Regional Greenhouse Gas Initiative Stakeholder Group Meeting Albany, New York February 10, 2006

2 Background & Context Events Since Last Meeting Memorandum of Understanding Model Rule Schedule Focus on Offsets Discussion Overview of Presentation

Groundwork –Data Assembly –Impacts Analysis –Stakeholder Process Policy Research & Deliberation Two-Year+ Effort

4 Staff Working Group  Agency Heads  Governors Unprecedented Collaboration between Energy & Environmental Agencies Expert Input from ISOs, Environmental & Energy Think Tanks, et al. Extensive Stakeholder Input Observations on the Process

5 RGGI Program Components Start Date of Covers Power Plants 25 Megawatts+ Two-Phase Cap—Stabilize Emissions through 2015; Reduce 10% by Comprehensive Review of Program in 2012.

6 RGGI Program Components Allocations: –25% for Consumer Benefit and/or Strategic Energy Purpose –Remaining 75% of the allocations left to each state to allocate 3-Year Compliance Period Banking Allowed

7 RGGI Program Components Offsets—project-based reductions: – Types: Natural Gas, Propane, Heating Oil Efficiency Land to Forest Landfill Gas Capture & Combustion Methane Capture from Animal Operations SF 6 Leak Prevention Leak Detection in Natural Gas Distribution

8 RGGI Program Components Offsets—project-based reductions: – Geographic Extent: Anywhere in the United States Offsets from Outside RGGI States 2:1 Discount – Limit on Use: Each Source may “cover” up to 3.3% of its total reported emissions

9 Allowance Price Safety Valves – $7.00 Trigger Limit on offset use increased to 5% of a source’s reported emissions Anywhere in North America Offsets from Outside RGGI States 1:1 RGGI Program Components

10 RGGI Program Components Allowance Price Safety Valves (Cont’d) – $10.00 Trigger Compliance Period extended for 1 year for up to 3 years (Maximum 6-year compliance period). – $10.00 Trigger—2 Consecutive Years Limit on use of offsets increased to 20% of a source’s reported emissions Offsets may come from anywhere in North America, or from recognized international trading regimes.

11 RGGI Program Components Imports & Leakage Working Group –Representatives from each Energy & Environmental Agency –Energy Regulatory Leads –Explore utilization of existing stakeholder group and resource panel, with some changes to reflect different subject matter –Explore using professional facilitator

Dec 20, 2005: MOU signed by 7 states Feb 10, 2006: MOU overview and discussion for stakeholders Feb 21, 2006: Share initial draft of model rule with agency heads Mar 23, 2006: Draft model rule to be released to stakeholders Mar 28, 2006: Stakeholder meeting in NYC to present model rule Mar 28 - May 22, 2006: Outreach in individual RGGI states may take place on a state-to-state basis as needed May 22, 2006: Stakeholder and public comments due by this date July 6, 2006: Complete revisions to the model rule based on feedback Model Rule Timeline

13 Review of design approach Overview of model rule components, administration Process for stakeholder input Offsets Update

14 RGGI Offset Design Approach Guidance from agency heads and stakeholders to pursue a benchmark/performance standard approach to additionality Allows project developers and interested stakeholders to understand program requirements up-front –sets a transparent standard for project evaluation Avoids administrative case law approach (CDM), which increases insurance of environmental integrity and reduces transaction costs

15 Additionality: What do we mean? Additionality requires projects to be beyond “business as usual” as defined by the program –Actions taken are "additional" to those that would have otherwise been undertaken, or that would have been undertaken but at some future date Is the action being undertaken as part of current standard market practice? If so, the action is likely not additional. Is offset revenue likely driving investment in a project beyond standard market practice, or is a project unlikely to occur without significant incentives? If so, the action is likely additional.

16 Additionality: Why do we care? Additionality is key criteria for ensuring that projects result in “real” emissions reductions –Incremental environmental benefits are being achieved due to the offset mechanism –Since offsets allow an additional ton of CO 2 to be emitted from sources subject to RGGI for each ton of emission reduction achieved through offsets, offsets projects must provide reasonable assurance that they are achieving emissions reductions that would not otherwise have occurred

17 Additionality: Why do we care? Offsets mechanisms without additionality criteria would simply involve quantification of emissions reductions achieved through typical market activities, such as: –Normal capital stock turnover due to replacement of old equipment –Actions undertaken to meet other non-GHG regulatory requirements –Actions undertaken as the result of other market transformation incentives –Improvement of production efficiency to meet competitiveness goals –Building remodels, retrofits

18 Operationalizing Additionality: How do you accomplish? Two levels of additionality: –Regulatory additionality: is the project required by law or regulation? Simple yes/no test. –Financial additionality: does the project present an attractive investment alternative in the current market? Requires a counterfactual assessment--knowledge of a future scenario that will not actually take place Involves development of a business-as-usual baseline Tests to determine investment attractiveness, such as market barrier evaluation, financial analysis (IRR or NPV for proposed offset project with and without expected offset allowance revenue, as compared to baseline project scenario)

19 Operationalizing Additionality: How do you accomplish? Case-by-case evaluation of financial additionality has been widely criticized Process is cumbersome, selection of case-specific scenarios and variables is critical to outcome Subject to gaming: “tell me a good story” Very difficult to accurately gauge the investment calculus of individual investors –Threshold investment decisions, such as IRR benchmarks vary among investors

20 Operationalizing Additionality: What are the alternatives? Use benchmarks and/or performance standards as proxies to infer financial additionality Examples: –Benchmark: qualitative eligibility criteria for a project that reasonably ensures that project is unlikely under standard market practice For example, prohibition of receipt of both offset allowances and other attribute credits (or ability to receive both only under certain limited conditions) –Performance standard: projects that exceed the standard qualify as additional Emission rate Energy efficiency criteria Market penetration rate

21 Overview of Model Rule Offsets Components Each eligible offset type will have a project standard in the model rule, outlining in detail the following: –Eligibility (includes additionality provisions) –Project description –Emissions baseline determination –Calculation of emissions reductions (or net carbon sequestered) –Monitoring and verification requirements –While proposed regulatory language will be fairly detailed, there will be the need for the development of guidance documents to elaborate some regulatory requirements

22 Overview of Model Rule Offsets Components Two-step application process –Consistency determination (made by regulatory agency): Project eligibility Certification of monitoring and verification plan Emissions baseline determination, as appropriate –Submittal of monitoring and verification reports: Must receive consistency determination prior to submittal of first M&V report Offsets allowances issued based on emissions reductions demonstrated per approved M&V reports (decision to issue made by regulatory agency) –Both steps of the process require independent certification component by accredited certifiers

Discussion