Presentation to RGGI Stakeholder Group September 21, 2005

Objectives Recap 2-Year Process RGGI Design Principles Present Details of Latest SWG Proposal to Agency Heads Present Details on Offsets Detail Projected Impacts of Proposal Hear Feedback

The RGGI Process

Recap Process Governor’s April 2003 Invitation July 2003 Launch Announcement Action Plan Announced after September 2003 Meeting of RGGI Agency Heads Formal Stakeholder Process Initiated on Regional Level

Recap Process Meetings of the Staff Working Group Meetings of RGGI Agency Heads 9 Meetings of Regional Stakeholder Group; 3 Expert Workshops Many Informal Meetings with Stakeholders Website:

Key Program Components The Model Rule Memorandum of Understanding The Groundwork Data Assembly Electric Sector Modeling Economic Modeling Analysis Stakeholder Process Post- Model Rule Rulemaking Regional Organization &

Recap Design Principles Reduce CO2 with flexible, market- based program to achieve least cost reductions. Create model for federal program. Maintain electricity affordability, reliability and fuel diversity. Make expandable to other states. Build on programs in place.

The Revised SWG Proposal

SWG Proposal Start Date of Two-Phase Cap—stabilization at approximately 150 million tons through 2015; 10% reduction by Built-in Review of Program in 2015 to Assess: –Program progress in meeting emissions reductions goal –Price impacts –Numerical limits on offsets –Imports and associated leakage

State Allowance Budgets as agreed among states after considering various metrics. Offsets – Initial Offset Types: landfill gas; sulfur hexaflouride gas from electricity T&D; natural gas/home heating oil/propane end-use efficiency; and afforestation. – Additional offset types to be developed –CDM & EU allowances above sustained allowance price SWG Proposal

Limit on the Use of Offsets equal to 50% of the Difference between BAU and Cap Tons Business as Usual Emissions Difference between BAU Emissions and Cap Cap Level ‘09-‘11 ‘12-‘14 ‘15-‘17 ‘18-‘20 3-Year Compliance Periods Line Dividing Difference in Half

Allowance Allocations: – 20% “Public Benefit” Allocation – 5% Strategic Carbon Fund to achieve additional reductions – Remaining 75% left to states SWG Proposal

20% of Each State’s Budget to Public Benefit Purposes: – “Public benefit purposes may include the use of allowances to promote energy efficiency, to directly mitigate electricity ratepayer impacts, promote renewable energy technologies, and/or to stimulate or reward investment in technologies that will reduce emissions of carbon dioxide from power generation in the state.” SWG Proposal

5% to Regional Strategic Carbon Fund: – Each state would contribute 5% of its emissions budget to the fund; – The fund would be administered by a regional organization to develop additional project-based reductions, in part to offset emissions leakage; – The fund could also be used to develop new offset standards. SWG Proposal

On Emissions Leakage: – States will implement strategic carbon fund to offset emissions leakage; –States will monitor imports and attempt to quantify leakage. –As part of 2015 review, states will consider the significance of any leakage and whether additional measures to address emissions leakage should be implemented. SWG Proposal

Other Program Components: – 3-year Compliance Period – Allow Early Reduction Credits – Allow Banking SWG Proposal

Focus on Offsets

Initial Eligibility: Landfill Gas (methane capture and destruction) SF 6 (capture and recycling) Natural Gas/Oil/Propane end-use energy efficiency measures (may include solar thermal) Afforestation (non-forested to forested state) Eligibility Broadened based on Sustained Price Trigger: EU Emissions Trading Scheme Allowances Clean Development Mechanism CERs Additional offsets types to be added over time (sustainable forestry management targeted on priority basis) SWG Proposal: Offsets

Addressing Additionality: Specific, detailed criteria for each eligible offset type applied through a standardized benchmark approach Criteria applied up-front, limiting discretion in approval or denial of applications SWG approach in developing detailed offsets standards is consistent with general criteria expressed in MA 310 CMR 7.29 (real, surplus, verifiable, permanent, and enforceable) SWG will be seeking feedback on detailed criteria as part of draft Model Rule public review process SWG Proposal: Offsets

Individual offsets standards to include details and specific criteria addressing the following: Project eligibility Emissions baseline determination Calculation of emissions reductions Monitoring and verification requirements Other requirements specific to each offset type (e.g., permanence and leakage issues for afforestation) Issuance of credits: Projects will be pre-approved (eligibility and emissions baseline) Issuance of offsets credits will be based on demonstrated reductions (verified emissions reductions/sequestration) Third-party certification may be required (emissions baseline and M&V) SWG Proposal

Stakeholder Feedback: SWG currently soliciting feedback on content of specific standards components elaborated Stakeholders will have opportunity to provide detailed feedback on standards as part of the draft Model Rule public review process. SWG will be seeking feedback on specific proposed additionality and other key criteria for individual offsets types SWG Proposal: Offsets

Years SWG Proposal: Offsets Limit on the Use of Offsets equal to 50% of the Difference between BAU and Cap Tons Business as Usual Emissions Difference between BAU Emissions and Cap Cap Level ‘09-‘11 ‘12-‘14 ‘15-‘17 ‘18-‘20 3-Year Compliance Periods Line Dividing Difference in Half

Calculating the Offsets Limit: SWG Proposal: Offsets

Offsets Limit in Context: RGGI setting a precedent in applying a limit Limit expressed as percentage of emissions budget Regional percentage limit applied at the source (as percentage of reported emissions - acknowledges degree of uncertainty in projecting BAU emissions) Limit is equivalent to following % of annual emissions budget in each compliance period (working proposal): –CP #1 (stabilization phase): 0.4% (550,000 tons/yr) –CP #2 (stabilization phase): 1.4% (2,150,000 tons/yr) –CP #3 (reduction phase): 3.6% (5,250,000 tons/yr) –CP #4 (reduction phase): 8.3% (11,450,000 tons/yr) –Annual average through 2020: 3.3% SWG Proposal: Offsets

Modeling Offsets: Data Supply curves used for LFG, SF 6, and afforestation (natural gas end-use not modeled - functionally, modeling assumes these offsets do not exist) National supply curves used for LFG and SF 6, regionalized based on estimated supply in 9-state RGGI region LFG and SF 6 supply curves are consistent with EPA national supply curves Afforestation supply curve based on analysis conducted by Sampson Group for RGGI Conservative RGGI adjustments employed to account for regional supply issues and uncertainty Cost adder used (all offsets have positive market cost to account for market incentive & transaction costs - even if project has positive NPV absent RGGI) SWG Proposal: Offsets

Available Annual Supply: LFG (2010): 6.4 million short tons CO 2 e at up to $2.80/ton; 6.9 million short tons at $9.80/ton SF 6 : 450,000 short tons CO 2 e at up to $1.50/ton Afforestation: 165,000 short tons CO 2 at $10/ton; 830,000 short tons at $20/ton CDM: $6.50/short ton CO 2 e - no assumed limit on available supply Quantitative Limit: Tonnage limit applied by run year based on difference between reference case emissions and modeled cap limits (50%) Modeling Offsets: Supply Curves SWG Proposal: Offsets

Questions?