1. Session 3: The Federal Question: Setting a Good Precedent & Positioning California for Competitive Advantage California Public Utilities Commission Greenhouse Gas Cap & Trade Systems: Symposium on Linking San Francisco, CA April 19, 2007 Derek K. Murrow Director of Policy Analysis Environment Northeast

2. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Environment Northeast Who We Are: Environment Northeast is a nonprofit research and advocacy organization focusing on the Northeastern United States and Eastern Canada. Our mission is to address large-scale environmental challenges that threaten regional ecosystems, human health, or the management of significant natural resources. We use policy analysis, collaborative problem solving, and advocacy to advance the environmental and economic sustainability of the region. Where We Are: Rockport, ME / Portland, ME Boston, MA / Providence, RI / Hartford, CT New Haven, CT Primary Project Areas: energy & climate policy in New England and Eastern Canada Cap & Trade Experience: one of 24 RGGI stakeholders, actively engaged in regional negotiation and program design as well as New England implementation Development of Comprehensive Policy Recommendations: see Climate Change Roadmap for New England and Eastern Canada for recent policy workClimate Change Roadmap for New England and Eastern Canada

3. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 What Happens if a Federal Cap & Trade Program is Implemented? Not a question of if, but when, and how will it be structured? Recommendations for CA and other leadership states to consider:  Set a good precedent for a national program Lead by example and create a model for a federal program Key elements: aggressive cap, allocation with a consumer focus, rigorous and limited offsets, and only price controls that assist with market stability but do not blow up the cap Set aggressive targets and demand similar federal targets - CA regulated entities should be advocating for a strong federal program  Position the State for Competitive Advantage: Create a program with an allocation scheme that rewards efficient and clean commitments and ask for the same at the federal level Recognize the benefits of efficiency and clean energy supply in terms of long-term costs under a federal program

4. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Source Based vs. Load Based: Sending the Right Signals to DC The federal program will likely be source based – due to inertia and experience at the federal level The load based system may in the end go away – but that doesn’t mean you shouldn’t do it, as long as it has environmental integrity A load based system can highlight and support:  Consumer interests – through allocation or auction choices  A focus on energy efficiency as a resource to reduce emissions and costs (system benefits are higher under a carbon cap)  Contracting for supply resources that are lower emitting and provide a hedge against higher fuel prices and future national carbon costs  An overall need for electric system planning to address environmental and economic goals – markets may not solve all problems  A solution to addressing emissions associated with imports (leakage)  Put the state at a competitive advantage (see subsequent discussion)

5. Setting a Good Precedent: Cap Level and Rate of Cap Decline Number 1 issue – cap level & trajectory - environmental outcome Send a long-term signal to developers and investors Initial cap level is important but setting a trajectory towards long-term goals (on track for ~80% by mid-century) is critical

6. Setting a Good Precedent: Allocation of Allowances Allowances are a new commodity that puts a value on a public good Load or source based – you have to decide how to allocate or auction allowances Many options from population to energy consumption to emissions This decision will always have winners and losers – think about the message to the Feds – get to the right metric over time if necessary RGGI States – Different Metrics for Apportioning the Regional Cap

7. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Setting a Good Precedent: Allocation of Allowances - Green is non-emitting

8. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Setting a Good Precedent: Allocation of Allowances

9. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Setting a Good Precedent: Offsets & Price Controls Rigorous Offsets that are Limited in Quantity  Offsets must be equal to an on-system emissions reduction  Set clear criteria that will be emulated federally: real, surplus (additional), verifiable, permanent, and enforceable  More on this issue tomorrow – limit the quantity to ensure change in emissions and investments in the electric sector Avoid Price Controls  Use only price controls that assist with market stability but do not blow up the cap (avoid increased emissions)  The price point matters: are you setting the market price ( $100/ton)  More on this issue tomorrow – avoid price controls and look to existing market experience

10. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Competitive Advantage: Clean Energy Choices No matter what happens in terms of design of a federal program, CA’s investment choices today will create benefits that carry over into the future There are two solutions to reducing emissions:  Use less energy through efficiency investments (end-use, T&D)  Supply energy with less emissions (renewables, high efficiency generation, and carbon capture and sequestration) California’s programs will do both:  Demand: loading order to capture all cost effective efficiency  Supply: carbon cap and trade program, along with RPS, DG/CHP incentives, and other policies  Both put the state on the right trajectory for a load or source based program

11. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Competitive Advantage: Federal Program Costs Demand and Energy Efficiency  A load based cap continues to increase the focus on energy efficiency by regulating the DISCO, which has planning and procurement authority over energy efficiency, and further encourages reduced use of energy  Cost = Price (w/ carbon costs) X Consumption (EE reduces) Supply Costs  The cost of electric supply under a carbon cap will be driven by the emissions and costs of the plants on the margin  Emissions Rate X Allowance price = Increase in Electric Price Natural Gas: ~0.5 tons/MWh X $10/ton = $5/MWh Coal: ~1.0 tons/MWh X $10/ton = $10/MWh  Clean supply choices now, with long-term contracts, yield lower costs in all carbon constrained futures

12. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Competitive Advantage: Efficiency Benefits Efficiency Costs Less: Efficiency vs. Supply Costs Efficiency Reduces C&T Costs: RGGI w/ and without 2X Efficiency

13. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Competitive Advantage: Supply Benefits Contracts and construction of additional low or non-emitting generation will keep CA’s supply costs low in relation to the nation once a federal program is developed New contracts for incremental generation should only be with clean sources

14. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Summary There is significant uncertainty about the timing and design of a federal program California should:  Move ahead with a rigorous GHG C&T program for the electric sector  If load based, think through the transition  Set a good example for the nation in terms of key design choices – in particular the cap level  Highlight the competitive advantage of clean and efficient choices today  Advocate for an equally aggressive national program before any CA program goes away

15. CPUC - GHG Cap & Trade Systems - Session 3 - April 19, 2007 Contact Information Derek K. Murrow Director of Policy Analysis 101 Whitney Ave. New Haven, CT 06510 (203) 495-8224 dmurrow@env-ne.org Environment Northeast Rockport, ME / Portland, ME / Boston, MA Providence, RI / Hartford, CT / New Haven, CT www.env-ne.org