How Cap and Trade Regulations Work and Who May Be Affected

By Lindsay Audin  
OTHER PARTS OF THIS ARTICLEPt. 1: This PagePt. 2: Preparing for Cap and Trade and its Impact on Energy Costs

First of all, relax. The sky is not about to fall, nor will energy bills skyrocket, despite scare tactics by opponents of proposed climate legislation.

Even if no climate law is passed by Congress, however, some form of regulation impacting energy costs is likely by 2011. Very few facilities will be directly affected: Most may instead see small impacts on electric and fuel bills. A long-term approach should be taken toward ways to minimize such effects through fuel switching, energy efficiency and other means. The first step for facility executives is to understand the new rules on the horizon.

In 2007, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency (EPA) needed to move ahead on a finding calling for reductions of emissions of carbon dioxide and five other greenhouse gases (GHG). In October 2009, EPA issued draft regulations that could take effect in early 2010, if Congress does not act first.

To address this matter more comprehensively, in June 2009 the U.S. House of Representatives passed a bill to cut carbon emissions. A companion bill was introduced in the U.S. Senate four months later. Both bills would also fund various programs supporting renewable energy and efficiency, and take other steps to minimize, avoid, or adapt to climate change.

If a new law fails to pass, EPA's proposed regulations will instead take effect. EPA's regulations would not, however, contain the financial goodies that Congressional legislation is offering to make carbon reductions more palatable.

As presently configured, the proposed legislation and regulations would both cover only facilities that annually produce at least 25,000 metric tons (MT) of equivalent carbon (1 MT roughly equals 1.1 U.S. tons). Only fossil-fueled power plants, many district heating and cooling systems, a lot of industrial facilities, and some large non-industrial campuses — universities, medical centers, military bases, office parks — would be directly affected. However, because all buildings use electricity, all could be indirectly affected by increased costs to run power plants.

What Is The Process?

Copying the "cap and trade" mechanism used in the '80s to reduce other pollutants, the proposed legislation would give "allowances" to each facility covered by it. Each allowance is a pass to emit 1 MT of GHG and, on day one, each facility would annually receive (on average) enough free allowances to cover 85 percent of its emissions. The facility would need to purchase the other 15 percent through a regulated market.

The total allowances set a cap above which a facility would need to buy more allowances, or else reduce its emissions to cover the difference. That annual cap would then gradually be reduced, forcing reductions in carbon emissions or buying of allowances ("trading") from others having more than they need.

Carbon offsets — essentially payments to others to cut carbon emissions in other ways — could also be used to maintain compliance. It's a bit like a game of musical chairs, with allowable emissions being the chairs: Each time the music stops, less carbon is allowed to be emitted, and the cost of continuing to do so rises.

If Congress fails to pass a climate bill, EPA would step in, using its authority under the Clean Air Act. At first, it would simply require reporting of carbon emissions by facilities annually pumping out 25,000 MT of GHG. That information would then form the basis of efforts to press such facilities to lower their carbon emissions, or risk losing their operating permits. EPA's proposed rules could eventually require, at new or modified facilities, installation of the "best available control technology" to minimize carbon emissions.

At present, technology for reducing carbon emissions works indirectly, meaning it does not remove carbon from the exhaust stream. Present day options instead include switching to a lower carbon fuel (such as from coal to natural gas), improved combustion efficiency that gets more heat out of less fuel, and flue gas economizers that recover exhaust heat, thus reducing the quantity of fuel to be burned. Several promising carbon capture systems are being developed, but are still in the experimental stage. Proposed EPA regulations do not offer funding for such retrofits, nor do they provide a financial alternative, such as buying carbon offsets or allowances.

Who May Be Affected?

To annually emit at least 25,000 MT from a non-industrial facility would require a central boiler plant serving roughly 3 to 6 million square feet (depending on fuel type, HVAC systems, climate, etc.). Several hundred non-industrial facilities fall into this category.

Through one interpretation of existing law, some have claimed that, if no bill passes Congress and EPA regulations instead pertain, facilities with emissions as low as 250 MT per year could be affected. But EPA's announcement of its proposed rules details how such an option would be logistically impossible to enforce, and its proposed regulations specifically block such an interpretation.

The federal Clean Air Act of 1990 contains a proviso that allowed states to "exempt hospitals and educational institutions" from EPA emission regulation. Large facilities falling into those categories may wish to check with their state environmental agencies to see if they are already exempted. It should be noted, however, that some states and regions have been moving ahead on regulating carbon emissions on their own. If no new law comes out of Washington, those mechanisms could fill the vacuum in some parts of the country.

In its October 2009 announcement, EPA asked for comments regarding setting its threshold at 50,000 tons to exclude many sources that would otherwise be "newly defined as major (e.g., landfills, hospitals, offices, hotels)." For details and how to submit comments, find EPA's filing at www.epa.gov/nsr/actions.html.

Carbon-Cutting Timelines

The House and Senate bills vary slightly in their dates for targeted carbon reductions, relative to emissions in 2005.

Here's the schedule:
  • by 2012, cut by 3 percent
  • by 2020, cut by 17 percent (House) or 20 percent (Senate)
  • by 2030, cut by 42 percent
  • by 2050, cut by 83 percent.

That schedule covers all forms of carbon generation, including fuel burned in transportation, which accounts for almost 30 percent of the total. Power plants are responsible for almost 33 percent, of which more than 80 percent is from coal.

— Lindsay Audin

Zeroing In On Who's Affected

If your facility has a large central boiler plant already holding an EPA Title V permit, it could be emitting 25,000 metric tons of carbon if it annually consumes about:

  • 11,000 tons of coal or
  • 2,300,000 gallons of fuel oil or
  • 4,750,000 therms of natural gas.

— Lindsay Audin

Continue Reading: What You Need to Know About Climate Change Legislation

How Cap and Trade Regulations Work and Who May Be Affected

Preparing for Cap and Trade and its Impact on Energy Costs

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  posted on 12/7/2009   Article Use Policy

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