MGA Cap and Trade Overview of Cap and Trade and MGA Process For KEC – Ray Hammarlund

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3 Typical Components of Cap & Trade Scope and Point of Regulation Emissions Measurement, Monitoring & Reporting Setting the Cap Distributing Allowances Offsets Compliance Periods and Enforcement

4 Committees for MGA Scope/Electricity (Nancy Jackson) (April 7-8) (June 2-3) Target Setting (Tom Gross) (April 8-9) (June 3-4) Modeling (April 27-28) (June 4-5) Allowances (April 28-29) (June 9-10) Offsets (Chuck Rice) (Ray Hammarlund-Chair) (April ) (June 10-11) Full Advisory Group Meeting (June 23-24) Full Committee Conference Call (July 10) Model Rule (July 22) – GHG Public Meeting

5 What is Cap and Trade? Cap on total emissions from a defined set of sources Cap is divided into one-ton permits, or allowances, and are distributed into the market. All emission sources are required to hold allowances equal to their emissions. Trade allowances to assure most cost effective reductions. Sources will reduce as long as the cost of allowances is greater than the reduction.

6 Scope – First big question What sources are capped in the cap and trade protocol? –Point Source - Easier –Non-Point Source – Difficult –100’s, 1000’s or million’s? Which greenhouse gases are capped? –Are they all in the same agreement or do you have separate protocols for each?

7 EU Cap & Trade Started with point sources such as coal plants Did not cap autos (large tax on petroleum in EU) Will begin to cap aircraft shortly Did not allow for offsets (agriculture and forestry)

8 Point of Control – Part of first question Upstream or downstream, that is the question –Upstream – farther away from the customer Petroleum in EU is regulated upstream – at the point of refining or importation –Downstream – closer to the customer Coal in EU is regulated downstream – at the point of generation (as opposed to upstream (i.e. extraction point )) Other points – At wholesale or retail Hybrid system for different pollution sources

9 Allowances – The BIG question (that begets many bigger questions) How many allowances to allocate? What entity does the allocation? Do you give away or sell at a market price? Do you do a combination of free and saleable credits? How do you set the initial price? What do you do with the revenue?

10 Offsets – Another Question What are offsets? –A project-based reduction that is demonstrated outside the capped sector. –Must be “real”, surplus (or additional), verifiable, permanent and enforceable (RSVP &E) –Typical offsets – forest reclamation, agriculture soil sequestration, animal methane digestors.