Cap & Trade

Cap & Trade (Cap) A cap commits a region or country to limits on greenhouse gas emissions (GHG) and then reduces those limits over time. All proposals set an emissions target (cap) on sources covered by the program. The cap is normally set in terms of a percentage reduction below a prior year’s emissions level. – For example: – 3 percent reduction below 2005 levels by 2012 – 20 percent reductions below 2005 levels by 2020

Cap & Trade (Covered Sources) Covered sources are likely to include major emitting sectors: – Power plants and carbon-intensive industries, fuel producers/processors (coal mines or petroleum refineries), or some combination of both. In almost every case, electric power producers are a covered sector. Some sectors that emit greenhouse gases may not be covered, such as agriculture.

Cap & Trade (Allowances) The emissions cap is partitioned into allowances. Typically, one emission allowance equals the authority to emit one (metric) ton of carbon dioxide- equivalent. – A metric ton is equal to 2,200 pounds. Why “equivalent”? Greenhouse gases other than carbon dioxide vary in their global warming potential. – Other GHG’s: methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons. – Methane absorbs 21 times more radiant energy than carbon dioxide; nitrous oxide absorbs 310 times more radiant energy than carbon dioxide.

Cap & Trade (Trade) Trade means entities may buy, sell or trade “allowances” between themselves or others. – This creates a market for “allowances.” A trading system places a market price on allowances. The market price should motivate industry, businesses and families to reduce GHG’s. A well-designed trading system should encourage efficiency, innovation and lowest-cost solutions.

Cap & Trade (Offsets) An offset is an activity, other than a direct emission reduction that can be done to lower GHG emissions. An offset must be an approved, measurable activity reduction, avoidance, or sequestration of greenhouse-gas emissions from a source not covered by an emission reduction program. Examples of offsets: – Planting trees – Paying dairy farmers for methane capture systems – Paying farmers for reduced or no-till activities Use of offsets is normally limited (30%).

Cap & Trade How does cap and trade work? Tally greenhouse-gas emissions – Energy Information Administration (EIA) and Environmental Protection Agency (EPA) have the data. Set a cap – 2005 has been selected as the base year; emission cap will begin in 2012 as a small percentage below 2005 levels. Distribute allocations – Some percentage given out freely, and some will be required to be purchased or traded. Enforce the cap – EPA will be given authority to regulate with severe penalties for non-compliance. Step it down – Cap decreases every year to reach a percent decrease from 2005 levels by 2050.

Cap and Trade Basics Baseline Cap Tons Years Reductions

How can the electricity industry respond? ?

Climate Change Basin Electric supports reasonable climate change legislation. We want to be a part of the solution, not part of the problem.

Energy Diversity

Largest carbon capture sequestration project in the world

Developing New Technologies Commercial-scale pilot carbon capture project at the Antelope Valley Station, Beulah, N.D. Working with a technology provider Anticipated start = 2013 Goal = 90% CO 2 removal

What does Cap & Trade mean to an average household? 1 metric ton carbon/month =

Annual Electricity Cost Increases to the Consumer $10 – $60/metric ton carbon cost $120 – $720$240 – $1,440$667,000 – $4 million

Power Supply Options Limited Natural gas price is highly volatile Nuclear option available but in the future Renewables, conservation and efficiency can not yet meet full base- load need

U.S. Economy CO 2 Emissions (million metric tons) Flat between %/yr. decline beginning in 2020 Results in “prism”-like CO 2 constraint on electric sector

U.S. Electric Sector Emissions (million metric tons) EIA Base Case 2007 Advanced Coal Generation DER PHEV CCS Nuclear Generation Renewables Efficiency Technology * Achieving all targets is very aggressive, but potentially feasible. Electric Sector CO 2 Reduction Potential

Key Elements in Legislation Incentives for technology development Credit for early adopters Time to develop the technology Price ceiling for carbon (safety valve) Free allocations vs. auction Regulatory certainty All sectors must be included Worldwide effort

Waxman-Markey Bill Cap and Trade Includes RES $1 billion/year in CCS grants Allocations Offsets Henry Waxman (CA) Ed Markey (MA)

American Clean Energy and Security Act (Waxman-Markey) 4 Titles I. Clean Energy (RES and Transmission) II. Energy Efficiency III. Reducing Global Warming IV. Transition to a Clean Energy Economy Bill has passed out of House Energy and Commerce Committee Still needs to go through several other committees Vote on entire House floor

Waxman-Markey Climate Provisions Targets and timetables – 17% below 2005 greenhouse gas emissions in 2020 – 83% below 2005 GHG emissions by 2050 Allowance allocation – 85% allowances will be freely given out at beginning – more allowances will be auctioned starting in 2026 Offsets (agriculture and forestry) – Domestic and international offsets are limited to 1 billion metric tons each of carbon per year

Allocations Allocations given to Local Distribution Companies (retail sales) – Based 50 percent on sales and 50 percent on carbon intensity of electricity purchases Allocations given to merchant generators – 5 percent of electric generator’s total Allocations to electric consumers phased out by 2030

Offsets Eligible Projects – Determined by EPA Project Requirements – Determined by EPA Verification – Determined by EPA Issuance of Credits Audits Offset Credits – 15 percent domestic and 15 percent international Offsets Integrity Advisory Board – 9 members established by EPA Offset Program – Regulations promulgated by EPA w/consultation with Federal Agencies and Advisory Board

Performance Standards New Coal : 50% reduction in CO 2 After 2020: 65% reduction in CO 2

Waxman-Markey Shortcomings Allocation formula is skewed – Some receive more than 100 percent of their needs and double allocations are given to others – Allocation should be based entirely on emissions – Allowances are fazed out too quickly Offset Program should be administered by the U.S. Department of Agriculture Credit for current emissions reduction (Early Action) is missing Timing of emission reduction does not match the development and commercialization of carbon capture technology

Waxman-Markey Shortcomings Auction – no restriction on the types of entities or individuals who could purchase the allocations Safety Valve – no safety valve price is included in the bill that could mitigate the harmful economic impact on the end consumers Research, Development & Deployment funding - inadequate to fund the necessary advancement in carbon capture technologies

NRECA Negotiations NRECA will not oppose the legislation, but will stand aside and work to improve the bill in the Senate in return for: – Pelosi will not object to Rural Utilities Service funding new nuclear generation – No utility shall receive allocations that exceed 100 % of their needed emissions. – Additional small utility allocations (less than 4 million MWh) for cooperatives.

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