The Connecticut Department of Environmental Protection (“DEP”) has submitted for legislative approval regulations to control carbon dioxide (CO2) emissions and establish a CO2 emissions credit program.[i] The controversial regulations are designed to fulfill Connecticut’s commitment to the Regional Greenhouse Gas Initiative (“RGGI”), which establishes a CO2 emissions cap and trade program for power plants in nine Northeastern and Mid-Atlantic states.[ii] RGGI is designed to be a model for a broader, national market-driven program to establish a market value for greenhouse gas (“GHG”) emissions to provide incentives for reducing GHG emissions over the long term.
Carbon dioxide is the most significant GHG by volume. Unlike many other pollutants emitted by the combustion of fossil fuels, there are no commercially available control technologies to limit CO2 emissions. Therefore, programs to reduce GHG emissions focus on improving energy efficiency, reducing the use of fossil fuels through conservation efforts, and using renewable and alternative fuels.
[i] Proposed Conn. Agencies Regs. § 22a-174-31 and 31a.
[ii] Information about RGGI can be found at http://rggi.org.
The regulations impose a tonnage cap on CO2 emissions from large fossil fuel-fired electricity generating units in Connecticut. The initial tonnage cap is 10.7 million tons. The regulations seek to stabilize CO2 emissions from these units in 2009-2014, then reduce those emissions by 2.5% per year in 2015-2018 from the electric utility sector. The regulations allow allocation of emissions offsets to be used for compliance where real reduction of greenhouse gases are achieved outside the regulated utility sector. They require auctioning of CO2 allowances and the use of auction proceeds for consumer benefit or strategic energy purposes as required by Conn. Gen. Stat. § 22a-200c.Finally, the regulations require a demonstration of compliance every three years.
The regulations must be approved by the Legislative Regulations Review Committee of the General Assembly before they can become effective. Significant controversy surrounds several of the key provisions which have been opposed by companies with electric generating facilities in the state.
One concern is that the CO2 allowance costs will push the price of electricity up for consumers, despite industry investments in energy efficiency. Critics of the regulation advocate direct per kilowatt-hour rate relief, which is not provided in the proposed regulations.
A second problem for the electric generating companies is the Department’s refusal to limit auction participation to RGGI regulated sources – the owners and operators of fossil-fueled electric generating facilities. DEP fears that closed auctions might result in lower prices for carbon allowances, due to lessened competition. However, with no cap on auction allowance prices, the regulated entities fear that financial speculators may drive up the price of this new commodity. There is also a significant concern that environmental organizations could purchase these allowances and “retire” them by taking them off the market, driving up the price of the remaining carbon allowances and possibly creating a shortage. Historical data suggests that generators in Connecticut may need 94% of the available allowances in 2009 in order to operate at levels expected to meet demand.
Another significant issue is that the proposed Connecticut regulations provide no cap or ceiling on the auction price for the CO2 allowances. DEP estimates that the allowance price in 2009 will be approximately $2 per ton, increasing to $5 per ton in 2024. The allowance price will have a direct impact on electric rates.
The anticipated rate impact prompted Maine, New Hampshire, and New Jersey to establish cap mechanisms to protect consumers. Maine established a limit of $5 per ton, the highest price estimated by Connecticut DEP, beyond which auction proceeds would be applied to kilowatt-hour rebates to ratepayers. New Hampshire is establishing a $6 per ton rate cap, above which funds would be rebated to consumers, similar to the Maine auction provisions. New Jersey has mandated that if two consecutive regional auctions result in allowance prices above $7 per ton, an action plan must be developed for ratepayer relief.
Finally, the regulations provide that DEP will retain 7.5% of the funds realized from the auctions for administrative costs and programs to mitigate the impacts of climate change, despite the fact that the agency concedes that it only needs a quarter of this retainage to cover the administrative costs of the program.
The proposed regulations were submitted to the Regulations Review Committee on June 6, 2008. The Committee has 65 days to approve, recommend modifications, or reject the proposed regulations. Whether the regulations will be in place before the first RGGI auction scheduled in September remains to be seen.
Gregory A. Sharp
Murtha Cullina LLP