A Guide to the Clean Air Act
for the Renewable Energy Community
Future Cap-and-Trade Programs
Each of the following CAA programs affects fossil-fired electric generators and could be modified to include emissions trading opportunities for renewables:
It is important to recognize that these programs and their trading mechanisms are rapidly evolving, and that there are opportunities for the renewables industry to influence these programs at both state and federal levels.
In each of these areas, renewable industry advocates could push for provisions that allow renewable energy firms to earn money for the clean energy attributes of their technologies. As described, an optimal combination of modified caps and multipollutant credit allocations could result in billions of dollars in annual revenues for the renewables industry.
The New Prototypes: NOx Cap-and-Trade Programs in the East
There are currently several important opportunities to promote reform of federal and state cap-and-trade systems through the development of emission control programs concerning ground-level ozone. Although the potential financial rewards for renewables from this program are small, it could set important precedents for more lucrative multipollutant trading mechanisms.
In October 1998 EPA finalized its NOx SIP Call, requiring 22 eastern states to submit revised implementation plans to reduce summertime NOx emissions from utilities and large industrial boilers.35 The rule is intended to reduce summertime NOx emissions by a million tons and to improve air quality from Missouri to Maine and from Georgia to Wisconsin. The action will also incidentally lessen acid rain, coastal water hypoxia, visibility impairment, and fine-particle pollution.
The rulemaking is a significant development in U.S. environmental law. It initiates a new "regional" approach to meeting clean air standards and a new emissions trading mechanism. This is the first time in history that EPA has used its interstate air pollution control authority to help attain the NAAQS. Each affected state has been assigned a cap on seasonal NOx emissions. The cap is based on an estimate of emissions that would occur in 2007.36 The action is integral to EPA's strategy to implement the 1997 NAAQS for ozone and lays the groundwork for a similar approach to attaining the fine-particulate-matter standard.
States will have the option of allowing sources to meet obligations through emissions trading. The final NOx SIP Call rule contains a model trading program applicable to larger sources.37 A state NOx emissions trading program may set aside NOx allowances for allocation to renewables and energy efficiency. A set-aside would reduce the amount of allowances allocated to fossil-fired power plants, and instead make the allowances available to energy efficiency or renewable technology vendors. The clean energy vendors would then sell the allowances and receive revenue to support their industry.
There are many issues involved in establishing an effective state clean energy set-aside. Many would object, for example, if garbage incineration is counted as a renewable or if the nuclear industry tries to earn allowances.38 Environmental groups may, in fact, resist a direct allowance allocation or set-aside for renewables if a proposal to do so opens the door to the same treatment for these industries. While an effective argument can be made that separate treatment of renewables is justified by the massive differences in the environmental impacts, in some jurisdictions the power of the nuclear and "mass-burn" industries makes environmental groups wary of supporting a renewable set-aside or generation performance standard.
Details on how to set up an effective renewable energy set-aside are contained in EPA's Guidance on Establishing an Energy Efficiency and Renewable Energy (EE/RE) Set-Aside in the NOx Budget Trading Program, March 1999.39 The Center for Clean Air Policy has also developed an excellent guide to the key issues in setting up a state NOx trading mechanism.40 The best approach is to allocate allowances to renewables in the same way as they are allocated to fossil generators. Alternatively, if a renewable set-aside is used, the renewable energy industry should urge states to reserve at least 10-15% of its utility NOx budget for qualifying energy efficiency and renewable energy programs.
Independent of EPA's NOx SIP call, several states are adopting renewable set-asides as part of regional NOx control programs:
Particulate Matter and Visibility in National Parks
Fine-particle-matter pollution and regional haze are caused in large part by power plant emissions. Regional haze is caused principally by the light-scattering effects of fine particles, of such as sulfate and nitrates, formed in the atmosphere from SO2 and NOx emissions. In order to attain the new National Ambient Air Quality Standard for PM2.5 and to improve visibility in national parks, EPA and the states will face the same combination of pollution movement and utility sources encountered with ozone and NOx. In each case, the regulatory focus will be on interstate transport of sulfur and nitrogen compounds. As in the case of the NOx SIP Call, states will have the option of using an emissions trading program for control of particulate emissions. The PM SIPs will be under development beginning in 2004, at which point renewable energy industries will have the opportunity to press for the inclusion of a set-aside in any emissions trading program that emerges.
The visibility impairment (or haze) programs may also be implemented through emissions trading mechanisms that could result in pollution avoidance revenues for renewable energy developers. Congress set up a special program in the 1990 amendments to protect and enhance visibility in federal parks.45 In April 1999, EPA finalized a rule that will require states to develop plans to essentially eliminate haze conditions in national parks.46
Although the implementation of the haze rule spans a 50-year period, there are several near-term opportunities to influence the program for the benefit of renewable energy resources. First, EPA will develop guidelines for voluntary state and regional emissions trading programs during 2000. These could encourage states to include a set-aside or direct allocation of emission credits for renewable energy generators. States that opt to include emissions trading controls (as an alternative to plant-by-plant best available retrofit technology controls)47 will begin developing plans by 2003 for filing with EPA according to a staggered schedule between 2005 and 2008.
In addition, a 1996 Grand Canyon Visibility Transport Commission (GCVTC) report established goals for the development of renewable energy resources as one means of reducing the impact of fossil fuel electric power plants on regional visibility conditions. The report called for renewable energy resources to account for 10% of the regional power needs by 2005, and 20% by 2015. By October 1, 2000, the GCVTC is to develop an annex to its 1996 report, including an emissions trading program to become effective if any of the eight western states that opt to comply with the GCTVC's recommendations miss key milestones in improving regional haze conditions.48
As noted earlier, renewables could enjoy large financial benefits from a cap-and-trade program for CO2 emissions if the cap is properly set and if the program contains a generation performance standard or an express set-aside of emission allowances for renewable electric power generators. The value is substantially higher than any conceivable revenue from SO2, NOx, or haze-control trading schemes.
The threat of climate change led to the adoption of the Framework Convention on Climate Change at the 1992 United Nations Conference on Environment and Development.49 The meeting adopted a goal of stabilizing greenhouse gas (GHG) concentrations, but it set no emission limits or timeframes to accomplish this goal. The details were spelled out at the Third Conference of the Parties, held in Kyoto, Japan, in December 1997. This resulted in specific global emission reduction requirements for industrial countries. If the U.S. Senate ratifies the Kyoto Protocol, the United States will need to reduce its GHG emissions to 7% below 1990 levels.50
At the November 1998 Conference of the Parties in Buenos Aires, however, treaty members postponed negotiations on an international emissions trading system. The next gathering, in Bonn in late 1999, further postponed tough decisions as the negotiators focused on rebuilding confidence in the protocol. In the absence of an agreement to implement international CO2 trading, a cap-and-trade system could be implemented domestically to meet the U.S. emission reduction obligations. EPA views the NOx SIP Call cap-and-trade system as an appropriate model for trading GHG emissions allowances.
The Clinton administration and members of Congress are proposing an "early reduction program" that will provide emission credits for sources that reduce emissions prior to ratification of the Kyoto Treaty. The debate over this early reduction provides an important near-term opportunity to carve out a role for renewables in CO2 trading. At least one congressional bill, introduced by Senators Connie Mack and Joseph Lieberman, would amend the CAA to authorize the President to enter into binding agreements with businesses operating in the United States that achieve voluntary emission reductions prior to January 2008.51 A business would receive Greenhouse Gas Reduction Credits if it "takes an action that reduces greenhouse gas emissions." The credits could be used in any future domestic program to mitigate GHG emissions.52
The bill as currently drafted, however, is unclear on whether electricity generation from renewables qualifies as such an "action" and appears to limit eligibility for credits to the owners of facilities that emit greenhouse gases. The bill could be amended to state that renewable energy project developers can earn credits directly, without the need to work through a utility or fossil-fuel-fired source.
By 2020, energy consumption worldwide is expected to be 75% above 1995 levels. Development of wind, solar, and biomass energy resources should be a key strategy to cement the Kyoto Protocol into a working, cost-effective pollution-control mechanism. The renewable energy industry needs to become a part of the negotiating process at both the domestic and the international level.
A Guide to the Clean Air Act for the Renewable Energy Community