ENV-43-07-00028-RP New York State CO Budget Trading Program

5/7/08 N.Y. St. Reg. ENV-43-07-00028-RP

NEW YORK STATE REGISTER

VOLUME XXX, ISSUE 19

May 07, 2008

RULE MAKING ACTIVITIES

DEPARTMENT OF ENVIRONMENTAL CONSERVATION

REVISED RULE MAKING

HEARING(S) SCHEDULED

I.D No. ENV-43-07-00028-RP

New York State CO Budget Trading Program

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following revised rule:

Revised action:

Addition of Part 242, and amendment of Part 200 of Title 6 NYCRR.

Statutory authority:

Environmental Conservation Law, sections 1-0101, 1-0303, 3-0301, 11-0303, 11-0305, 11-0535, 13-0105, 15-0109, 15-1903, 16-0111, 17-0303, 19-0103, 19-0105, 19-0107, 19-0301, 19-0303, 19-0305, 24-0103, 25-0102, 34-0108, 49-0309, 71-2103 and 71-2105; Energy Law, sections 3-101 and 3-103; Public Authorities Law, sections 1850, 1851, 1854 and 1855

Subject:

New York State CO Budget Trading Program. These regulations apply statewide to fossil fuel-fired electric generating units.

Purpose:

To reduce CO emissions from fossil fuel-fired electric generating sources statewide to counter the threat of a warming climate. The CO Budget Trading Program will also produce significant environmental co-benefits in the form of improved local air quality, forest preservation, improved agricultural manure handling practices leading to better water and air quality in rural areas of the State, and a more robust, diverse and clean energy supply in the State.

Public hearing(s) will be held at:

1:00 p.m., June 9, 2008 at Department of Environmental Conservation, Region 1, 50 Circle Rd., Conference Rm., Basement Rm. #002 A/B, Stony Brook, NY; 2:00 p.m., June 9, 2008 at Department of Environmental Central Office, 625 Broadway, Public Assembly Rm. 129, Albany, NY.

Accessibility:

All public hearings have been scheduled at places reasonably accessible to persons with a mobility impairment.

Interpreter Service:

Interpreter services will be made available to deaf persons, at no charge, upon written request submitted within reasonable time prior to the scheduled public hearing. The written request must be addressed to the agency representative designated in the paragraph below.

Substance of revised rule:

Part 242 establishes the New York State CO Budget Trading Program, which is designed to stabilize and then reduce anthropogenic emissions of carbon dioxide (CO), a greenhouse gas (GHG), from CO Budget sources in an economically efficient manner.

Part 242 establishes emission budgets for CO. Part 242 establishes a trading program by creating and allocating allowances that are limited authorizations to emit up to one ton of CO in each control period. Affected sources are required to hold for compliance deduction, at the respective allowance transfer deadlines, the tonnage equivalent to the emissions at the source for the control period immediately preceding such deadline.

For Part 242, the first control period commences on January 1, 2009 and concludes on December 31, 2011. Subsequent control periods begin on January 1st and conclude on the December 31st three years later. Part 242 applies to units that serve an electrical generator with a nameplate capacity equal to or greater than 25 megawatts of electrical output and sells or uses any amount of electricity.

Part 242 includes a limited exemption provision that allows units otherwise affected by the regulation to be exempt from nearly all of the reporting, permitting and allowance compliance requirements. A limited exemption is available to industrial units that restrict the supply of the unit's electrical output to the grid during a control period to less than 10 percent of the gross generation of the unit.

Part 242 requires each CO budget unit to have a CO authorized account representative (AAR) who shall be responsible for, among other things, complying with the CO budget permit requirements, the monitoring requirements, the allowance provisions, and the recordkeeping and reporting requirements. The owner and/or operator of the unit may also designate an alternate CO AAR to perform the above duties. The CO Budget Trading Program was designed to allow for the use of agents that can make electronic submissions on behalf of the AAR and Alternate AAR. If the CO budget source is also subject to the CAIR NOx Ozone Season Trading Program, CAIR NOx Annual Trading Program, or CAIR SO2 Trading Program then, for a CO Budget Trading Program compliance account, this natural person shall be the same person as the alternate CAIR designated representative under such programs. If the CO budget source is also subject to the Acid Rain Program, then for a CO Budget Trading Program compliance account, this natural person shall be the same person as the alternate designated representative under the Acid Rain Program.

In order to meet the necessary permit requirements, the authorized account representative of each CO budget unit shall submit a complete application for a facility operating permit or a modification to an existing permit in accordance with the provisions of 6 NYCRR Parts 201 and 621. The CO AAR shall submit to the department a compliance certification report for each control period by March 1st immediately following the relevant control period.

The Statewide CO Budget Trading Program base budget is 64,310,805 tons per year for the first two control periods (2009-2011 and 2012–2014). The base budget decreases as follows: to 62,703,035 tons in 2015, to 61,095,265 tons in 2016, to 59,487,495 tons in 2017 and to 57,879,725 tons per year for 2018 and beyond. By January 1, 2009, the department or its agent will record in the energy efficiency and clean technology account the CO allowances for all allocation years.

The department will allocate most of the CO Budget Trading Program base budget to the energy efficiency and clean energy technology account. The New York State Energy Research and Development Authority (NYSERDA) will administer the energy efficiency and clean technology account so that allowances will be sold in an open and transparent allowance auction or auctions. The proceeds of the auction or auctions will be used to promote the purposes of the energy efficiency and clean technology account and for administrative costs associated with the CO Budget Trading Program. The auction will be carried out to achieve the following objectives to the extent practicable: achieve fully transparent and efficient pricing of allowances; promote a liquid allowance market by making entry and trading as easy and low-cost as possible; be open to participation for bidding by any individual or entity that meets reasonable minimum financial requirements; monitor for and guard against the exercise of market power and market manipulation; be held as frequently as is needed to achieve design objectives; avoid interference with existing over-the-counter allowance markets; align well with wholesale energy and capacity markets; and be designed to not act as a barrier to efficient investment in existing or new electricity generating sources.

New York has agreed to specific design elements of the auction. These include: reserve price, auction structure and format, allowance sale schedule, participation, unsold allowances, notice of auctions, monitoring, and auction results.

The Reserve Price represents the price below which no allowances will be sold at the auction. It will be used to mitigate the potential for auction prices to clear significantly below current market prices, due to tacit or explicit collusion, weak competition, or to maintain a minimum rate of progress in reducing emissions below business as usual. The Department and the Authority will disclose the Reserve Price before every auction.

The hybrid reserve price mechanism includes two components: 1) a Minimum Reserve Price (MRP) of $1.86 (adjusted for the Consumer Price Index); and 2) a Current Market Reserve Price (CMRP) that is 80 percent of the Current Market Price of a CO Allowance for the particular allowance vintage year. The reserve price for each auction will be the higher of the Minimum Reserve Price or Current Market Reserve Price.

The first component of the hybrid reserve price mechanism, the Minimum Reserve Price of $1.86, was established based on the ICF International's Integrated Planning Model. Some of the critical program impacts evaluated with the model include CO emission reductions achieved, projected CO allowance prices, and projected impacts on electricity prices. According to the model, the projected CO allowance price under the selected RGGI program design is $2.32/ton (2009 dollars) at the beginning of the Program in 2009. Because the modeled value of $2.32 is the expected Current Market Price for the first auction, it was determined that $1.86, or 80 percent of the modeled value of $2.32, will be Minimum Reserve Price.

The second component of the hybrid reserve price mechanism, the Current Market Reserve Price, is 80 percent of the Current Market Price of a CO Allowance for the particular allowance vintage year. A volume-weighted average of market transactions will be used to produce an estimate of the Current Market Price.

All unsold allowances will be available for sale in auctions where the reserve price in effect is greater than the Minimum Reserve Price. Since unsold allowances may exist at the end of the first control period, the Department will decide whether to retire any unsold allowances from the first control period or to roll these allowances into auctions during the second control period.

The department will also include a voluntary renewable energy market and long term contract set-aside allocation. Accordingly, the department shall allocate 700,000 and 1,500,000 tons to the voluntary renewable energy market and long term contract set-aside accounts, respectively, from the CO Budget Trading Program annual base budget.

The department may award early reduction allowances to a CO budget source for reductions in the CO budget source's CO emissions (inclusive of all emissions from the CO budget units at the CO budget source) that are achieved by the source during the early reduction period (2006, 2007 and 2008). Total facility shutdowns or reductions that result from enforcement actions shall not be eligible for early reduction allowances. Early reductions during the control period will be demonstrated against the baseline period (2003, 2004 and 2005).

The department will establish one CO compliance account for each CO budget source. Deductions of allowances for compliance purposes will be made from the compliance account. Allowances may be banked without discount until deducted for compliance. The CO AAR may specify the allowances by serial number to be deducted for compliance purposes in the compliance certification report or utilize the first in, first out protocols in the regulation. In order to meet the source's budget emissions limitation for the control period immediately preceding, CO allowances must be submitted for recordation in a unit's compliance account by midnight of March 1st. After making the deductions for compliance, if a unit has excess emissions the department will deduct from the source's compliance account, allowances allocated for a subsequent control period, allowances equal to three times the unit's excess emissions. If the source has insufficient CO allowances to cover three times the number of allowances in its compliance account, the source shall be required to immediately transfer sufficient allowances into its compliance account.

Part 242 will provide for the award of CO offset allowances to sponsors of CO emissions offset projects or CO emission credit retirements that have reduced or avoided atmospheric loading of CO, CO equivalent (a metric measure used to compare the emissions from various greenhouse gases based upon their global warming potential) or sequestered carbon as demonstrated in accordance with the offset consistency application and monitoring and verification report requirements of the program. Offsets can be obtained from eligible landfill methane capture and destruction projects, reduction in emissions of sulfur hexafluoride, sequestration of carbon due to afforestation, reduction or avoidance of CO emissions from natural gas, oil or propane end-use combustion due to end-use energy efficiency, and from avoided methane from agricultural manure management operations. CO retirements include the permanent retirement of GHG allowances or credits issued pursuant to any governmental mandatory carbon constraining program outside of the United States that places a specific tonnage limit on GHG emissions, or certified GHG emissions reduction credits issued pursuant to the United Nations Framework Convention on Climate Change (UNFCCC) or protocols adopted through the UNFCCC process.

For CO offset allowances, the number of CO offset allowances that are available to be deducted for compliance with a CO budget source's CO budget emissions limitation for a control period may not exceed the number of tons representing 3.3 percent of the CO budget source's CO emissions for that control period. If the department determines that there has been a stage one trigger event, five percent will be allowed and if the department determines that there has been a stage two trigger event, offset up to 10 percent will be allowed. A stage one trigger event is the occurrence of any 12 month period that completely transpires following the market settling period and is characterized by an average CO allowance price that is equal to or greater than the stage one threshold price ($7.00 adjusted annually by the consumer price index). A stage two trigger event is the occurrence of any 12 month period that completely transpires following the market settling period and is characterized by an average CO allowance price that is equal to or greater than the stage two threshold price ($10.00 adjusted annually by the consumer price index plus two percent).

Part 200 cites the portions of Federal statute and regulations that are incorporated by reference into Part 242.

Substantial revisions were made in sections:

242-1.2(b)(3), (5), (7), (11), (14)–(16), (24), (38), (41)–(43), (55), (58), (59), (63), (66), (69), (76), (80), (81), 242-1.4(b)(1), 242-1.5(a)(1), 242-3.2, 242-3.3(1), 242-5.3(a)(3)(i), (ii), (d)(2), (3), (3)(ii)–(iv), (4)–(6), 242-6.4(c), 242-6.5(a), (a)(3), (c)(2)(i), (ii), 242-6.8(b), 242-8.1, (a)(1), (c)(3), 242-8.2(c), 242-8.6(a), (b), 242-8.7, 242-8.8(g), 242-10.3(a)(2), (g), 242-10.4(c)(3), (d), 242-10.7(a)(1), (2), (c)(3), (d) and (e).

Text of revised proposed rule and any required statements and analyses may be obtained from:

Michael P. Sheehan, Department of Environmental Conservation, Division of Air Resources, 625 Broadway, Albany, NY 12233-3261, (518) 402-8396, e-mail: 242rggi@gw.dec.state.ny.us

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

10 days after the last public hearing.

Additional matter required by statute:

Pursuant to article 8 of the State Environmental Quality Review Act, a short environmental assessment form, a positive declaration and a draft generic environmental impact statement are on file. (The Supplemental DGEIS is currently being prepared.) A coastal assessment form is also on file. This rule must be approved by the Environmental Board.

Revised Regulatory Impact Statement

On December 20, 2005, New York State entered into a historic regional agreement to reduce greenhouse gas (GHG) emissions from power plants, an important step to protect our environment and meet the significant challenge of climate change. Under the agreement, the governors of 10 Northeastern and Mid-Atlantic states have committed to propose the Regional Greenhouse Gas Initiative (RGGI), a program to cap and reduce carbon dioxide (CO) emissions from power plants in the region by 10 percent by 2019, for adoption in their states.¹ In order to carry out the State's commitment, the Department of Environmental Conservation (the Department) is proposing to establish the CO Budget Trading Program (the Program) by promulgating 6 NYCRR Part 242, and to revise 6 NYCRR Part 200, General Provisions.

The statutory authority to promulgate Part 242 in the State derives primarily from the Department's obligation to prevent and control air pollution, as set out in the Environmental Conservation Law (ECL) at Sections 1-0101, 1-0303, 3-0301, 19-0103, 19-0105, 19-0107, 19-0301, 19-0303, 19-0305, 71-2103, 71-2105. The Department's obligation to preserve and protect the other natural resources and public health in the State as it relates to climate change extends beyond the control of air pollution, however, as set out in ECL Sections 11-0303, 11-0305, 11-0535, 13-0105, 15-0109, 15-1903, 16-0111, 17-0303, 24-0103, 25-0102, 34-0108, and 49-0309. The promulgation of the Program is also consistent with the Department's obligations under Energy Law 3-101 and Energy Law 3-103. The general powers of the New York State Energy Research and Development Authority (NYSERDA) that are relevant to the Program's ability to sell allowances in a transparent auction are set forth in the Public Authorities Law Sections 1850, 1851, 1854 and 1855.

Mitigating the impacts of New York's warming climate represents one of the most pressing environmental challenges for the State, the nation and the world. Extensive scientific work demonstrates the need for immediate world-wide action to reduce emissions from burning fossil fuels, as well as the great benefits that will accrue if the emissions are reduced through programs like RGGI. This section outlines the Department's analysis of the needs and the considerable benefits of the Program.

A naturally occurring greenhouse effect has regulated the earth's climate system for millions of years. Solar energy from the sun that reaches the surface of the earth is radiated back out into the atmosphere as long wave or infrared radiation. CO and other naturally occurring GHGs trap heat in our atmosphere, maintaining the average temperature of the planet approximately 50 degrees Fahrenheit (°F) above what it would be otherwise. An enhanced greenhouse effect, and associated climate change, results as large quantities of anthropogenic GHGs, especially CO from the burning of fossil fuels, are added to the atmosphere.

Atmospheric concentrations of CO and other GHGs have substantially increased since the mid-1700s due to human activities. In addition, ice core samples spanning thousands of years have proven that CO concentrations far exceed pre-industrial values. These global increases in CO concentration are due primarily to fossil fuel use and land-use change.²

While there is strong evidence that the climate is warming, there is also clear scientific consensus that anthropogenic emissions of CO from the burning of fossil fuels are contributing to observed warming of the planet. The evidence comes from direct measurements of rising surface air and subsurface ocean temperatures, increases in sea levels, retreating glaciers and changes to many physical and biological systems.

Scientists have already observed significant warming in New York's climate due in part to increased concentrations of GHGs in the atmosphere.³ Since 1970, the Northeast United States has been warming at a rate of 0.5°F per decade. Winter temperatures have risen even faster, at a rate of 1.3°F per decade from 1970 to 2000. Temperature increases in the coastal areas of the state have been more dramatic. In summary, scientists have concluded that the New York climate has already begun migrating south, taking on the characteristics of the climate formerly found in the states south of New York.⁴

Scientific literature confirms that reducing emissions of GHGs like CO will help to mitigate the impacts of climate change. It is clear that these projections about New York's potential future will have adverse impacts on New York's environment and human health. It is also clear that reducing GHG emissions will reduce those impacts. More intense and prolonged periods of summertime heat can result in increased mortality and heat illnesses, especially in cities that experience the heat island effect. The term “heat island” refers to urban air and surface temperatures that are higher than nearby rural areas. Many U.S. cities and suburbs have air temperatures up to 10°F warmer than the surrounding natural land cover.⁵ The United States Environmental Protection Agency (EPA) reports that a one degree Fahrenheit increase in average temperature could more than double heat related fatalities in New York City from 300 to 700 per year.⁶ Increased GHG emissions contribute to conditions that enhance the formation of ground-level ozone, specifically by increasing temperature through global climate change. Increased temperature and precipitation levels also produce conditions favorable to the introduction or spread of vector-borne illnesses such as Lyme Disease, Equine Encephalitis, West Nile Virus, and other diseases spread by mosquitoes, ticks, and wild rodents.⁷

New York has approximately 2,625 miles of coastline including barrier islands, coastal wetlands, and bays that could also be affected by a warming climate.⁸ The major contributor to sea level rise is thermal expansion and melting of glaciers and ice sheets. In New York City for example, sea level has risen 0.27 cm/year on average over the last hundred years and is expected to increase over the next century to an average of approximately 0.60 cm/year.⁹ Accelerated sea level rise due to global climate change is expected to increase the frequency and magnitude of storms such as the 100 year storm, which would result in increased flood damage. The return period of the resulting 100 year flood could be reduced to once every 50 years by the 2080s, and as often as once every four years in worst case scenarios.¹⁰

New York's public water supply could also be stressed by changes in temperature and precipitation. The majority of drinking water is obtained from surface flow, which can be highly variable. The New York City water supply comes from a 2,000 square mile watershed area in upstate New York that is greatly influenced by temperature and precipitation levels.¹¹ Lake Erie and Lake Ontario are critical water sources to New York State which would also be threatened by global climate change. New York relies on these Great Lakes for drinking water, hydroelectric power, commercial shipping, and recreation, including boating and fishing. New York State has approximately 331 miles of shoreline along Lake Ontario and approximately 77 miles along Lake Erie.¹²

Agriculture and forests in New York will also be affected by global climate change. The majority of crops grown in New York may be able to withstand a warmer climate with the exception of cold weather crops which include apples, potatoes, and others which would shift to the north or have reduced growing seasons. Dairy farmers would also be impacted since milk production is maximized under cooler conditions ranging from 41°F to 68°F.¹³ Global climate change could also affect the current forest mix in New York. New York State's Adirondack Park is the largest forested area east of the Mississippi and it consists of six million acres including 2.6 million acres of state-owned forest preserve.¹⁴ Climate change would also negatively impact New York's maple syrup industry since specific temperature conditions are required in order for the sugar maples to produce sap. As forest species change, the dulling of fall foliage will likely have a negative impact on regional tourism.¹⁵ Distribution of wildlife is also likely to change due to increased temperature and changes in precipitation. As a result, cold-water salmon and trout fisheries and migratory birds could be adversely impacted due to loss or changes in habitat.

The global community must reduce its GHG emissions well below 1990 levels within a few decades if we are to stabilize atmospheric concentrations of CO at acceptable levels. The burning of fossil fuels in power plants in New York is a major contributor to increased atmospheric concentrations of CO. In 2005, power plants in New York burned fossil fuels to produce approximately 61 million tons of CO and significant amounts of other harmful pollutants that impact the health and welfare of New Yorkers. This represents approximately one-quarter of the State's total GHG emissions. Any effort to curb the State's contribution to atmospheric concentrations of CO, therefore, must address CO pollution from power plants.

Offsets are an integral part of RGGI and the Program. An “offset” is a project-based GHG reduction (or sequestration) occurring at sources that are not subject to the Program that may be used by regulated sources for the purpose of compliance with the Program. Offsets not only provide flexibility for regulated sources, but also provide significant environmental and or economic co-benefits. Offsets allowed under the Program are from: Landfill Gas; SF: reduction of fugitive emissions from electricity transmission and distribution infrastructure; Afforestation; Agricultural methane; and Natural gas and oil/ end-use energy efficiency. The Program also incorporates an energy efficiency and clean energy technology allocation (the “EE & CET Allocation”). The EE & CET Allocation will be administered by NYSERDA and allowances in the account will be sold in a transparent allowance auction or auctions. This will better achieve the emissions reduction goals of the Program by promoting or rewarding investments in energy efficiency, renewable or non-carbon-emitting technologies, innovative carbon emissions abatement technologies with significant carbon reduction potential, and/or the administration of the Program.

The allowance auctions will include a Reserve Price. The Reserve Price represents the price below which no allowances will be sold at the auction. Its use is important for mitigating the potential for auction prices to clear significantly below current market prices, due to tacit or explicit collusion, weak competition, or to maintain a minimum rate of progress in reducing emissions below business as usual. Setting a Reserve Price can be accomplished in a variety of ways, including mechanisms that are, or are not, directly linked to current market prices.

NYSERDA currently administers similar energy efficiency and clean energy technology programs, and the addition of the EE & CET Allocation, should be readily accomplished. The EE & CET Allocation will increase the emissions reduction benefits of the Program while simultaneously reducing impacts on consumers. The Department will also include a voluntary renewable energy market and long term contract set-aside allocation. Accordingly, the Department shall allocate 700,000 and 1,500,000 tons to the voluntary renewable energy market and long term contract set-aside accounts, respectively, from the CO Budget Trading Program annual base budget.

The Department sought input from NYSERDA and the New York State Department of Public Service (DPS) with respect to the costs and other impacts associated with compliance of the Program. The analysis provided by NYSERDA includes modeling of the electricity sector showing the impacts of RGGI. ICF International (ICF) was contracted by NYSERDA to perform the modeling analysis. ICF utilized the Integrated Planning Model (IPM®), a nationally recognized modeling tool that is used by the EPA, state energy and environmental agencies, and private sector firms such as utilities and generation companies. The Department also analyzed the costs associated with state and local governments' compliance with the Program and considered analysis of the impacts the program may have on the state economy.¹⁶

CO allowance prices (the cost of complying with RGGI) are projected to increase from approximately $2/ton in 2009 to about $3.00/ton in 2015 and about $4.45/ton in 2021. Under the Program, New York's wholesale electricity prices (including both energy and capacity costs) are projected to be $1.04/MWh higher in 2015 and $1.51/MWh higher in 2021. RGGI is projected to increase wholesale electricity prices by about 1.6 percent in 2015 and 2.4 percent in 2021. For a typical New York residential customer (using 750 KWh per month), the projected increase in wholesale electricity prices in 2015 (1.6 percent) translates into a monthly retail bill increase of about 0.7 percent or $0.78. In 2021, the projected increase in wholesale electricity prices (2.4 percent) translates into a monthly residential retail bill increase of about 1.0 percent or $1.13. For commercial customers, the projected retail price impact of RGGI is about 0.9 percent in 2015 and 1.2 percent in 2021. For industrial customers, the projected retail price impact of RGGI is about 1.7 percent in 2015 and 2.4 percent in 2021.¹⁷ A macro-economic impact study of the Program was also conducted at the direction of the RGGI state agencies through the Massachusetts Division of Energy Resources to estimate the potential impact of the Program on the economies of participating states.¹⁸ The study used a computer model called the Regional Economic Models, Inc. (REMI) model. The study concluded that the economic impacts of RGGI on the economies of the participating states, including New York, were very small and generally positive.

There will also be costs associated with the administration of the Program. First and foremost, the Department will incur costs associated with the implementation of the Program. The Department estimates that between five and eight person years (the full time equivalent of working 100 percent on a project for a full work year expressed as 220 days) will be required to implement all aspects of the Program at a cost of $110,000 per person year or up to $880,000 annually. The Department will also need to reimburse its agent for its costs in administering the emission and allowance tracking and reporting system. Based on contractor costs associated with the administration of the Acid Deposition Reduction Program (ADRP) under Parts 237 and 238, the Department estimates that the capital start up costs for designing and implementing a regional system for tracking CO allowance transactions will be between $500,000 and $950,000. The Department is currently contracting with an agent to administer the ADRP program and the annual operating costs for the administration of the emission and allowance tracking and reporting system under that program are approximately $160,000. The Department estimates that administration of a regional system will be between $150,000 and $300,000.

The owners and operators of each source subject to the Program and each unit at the source shall keep each of the following documents for a period of 10 years from the date the document is created: account certificate of representation form; all emissions monitoring information; copies of all reports, compliance certifications, and other submissions and all records made or required under the Program; copies of all documents used to complete a permit application and any other submission under the Program or to demonstrate compliance with the Program; copies of all documents used to complete a consistency application and monitoring and verification report to demonstrate compliance with the offset provisions of the Program.

For each control period in which one or more units at a source are subject to the CO budget emission limitation, the CO authorized account representative of the source shall submit to the Department, a compliance certification report for each source covering all such units. This must be submitted by the March 1st following the relevant control for the units subject to the Program.

The Department examined the alternative of an emission rate based program for CO to the cap-and-trade structure of the Program that could conceivably be used to achieve equivalent emissions reductions. This alternative is a command-and-control regulatory structure which the Department concluded is less cost-effective and more difficult for sources to implement than the Program. The Department also determined that an emission rate program would be no more protective of the public health and the environment.

The Department also considered a number of variations of the emissions cap-and-trade construct that could share many or most of the features of the Program as proposed. These alternatives included: (1) a New York only trading program; (2) allocating allowances to generators at no cost; and (3) applicability to smaller sources.

In carrying out its statutory obligation to assess all relevant factors in developing an appropriate control program that is most cost-effective, the Department determined that emissions cap-and-trade programs are the most appropriate programs for the control of CO emissions from the subject sources.

There are currently no Federal standards that limit CO emissions from the electricity generating sector. The Program will reduce CO emission from electric generating sources to 10 percent below current levels by 2018. In response to the need to reduce GHG and the lack of a national program, the Department has determined that fossil fuel-fired electricity generators will have to reduce emissions of CO.

The Program will require affected sources and units to comply with the emission limitations of the Program beginning with the first three year control period (2009, 2010 and 2011). In order to meet the necessary permit requirements, the CO authorized account representative of the source must submit to the Department by the March 1st following the relevant control period, a compliance certification report for each source covering all such units. Each year, the owners and operators of each source subject to the Program shall hold a number of CO allowances available for compliance deductions, as of the CO allowance transfer deadline not less than the total tons of CO emissions for the control period. A unit is subject to this requirement starting on the later of January 1, 2009 or date the unit commences operation.

¹ In addition to New York, the other states participating in RGGI are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, and Vermont.

² IPCC WGI Fourth Assessment Report, Climate Change 2007: The Physical Science Basis, February 2007, and available at: http://www.ipcc.ch

³ Climate Change in the U.S. Northeast, A Report of the Northeast Climate Impacts Assessment (2006), available at: http://www.climatechoices.org/ne/resources_ne/jump.jsp?path=/assets/documents/climatechoices/NECIA_climate_report_final.pdf.

⁴ Id.

⁵ http://www.epa.gov/hiri/about/index.html

⁶ United States Environmental Protection Agency. “Climate Change and New York.” September 1997. Page 3.

⁷ National Assessment Synthesis Team (NAST), 2001: Climate Change Impacts On The United States, The Potential Consequences of Climate Variability and Change. Page 450.

⁸ National Oceanic and Atmospheric Administration (NOAA). Treasure Our New York Coasts and Estuaries. June 2003. Page 1.

⁹ Goddard Institute for Space Studies Institute on Climate and Planets (GISS ICP). Climate Impacts in New York City: Sea Level Rise and Coastal Floods. 2002. Page 3.

¹⁰ GISS ICP. Rising Seas: A View From New York City. August 2000. Page 2.

¹¹ NAST. Page 123.

¹² Michigan Department of Environmental Quality: Shorelines of the Great Lakes. http://www.michigan.gov/deq/0,1607,7-135-3313_3677-15959-,00.html

¹³ Garcia, Alvaro. Dealing With Heat Stress In Dairy Cows. South Dakota Cooperative Extension Service. September 2002. Page 1.

¹⁴ New York State Adirondack Park Agency (APA). http://www.apa.state.ny.us/About_Park

¹⁵ NAST. Page 125.

¹⁶ “REMI Impacts for RGGI Policies based on the Std REF & Hi-Emission REF” by the Economic Development Research Group, dated November 17, 2005.

¹⁷ Typical customer usage numbers from U.S. Department of Energy, Energy Information Administration (EIA). Average electricity prices from NYSERDA, Patterns and Trends (December 2005).

¹⁸ “REMI Impacts for RGGI Policies based on the td REF & Hi-Emission REF” by the Economic Development Research Group, dated November 17, 2005.

Revised Regulatory Flexibility Analysis

The burning of fossil fuels to generate electricity is a major contributor to a warming climate because fossil-fuel generators emit large amounts of CO, the principal GHG. Overwhelming scientific evidence suggests that a warming climate poses a serious threat to the environmental resources and public health of New York State-the very same resources and public health the Legislature has charged the Department to preserve and protect. The warming climate threatens the State's air quality, water quality, marine and freshwater fisheries, salt and freshwater wetlands, surface and subsurface drinking water supplies, river and stream impoundment infrastructure, and forest species and wildlife habitats. Not only will the Program help counter the threat of a warming climate, it will also produce significant environmental co-benefits in the form of improved local air quality, forest preservation, improved agricultural manure handling practices leading to better water and air quality in rural areas of the State, and a more robust, diverse and clean energy supply in the State.

1. Effects on Small Businesses and Local Governments. No small businesses will be directly affected by the adoption of new Part 242 and the amendments to Part 200.

The only local government affected by the Programs is the Jamestown Board of Public Utilities (JBPU), a municipally owned utility which owns and operates the S. A. Carlson Generating Station (SACGS). The emissions monitoring at SACGS currently meets the monitoring provisions of the Program, 40 CFR part 75. Therefore, no additional monitoring costs will be incurred. The costs associated with the Program will be dictated by how JBPU decides to comply with the provisions of the regulation.

2. Compliance Requirements. The JBPU, as owner and operator of the SACGS, will need to comply with the provisions of the Program, as described below.

The Program will require affected sources and units to comply with the emission limitation of the Program beginning with the 2009–2011 control period. In order to meet the necessary permit requirements, the authorized account representative of each CO subject unit shall submit to the Department a complete CO Budget permit application, by January 1, 2009 or 12 months before the date the unit commences operation.

Each year, the owners and operators of each source subject to the Program shall hold a number of CO allowances available for compliance deductions, as of the CO allowance transfer deadline (Midnight of March 1 or, if March 1 is not a business day, midnight of the first business day thereafter), in the source's compliance account that is not less than the total tons of CO emissions for the control period. A unit is subject to this requirement starting on the later of January 1, 2009 or date the unit commences operation.

For each control period in which one or more units at a source are subject to the Program, the authorized account representative of the source must submit to the Department by the March 1st following the relevant control period, a compliance certification report for each source covering all such units.

3. Professional Services. The only local government affected by the Program, the JBPU, may need to hire outside professional consultants to comply with the Program and the amendments to Part 200. This work would likely be associated with any analyses of the Program. If it is determined that capital investments are needed to comply, design and construction management services will likely need to be procured.

4. Compliance Costs. In addition to the costs identified for regulated parties and the public, state and local governments will incur costs. The Jamestown Board of Public Utilities (JBPU), a municipally owned utility, owns and operates the S.A. Carlson Generating Station (SACGS). Since the emissions monitoring at SACGS currently meets the monitoring provisions of the Program, no additional monitoring costs will be incurred.

Notwithstanding this, the JBPU will need to purchase allowances equal to the number of tons emitted. The Department limited the analysis of control costs to the purchase of allowances to comply with the Program and assumed the costs of allowances will be $3 per ton for CO.² To estimate total costs for SACGS under the Program, the Department reviewed 2002 through 2004 emissions from Jamestown's affected unit. The highest emissions from the affected unit during that time frame were approximately 41,772 tons. Purchasing allowances to cover emissions will result in estimated costs of approximately $125 thousand annually. These costs will eventually be passed on to the consumers of electricity from the JBPU.

The JBPU has a range of compliance options open to it and can utilize the flexibility inherent under the Program to comply. Since the Program has a three year control period with the compliance obligation at the end of the control period, the emission peaks associated with electricity generation will be averaged out and more long term planning options will be available to SACGS. In addition, the Program allows affected sources to offset up to 3.3 percent of their emissions utilizing reductions from emission categories outside of the regulated sector.

5. Minimizing Adverse Impact. The promulgation of the Program and the amendments to Part 200 do not directly affect small businesses. Only one local government is affected by the Program, the JBPU. The Program constitutes an emissions allowance based cap and trade program. Cap and trade systems are the most cost effective means for implementing emission reductions from large stationary sources. By implementing the Program in such a manner, the Department will minimize the adverse economic impacts of the Program on the JBPU.

6. Small Business and Local Government Participation. The JBPU actively participated in the public forums established by the Department to discuss the Program with interested parties.

7. Economic and Technological Feasibility. The JBPU has the option to do any combination of the following to comply with the Program: increase the efficiency of the natural gas-fired turbine, co-fire biofuel; purchase allowances, or purchase offsets. It has never been demonstrated that any or all of these options are technologically or economically infeasible to apply to SACGS.

¹ In addition to New York, the other states participating in RGGI are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, and Vermont.

² Regional Greenhouse Gas Initiative (RGGI): New York Electricity Sector Modeling Results, September 15, 2006, DRAFT.

Revised Rural Area Flexibility Analysis

TYPES AND ESTIMATED NUMBER OF RURAL AREAS AFFECTED

The promulgation of the Program and the amendments to Part 200, apply to affected sources statewide. All public and private businesses subject to the regulations regardless of location, including those in rural areas, will be affected.

REPORTING, RECORDKEEPING AND OTHER COMPLIANCE REQUIREMENTS

The promulgation of the Program and the amendments to Part 200, apply to affected sources statewide. All public and private businesses subject to the regulations, that are located in rural areas, will be subject to the reporting, record keeping and compliance requirements detailed below.

The Program will require affected sources and units to comply with the emission limitation of the Program beginning with the 2009 – 2011 control period. In order to meet the necessary permit requirements, the authorized account representative of each Program unit shall submit to the Department a complete CO Budget permit application by January 1, 2009 or 12 months before the unit commences operation.

The owners and operators and, to the extent applicable, the authorized account representative of each source subject to the Program and each unit at the source shall comply with the monitoring and reporting requirements thereof.

Each control period, the owners and operators of each source shall hold a number of CO allowances available for compliance deductions, as of the CO allowance transfer deadline (midnight of March 1st, or if March 1st is not a business day, midnight of the first business day thereafter), in the source's compliance account that is not less than the total tons of CO emissions for the control period. A unit is subject to this requirement starting on the later of January 1, 2009 or date the unit commences operation.

COSTS

Introduction

The Department sought input from the New York State Energy Research and Development Authority (NYSERDA) and the New York State Department of Public Service (DPS) with respect to the costs and other impacts associated with compliance with the Program. The analysis provided by NYSERDA includes modeling of the electricity sector showing the impacts of RGGI. ICF International (ICF) was contracted by NYSERDA to perform the modeling analysis. ICF utilized the Integrated Planning Model (IPM®), a nationally recognized modeling tool that is used by the EPA, state energy and environmental agencies, and private sector firms such as utilities and generation companies. The Department also analyzed the costs associated with state and local governments' compliance with the Program and considered analysis of the impacts the Program may have on the state economy.²

Costs to the Regulated Sources and the Public

The modeling analysis and review process was coordinated by NYSERDA staff, working closely with the Department and DPS staff, as well as staff from each regional Independent System Operator (ISO, a federally regulated regional organization which coordinates, controls and monitors the operation of the electrical power system of a particular state) staff and the RGGI Staff Working Group, consisting of energy and environmental representatives from all of the states participating in the Program.

To estimate the potential impacts of the Program, IPM® was used to compare a future with the Program (Program Case) to a business-as-usual (BAU) Case that projects what the electricity system would look like if the Program were not implemented. The modeling assumptions and input data were developed through an extensive stakeholder process with representatives from the electricity generation sector, business and industry, environmental advocates and consumer interest groups. Modeling results were presented to stakeholders for review and comment throughout the process of developing the RGGI proposal.

Assumptions and sources of input data are specified in detail in the “Assumption Development Document: Regional Greenhouse Gas Initiative Analysis.”³ Key assumptions and data include regional electricity demand, load shapes, transmission system capacities and limits, generation unit level operation and maintenance costs and performance characteristics, fuel prices, new capacity and emission control technology costs and performance characteristics, zonal reliability requirements, reserve margins, Renewable Portfolio Standard requirements, national and state environmental regulations, and financial market assumptions. All estimates are based on 2003 dollars. Regional electricity demand growth projections, transmission capacities and limits, and near-term expected infrastructure additions/retirements were provided by the regional ISOs. Long range Henry Hub natural gas prices, based on forecast data from Energy and Environmental Analysis, Inc. were projected to be approximately $7/MMBtu (constant 2003 dollars).

Building new coal-fired and nuclear plants were precluded as an economic choice to meet projected capacity shortfalls within the RGGI region. However, a 600 MW Integrated Gasification Combined Cycle (IGCC) coal plant with 50 percent carbon capture capability was assumed to be operational in upstate New York by 2018 in response to the State's Advanced Clean Coal Power Plant Initiative. New nuclear units were also precluded outside the RGGI region. A national 3-pollutant policy (SO, NO and mercury) that approximates the Clean Air Interstate Rule (CAIR) and the Clean Air Mercury Rule (CAMR) is assumed as well as the achievement of RPS in individual states.

Under the BAU Case, generation from new gas-fired combined cycle units is projected to supply most of the growing electricity demand. Generation from gas-fired plants is projected to approximately double from 36,307 Gigawatt hours (GWh) in 2006 to 64,934 GWh in 2021. (However, note that as recently as 1999, New York's gas-fired generation reached as high as 46,000 GWh.) Generation from new renewable resources (primarily wind units) is projected to increase significantly in response to RPS requirements. While nuclear generation is projected to increase by about two percent between 2006 and 2021 due to capacity up-rates at existing plants, generation from coal-fired plants is projected to increase by about 17 percent between 2015 and 2018 with the addition of the new proposed IGCC plant. Finally, generation from existing oil/gas steam units is projected to decrease over time, as a result of displacement by lower-cost electricity from new gas-fired units.

Net imports of electricity into New York are projected to decrease from approximately 21,000 GWh in 2006 to approximately 10,000 GWh in 2021. Underlying the projected decrease in net imports to New York is the increasing reliance on generation from new gas-fired units in neighboring Mid-Atlantic States. Generally, electricity flows from one region to another because of price differentials between those regions. As gas-fired generation increasingly sets market-clearing electricity prices in neighboring states, their electricity prices increasingly approach those of New York, where electricity prices are already largely determined by gas-fired generation.

CO emissions in the BAU Case are projected to increase from approximately 52.9 million tons in 2006 to about 58.6 million tons in 2021. This increase is due primarily to the addition of new gas-fired power plants to meet projected load growth, but also includes the emissions from the new IGCC coal plant. There are several factors that contribute to the result showing that BAU emissions from the model in 2006 are lower than actual CO emissions reported to both the EPA and the Department over the period 2000 through 2004. The first is the use of total on-site emissions from cogeneration. Actual emissions reports to EPA and the Department are inclusive of on-site emissions while the modeling analysis reflects only the emissions associated with the electricity provided to the grid. A second contributing factor is an upward bias in emissions recorded by continuous emissions monitoring systems as reported to EPA.⁴ As a result, it is expected that emissions reported to EPA are on the order of two to 10 percent higher than actual emission. In contrast the modeling analysis was based on carbon emissions factors that are not subject to systematic errors in measurement. Lastly, significant changes to the electricity sector also contribute to the difference between BAU emissions and 2000 to 2004 actual emissions. These include the addition of new natural gas-fired combined cycle capacity and new renewable resources as well as the updating of existing nuclear units.

Several assumptions were made to project the impacts of the Program in the Program Case. The Program was applied to electricity generators 25 MW and larger in nine northeastern and mid-Atlantic states including New York, Maine, New Hampshire, Vermont, Connecticut, New Jersey, Massachusetts, Rhode Island, and Delaware. For modeling purposes, the proposed initial CO cap is assumed to be “current” emission levels. The initial cap level, stabilizing emissions at current levels, is implemented in 2009 through 2015. From 2015 until 2019, the cap is reduced linearly so that emission levels in 2019 are capped at 10 percent below current levels. The Program Case allows a limited number of emission offsets to be purchased by affected generators and used for compliance. The Program Case assumes that all RGGI states extend current annual levels of public benefit expenditures on end-use energy efficiency programs through 2025. Further, the public benefit programs are assumed to continue to deliver annual electricity end-use reductions at the same incremental cost as reported in most recent years. This assumption results in regional electricity demand in each year being lower in the Program Case than in the BAU Case.

Several types of results between the Program Case and the BAU Case are compared including generation mix, net electricity imports, changes in generation capacity, CO emissions, CO allowance prices, and wholesale and retail electricity price impacts.

The generation mix in New York under the Program Case reflects the continuation of energy efficiency projects and the change in build mix. Electricity generation from gas-fired units in 2021 is about 10,600 GWh or 16 percent lower in the Program Case than in the BAU Case. Net imports into New York in 2021 are projected to be about 4,000 GWh or 40 percent higher in the Program Case than in the BAU Case. However, the projected imports in 2021 in the Program Case are about 7,000 GWh or 33 percent lower than BAU Case imports in 2006. The total electricity requirement (generation plus net imports) is lower in the Program Case by about 7,000 GWh (3.7 percent) in 2021, due to the higher level of end-use energy efficiency expenditures assumed in the Program Case.

Relative to the BAU Case, total capacity additions in the Program Case are 757 megawatts lower (10 percent) in 2015 and 918 megawatts lower (eight percent) in 2021. The block of avoided capacity additions due to RGGI is comprised almost entirely of gas-fired combined-cycle units.

CO emissions from New York generators are projected to be 5.1 million tons (8.7 percent) lower in 2021 for the Program Case as compared to the BAU Case. The initial cap level, which stabilizes emissions at current levels, is proposed to be implemented in 2009 through 2015. From 2015 until 2019, the cap is reduced linearly so that emission levels in 2019 are capped at 10 percent below current levels. CO emissions from the electricity sector are projected to remain approximately flat between 2006 and 2021, rather than decreasing, as might be suggested by the decreasing cap level over the last five years of this period. This result is expected because RGGI-affected sources are allowed to bank emission allowances in the early years of the policy for use in later years when the cap becomes more stringent. Further, a portion of the cap is projected to be achieved by the use of offsets based on emission reduction projects implemented in sectors outside the electricity sector. Through 2021, about 70 percent of the CO emission reductions resulting from RGGI are projected to be achieved by on-system reductions by the electricity sector, while about 30 percent are projected to be achieved by purchasing emission offsets.

Under the Program Case, New York's wholesale electricity prices (including both energy and capacity costs) are projected to be $1.04/MWh higher in 2015 and $1.51/MWh higher in 2021, than the BAU Case. RGGI is projected to increase wholesale electricity prices by about 1.6 percent in 2015 and 2.4 percent in 2021. For a typical New York residential customer (using 750 kWh per month), the projected increase in wholesale electricity prices in 2015 (1.6 percent) translates into a monthly retail bill increase of about 0.7 percent or $0.78. In 2021, the projected increase in wholesale electricity prices (2.4 percent) translates into a monthly residential retail bill increase of about 1.0 percent or $1.13. For commercial customers, the projected retail price impact of RGGI is about 0.9 percent in 2015 and 1.2 percent in 2021. For industrial customers, the projected retail price impact of RGGI is about 1.7 percent in 2015 and 2.4 percent in 2021.⁵

The analysis conducted by ICF did not identify any New York generation facilities as candidates for retirement due to the costs imposed by the Program. DPS, NYSERDA and the Department developed a two phase analysis to test that result. The analyses focused on generating units that are considered necessary to the reliable operation of New York State's bulk power system. The selection of those units was based on provisions in the New York State Reliability Council's reliability rules which require their operation under certain conditions.

The first phase of the analysis was performed by DPS using plant specific data, combined with zone-specific modeling output (i.e. projected kWh, energy prices, etc.) from IPM®. This assessment predicted that the Program would result in small decreases in net operating revenue for certain of the units being studied while others actually did better under a future with RGGI, and supported ICF's conclusion that the units would not retire. The second phase of the analysis conducted by the DPS consisted of more detailed modeling with General Electric's MAPS model. The second phase analysis confirmed the results of the first phase analysis. In summary, the two-phase reliability analysis concluded that the Program would not adversely affect system reliability.

A macro-economic impact study of the Program was also conducted at the direction of the RGGI state agencies through the Massachusetts Division of Energy Resources to estimate the potential impact of the Program on the economies of participating states.⁶ The study used a computer model called the Regional Economic Models, Inc. (REMI) model. The study concluded that the economic impacts of RGGI on the economies of the participating states, including New York, were very small and generally positive.

MINIMIZING ADVERSE IMPACT

The promulgation of the Program and the amendments to Part 200, apply to affected sources statewide, including those located in rural areas. Since the regulations apply equally to affected facilities statewide, rural areas are not impacted any differently than other areas in the State. The Department is implementing the Program through a cap-and-trade program. Allowance based cap and trade systems are the most cost effective means for implementing emission reductions from large stationary sources, therefore the Department has attempted to minimize the adverse economic impacts of the Program to all sources on a statewide basis.

RURAL AREA PARTICIPATION

Since the announcement of the Regional Greenhouse Gas Initiative in September of 2003, Department staff held numerous stakeholder meetings with affected parties and various representative coalitions and consultants to the electric industry. Copies of the draft regulations were forwarded to all affected parties prior to initiating the promulgation of the regulations and interested parties afforded informal opportunities for public comment.

¹ In addition to New York, the other states participating in RGGI are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, and Vermont.

² “REMI Impacts for RGGI Policies based on the Std REF & Hi-Emission REF”, by the Economic Development Research Group, dated November 17, 2005.

³ The modeling assumptions document and the tabular results for each modeling run are located at http://www.rggi.org/documents.htm

⁴ Russel S. Berry and Jack C. Martin (RMB Consulting and Research, Inc.) and Charles E. Dene (Electric Power Research Institute). “CEMS Analyzer Bias and Linearity Effects Study.” rmb-consulting.com/newpaper/cable/cable.htm

⁵ Typical customer usage numbers from U.S. Department of Energy, Energy Information Administration (EIA). Average electricity prices from NYSERDA, ‘Patterns and Trends’ (December 2005).

⁶ REMI.

Revised Job Impact Statement

1. Nature of Impact: On December 20, 2005, New York State entered into a historic regional agreement to reduce greenhouse gas (GHG) emissions from power plants, an important step to protect our environment and meet the significant challenge of climate change. Under the agreement, the governors of 10 Northeastern and Mid-Atlantic states have committed to propose the Regional Greenhouse Gas Initiative (RGGI), a program to cap and reduce carbon dioxide (CO) emissions from power plants in the region by 10 percent by 2019, for adoption in their states.¹ In order to carry out the State's commitment, the Department of Environmental Conservation (the Department) is proposing to establish the CO Budget Trading Program (the Program) by promulgating 6 NYCRR Part 242, and to revise 6 NYCRR Part 200, General Provisions.

Based on analyses conducted for the RGGI states by the Economic Development Research Group, the Program is expected to have a very modest net positive impact on economic growth in New York and in the region.² As such, the Program will have minimal positive impacts on overall job and employment opportunities. Electricity generators will incur costs related to the requirements of the Program and based on the modeling this will translate into modest increases in electricity costs.

2. Categories and Numbers Affected: The Department sought input from the New York State Energy Research and Development Authority (NYSERDA) and the New York State Department of Public Service (DPS) with respect to the costs and other impacts associated with compliance with the Program. The analysis provided by NYSERDA includes modeling of the electricity sector showing the impacts of RGGI. ICF International (ICF) was contracted by NYSERDA to perform the modeling analysis. ICF utilized the Integrated Planning Model (IPM®), a nationally recognized modeling tool that is used by the EPA, state energy and environmental agencies, and private sector firms such as utilities and generation companies. The Department also analyzed the costs associated with state and local governments' compliance with the Program and considered analysis of the impacts the Program may have on the state economy.³ In addition, a jobs impact analysis has been provided based on NYSERDA's experience with the Energy $mart Program and their administration of energy efficiency programs that are very similar to those that will be funded with auction proceeds.

Costs to the Regulated Sources and the Public

Assumptions and sources of input data are specified in detail in the “Assumption Development Document: Regional Greenhouse Gas Initiative Analysis.”⁴ Key assumptions and data include regional electricity demand, load shapes, transmission system capacities and limits, generation unit level operation and maintenance costs and performance characteristics, fuel prices, new capacity and emission control technology costs and performance characteristics, zonal reliability requirements, reserve margins, Renewable Portfolio Standard requirements, national and state environmental regulations, and financial market assumptions. All estimates are based on 2003 dollars. Regional electricity demand growth projections, transmission capacities and limits, and near-term expected infrastructure additions/retirements were provided by the regional ISOs. Long range Henry Hub natural gas prices, based on forecast data from Energy and Environmental Analysis, Inc. were projected to be approximately $7/MMBtu (constant 2003 dollars).

CO emissions in the BAU Case are projected to increase from approximately 52.9 million tons in 2006 to about 58.6 million tons in 2021. This increase is due primarily to the addition of new gas-fired power plants to meet projected load growth, but also includes the emissions from the new IGCC coal plant. There are several factors that contribute to the result showing that BAU emissions from the model in 2006 are lower than actual CO emissions reported to both the EPA and the Department over the period 2000 through 2004. The first is the use of total on-site emissions from cogeneration. Actual emissions reports to EPA and the Department are inclusive of on-site emissions while the modeling analysis reflects only the emissions associated with the electricity provided to the grid. A second contributing is an upward bias in emissions recorded by continuous emissions monitoring systems as reported to EPA.⁵ As a result, it is expected that emissions reported to EPA are on the order of two to 10 percent higher than actual emission. In contrast the modeling analysis was based on carbon emissions factors that are not subject to systematic errors in measurement. Lastly, significant changes to the electricity sector also contribute to the difference between BAU emissions and 2000 to 2004 actual emissions. These include the addition of new natural gas-fired combined cycle capacity and new renewable resources as well as the updating of existing nuclear units.

CO allowance prices (the cost of complying with RGGI) are projected to increase from approximately $2/ton in 2009 to about $3.00/ton in 2015 and about $4.45/ton in 2021. The availability of emissions offsets to meet a limited portion of the emission reduction requirement (as allowed by the Program) contributes significantly to maintaining CO allowance prices below the $7/ton offset expansion threshold specified.

A macro-economic impact study of the Program was also conducted at the direction of the RGGI state agencies through the Massachusetts Division of Energy Resources to estimate the potential impact of the Program on the economies of participating states.⁷ The study used a computer model called the Regional Economic Models, Inc. (REMI) model. The study concluded that the economic impacts of RGGI on the economies of the participating states, including New York, were very small and generally positive.

NYSERDA currently administers, through the New York Energy $mart Program, energy efficiency and clean energy technology programs that are very similar to those that will be funded with auction proceeds under the CO Allowance Auction Program. A 2006 Macroeconomic Impact Analysis of the New York Energy $mart Program concluded that expenditures under that program created approximately 4.8 new sustained jobs per $1 million of program funds spent. The following chart illustrates the breakdown of jobs created per sector:

2006 Update

Economic Sector	% of Total Added Jobs Through 2006
Agriculture, Forestry, and Mining	0.60%
Construction	10.52%
Products Manufacturing	5.07%
Equipment and Instrument Manufacturing	6.46%
Transportation, Communication, and Other Public Services	3.30%
Wholesale and Retail Trade	30.86%
Personal and Business Services	52.81%
Electric utilities	−9.63%
Total	100%

The results of the Macroeconomic Impact Analysis were published in the March 2007 New York Energy $mart Evaluation Report, which is available on NYSERDA's website at: http://www.nyserda.org/Energy_Information/evaluation.asp.

3. Regions of Adverse Impact: A statewide analysis was performed for the Program and the modeling predicts that the statewide average increase in wholesale electricity prices will be 1.6 percent in 2015 and 2.4 percent in 2021.

4. Minimizing Adverse Impact: The Department is implementing the Program through a cap-and-trade program. Allowance based cap and trade systems are the most cost effective means for implementing emission reductions from large stationary sources. By implementing the Program through an allowance based cap and trade system, the Department has attempted to minimize the adverse economic impacts including the adverse employment impacts of the Program.

5. Self-Employment Opportunities: Not applicable.

¹ In addition to New York, the other states participating in RGGI are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, and Vermont.

² REMI Impacts for RGGI Policies based on the Std REF & Hi-Emission REF” by the Economic Development Research Group, dated November 17, 2005.

³ REMI.

⁴ The modeling assumptions document and the tabular results for each modeling run are located at http://www.rggi.org/documents.htm

⁵ Russel S. Berry and Jack C. Martin (RMB Consulting and Research, Inc.) and Charles E. Dene (Electric Power Research Institute). “CEMS Analyzer Bias and Linearity Effects Study.” rmb-consulting.com/newpaper/cable/cable.htm

⁶ Typical customer usage numbers from U.S. Department of Energy, Energy Information Administration (EIA). Average electricity prices from NYSERDA, Patterns and Trends (December 2005).

⁷ REMI.

Summary of Assessment of Public Comment

The New York State Department of Environmental Conservation (Department) is proposing to establish 6 NYCRR Part 242, CO Budget Trading Program, which is designed to stabilize and then reduce anthropogenic emissions of carbon dioxide (CO), a greenhouse gas (GHG), from CO budget sources in an economically efficient manner. The New York State Energy Research and Development Authority (Authority) is proposing to establish 21 NYCRR Part 507, CO Allowance Auction Program, which implements essential segments of the CO Budget Trading Program.

The Department proposed Part 242, and the Authority proposed Part 507, on October 24, 2007. Hearings were held in Albany, NY on December 10, 2007, in Ray Brook, NY on December 11, 2007, in New York City, NY on December 12, 2007, and in Avon, NY on December 13, 2007. The comment period closed on December 24, 2007. The Department and the Authority received written and oral comments from approximately 10,000 commenters on the proposed regulations. All of these comments have been reviewed, summarized, and responded to by the Department and the Authority.

Commenters generally support the Department's and the Authority's adoption of the CO Budget Trading Program and CO Allowance Auction Program (collectively “the Program”), although many, primarily electric generators and those affiliated with the energy industry, are opposed to the Program for various reasons. Comments address legal issues, proposed revisions to the regulations, implementation, and the potential benefits and impacts of the Program.

Several commenters challenge the Department's and the Authority's statutory authority to establish the Programs. Specifically, it is asserted that the Department and the Authority cannot establish the Program without legislative expression of a statewide policy addressing global climate change. In response, the Department and the Authority cite extensive statutory authority which overwhelmingly supports the Department's and the Authority's statutory authority to establish the Programs. Principally, the Department has the authority to enact the Program pursuant to New York State Environmental Conservation Law (ECL) Sections 19-0103 and 19-0301. The Department's broad authority to develop regulatory programs derives primarily from its obligation to prevent and control air pollution, as set out in the ECL at Sections 1-0101, 1-0303, 3-0301, 19-0103, 19-0105, 19-0107, 19-0301, 19-0303, 19-0305, 71-2103, 71-2105. Further, the Department's obligation to preserve and protect natural resources and public health in the State as it relates to climate change also extends beyond the control of air pollution, as set out in ECL Sections 11-0303, 11-0305, 11-0535, 13-0105, 15-0109, 15-1903, 16-0111, 17-0303, 24-0103, 25-0102, 34-0108, and 49-0309 and the Energy Law Sections 3-101 and 3-103.

Similarly, the general powers of the Authority that are relevant to the Program's ability to sell allowances in an auction are set forth in the Public Authorities Law (PAL) Sections 1851, 1854 and 1855. Under the Program, the Authority's activities would include the conduct of allowance auctions and the administration of the Energy Efficiency and Clean Energy Technology Account (Account). The statutory provision relevant to the Authority's statutory authority to accept the allowances allocated to it by the Department is PAL Section 1855, subsections 10, 14 and 17.

Commenters also argue that although the Legislature has never authorized the Authority to issue or sell regulatory licenses/permits, the Program purports to empower the Authority to auction allowances, which constitute licenses/permits under New York State law. The Department and the Authority disagree with this contention and believe that the allowances themselves are not permits or licenses under New York Law. Rather, an allowance is a condition of an operating permit that constitutes a limited authorization to emit up to one ton of CO.

Another significant comment states that the Program constitutes taxation in contravention of the New York State Constitution. Alternatively, commenters argue that if the Program does not impose a tax, the Program is ultra vires because the Department and the Authority lack the statutory authority to create fees.

The Department and the Authority do not believe that the Program constitutes a tax. The primary purpose of this measure is to discourage the emissions of CO. The sale and auction of allowances will help create CO allowance price signals at a level sufficient to cause investment in technologies and strategies that would reduce or avoid emissions of CO. Similarly, the Program does not implement a fee. Rather, the Department is requiring owners and operators of each CO budget unit at the source to acquire allowances either at an auction or in the secondary market.

Regarding reliability, many commenters suggest that the Program might have an impact on electric system reliability; some further allege that the modeling conducted to assess potential impacts on reliability is inadequate. Notwithstanding this, the New York Independent System Operator (NYISO), ICS Consulting, and the Department of Public Service (DPS) each concluded that reliability would not be impacted. Based on their research, these entities all found that no generating facility would be forced to retire as a result of the Program.

Several commenters expressed concern over the potential for leakage. Concerns regarding cost effectiveness, price increases for energy in RGGI states, utility diminishment, and importation of energy from non-RGGI states are also expressed. In response, the Department submitted a final report of the RGGI Emissions Leakage Workgroup dated March 31, 2008. Among other things, the report includes: 1) information about the tracking of potential leakage, 2) a number of possible leakage mitigation policies, and 3) information about the current political momentum towards a national cap-and-trade program.

Although the Department and the Authority provided an unprecedented amount of public comment on the model rule, pre-proposal and the proposed Program and Draft Generic Environmental Impact Statement (DGEIS), some commenters note that the comment period was insufficient. The Department and the Authority strongly disagree with this comment because the public had ample opportunity over several years to engage in the unprecedented stakeholder process. RGGI included an extensive stakeholder process in which an expert Resource Panel was assembled to provide the RGGI states with assistance in the development of a framework for a regional carbon cap-and-trade program.

To supplement the regional stakeholder process, New York carried out its own stakeholder process which was designed to afford additional opportunities to provide input directly to New York's representatives. On December 5, 2006, the Department released a pre-proposal draft of the Program after which it held a public meeting. The Department allowed stakeholders and the public the opportunity to provide written comments which were then reviewed and considered in the development of the Program. On October 24, 2007, the Department and the Authority formally proposed the Program which was also followed by public hearings. In response to these comments, the Department and the Authority are proposing revised rules.

Comments were also received requesting additional offset categories, including tail pipe emissions projects, biomass, and forest products, among others. The Department responded that it will not deviate from the five categories included in the original proposal, but it will work with the other RGGI states to determine additional categories in the future.

In addition to the offset comments, several comments regarding the auction component of the Program were received which center on the structure of the auction system, the transparency of its operation, the pricing and allocation of allowances and the implementation of the Account. Many comments are directed at the perceived potential for manipulating the auction process, and the need for a “robust” oversight and monitoring system. The Department and the Authority responded by amending the rule to provide for an independent monitor to observe the conduct and outcome of each auction and activity among and between the allowance accounts looking for collusion, price manipulation or unfair market power.

Concern is also voiced about the use of a reserve price in the auctions. Several comments expressed concern that allowances not sold would be taken out of the market or have their market entry delayed. Others said that a reserve price creates an artificial floor. The Department's and the Authority's decision to use a reserve price was based upon extensive analysis by the Authority's research team with stakeholder input. Both the Authority and the Department agree that the reserve price protects against the possibility of collusion and provides a price signal that supports a minimum rate of investment in technologies and strategies that reduce CO emissions.

Several comments are directed at the structure and implementation of the Account. Furthermore, while many support the Authority as the appropriate manager of auction proceeds and suggest that an oversight committee to assist with distribution issues would also be appropriate, some make specific requests that the auction proceeds flow back to certain entities or for specific purposes, including rate payer relief.

The Authority responded that the proceeds raised through the sale of allowances will be used to promote and implement programs for energy efficiency, renewable or non-carbon emitting technologies, and innovative carbon emissions abatement technologies with significant carbon reduction potential. The Authority will periodically convene an advisory group of stakeholders representing a broad array of energy and environmental interests to advise it on how to best utilize the funds to achieve the goals of the Account. As part of initial program development, the Authority will outline draft program guidelines and funding criteria for the Account. Stakeholders will have an opportunity to provide input and comment on these guidelines through the stakeholder advisory group and open public comment. Subsequently, a draft multi-year operating plan will be presented to the stakeholder advisory group for comment. An annual program evaluation and progress report will be prepared and shared with the stakeholder advisory group and the public.

In response to several comments, Part 507.6 of the Auction Program has been revised to accommodate quarterly auctions. The rule now provides that they will be held at least quarterly or “as often as necessary to effectuate the objectives of the budget trading program.” Further, in response to several comments, the Department and Authority state that they are committed to making nearly 100 percent of the allowances for sale.

A majority of comments voice support for a regional auction that uses a uniform price auction formula. Accordingly, Part 507 has been revised to provide that participation in a multi state auction is the preferred approach. New York State will not take place in the first scheduled auction in September, but plans to participate in the December multi State auction.

Concerns regarding the potential participation of eligible companies in the auction were also expressed. In response, the revised regulations allow the Authority to limit the participation of any applicant or bidder found to have violated any rule, regulation or law associated with any commodity market. The Authority also may limit eligibility to participate in any auction to the level of security provided. Finally, the Program was revised to require public disclosure of auction related auction results.

Apart from the auctions, some commenters allege that the Department and the Authority did not comply with the requirements of the State Environmental Quality Review Act (SEQRA) because the DGEIS was incomplete. To address this concern, the Department and the Authority are preparing a Supplemental DGEIS to consider aspects of the Program that were not fully developed at the time the initial DGEIS was prepared.

Some commenters are concerned about the possible costs of the Program to both regulated facilities and electricity consumers. They oppose the decision to auction nearly 100 percent of the allowances, rather than allocate the allowances for free; they also claim that a price cap is needed in order to protect consumers. The Department and the Authority responded that a price cap would have no impact on the cost to consumers because it would not affect the price of allowances on the secondary market. Moreover, the investment of auction proceeds in energy efficiency will reduce electricity demand and thus lessen any increase in cost to consumers caused by the Program.

Several comments were received regarding the behind-the-meter exemption. Some commenters express an opinion that there should be no such exemption, while others feel that the exemption is not large enough. The Department included this provision to create a limited exemption for industrial sources, not typically regulated in New York as electric generators, that provide little or no electrical output to the grid.

Most comments received regarding the voluntary renewable set-aside support this provision, while a small number oppose it. In particular, commenters addressed the 700,000 ton amount of the set-aside. Adjustments to the amount of the set-aside can be made through amendments to the regulation if the set-aside is determined to be over or under subscribed.

A number of commenters recommend that a sunset provision be included that is contingent upon the enactment of a Federal cap and trade or other climate change program. The Department and the Authority anticipate that they will repeal or amend the regulations to comport with the Federal program, in the event such a program is established.

Several comments address the Department's inclusion of a Long-term Contract (LTC) set-aside of 1.5 million allowances. The vast majority of these comments are opposed to the set-aside, while a small number of commenters urged an increase in the size of the set-aside. The Department created the set-aside to accommodate the small number of generators able to demonstrate a financial hardship created by having to purchase allowances. The Department made revisions to the Program to further limit the use of the set-aside, including requiring that the allowances be used for compliance only.

A substantial number of comments were received that express support for the Program and New York's participation and leadership in RGGI. The Department acknowledged that adequately addressing climate change issues will eventually require economy-wide regulation.

Many commenters suggest that the emissions cap is set too high and request that the Department consider re-evaluating the numbers to reflect the reduction in emissions since 2005. Other commenters note that if the cap is too high in 2009, an artificially low market would be created. The Department maintains that the base budget will be used and will not be revisited at this time; however, there will be annual updates that may be used to adjust the cap if necessary.

Finally, many comments were received that provided specific recommendations for changes to or clarifications of the regulatory language, such as definitions and permitting requirements. In each instance, the Department and the Authority explained the reasoning behind the inclusion of the particular language, and in some cases made the suggested changes to the regulations.

ENV-43-07-00028-RP New York State CO Budget Trading Program

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