safety Valve Offsets Reset. After a Safety Valve Offsets Trigger Event, the limits on geography and use of offsets set forth in Section (2) above shall once again apply commencing at the start of the subsequent compliance period.

Allocations of Allowances

Each Signatory State may allocate allowances from its CO2 emissions budget as determined appropriate by each Signatory State, provided:

1. each Signatory State agrees that 25% of the allowances will be allocated for a consumer benefit or strategic energy purpose, and
2. the Signatory States recognize that, in order to provide regulatory certainty to covered sources, state-specific rules for allocations should be completed as far in advance of the launch of the Program as practicable.

Banking

The banking of allowances, offset allowances and early reduction credits will be allowed without limitation.

Federal Program

When a federal program is proposed, the Signatory States will advocate for a federal program that rewards states that are first movers. If such a federal program is adopted, and it is determined to be comparable to this Program, the Signatory States will transition into the federal program.

Comprehensive 2013 Review

Back during the initial implementation of RGGI, stakeholders agreed to a 2012 program review which included a comprehensive future analysis of the electricity sector, CO2 emissions and macroeconomics in the region. On February 7, 2013, the States released an Updated Model Rule in hopes of completing individual state specific processes for changes to take effect on January 1, 2014. Some of the updates include a reduced size and structure for the cap, along with information on undistributed and unsold allowances that may be retired. RGGI has proposed reducing the cap to 91 million short tons beginning in 2014 and an annual 2.5% decline beginning in 2015 through 2020. Additionally, RGGI has added a Cost Containment Reserve (CCR) to help keep compliance costs down in the event allowance prices skyrocket. The floor price for the program in 2014 is $2.00 and has an increase factor of 1.025 annually. Reconciliation of emissions still occurs every 3 years but there is a new rule that requires entities to true-up 50% annually over the first 2 years of a compliance period. In terms of offsets, the 3.3% limit remains the same and international offsets are removed from the program. A new U.S. Forests Offset Protocol has been introduced in alignment with the California Air Resources Board (ARB).

For further information, please contact BGC at 646.346.6899.