RGGI participating states comment on Virginia’s proposed emissions trading regulation

On 9 April 2018, the nine US-states participating in the Regional Greenhouse Gas Initiative (RGGI) submitted joint comments to the state of Virginia concerning the consistency of Virginia’s proposed regulation for emissions trading with the RGGI states’ 2017 Model Rule, a set of directions providing the basis for each RGGI state’s CO2 Budget Trading Program. The RGGI states applauded Virginia’s move to draft a cap-and-trade regulation and have been in talks with Virginia officials over the past months.

In November 2017, the Air Pollution Control Board of Virginia’s Department of Environmental Quality (DEQ) released a draft regulation proposing   to join RGGI by 2020. According to the RGGI Model Rule, any potential member state first needs to establish a corresponding CO2 Budget Trading regulation so as to join the initiative. Only if key design elements between the Virginia regulation and the RGGI Model Rule are harmonized could the two systems be linked, ensuring the integrity of the carbon market while profiting from the benefits of an enlarged market.

Consequently, in their comments, the RGGI participating states primarily addressed the issue of regulatory compatibility:

• Offsets: While offsets are not mentioned in the DEQ’s draft regulation, RGGI participating states recommended that Virginia specify that entities limit their use of offsets to 3.3% of an entity’s compliance obligation –in line with the RGGI Model Rule. Whether or not Virginia decides to establish state-specific offset protocols would be up to the state’s discretion.
• Terminology harmonization: RGGI participating states also called for more consistent language in the proposed cap-and-trade regulation, suggesting the alignment of several terms, such as allowance and conditional allowance, with the 2017 RGGI Model Rule.
  
• Retiring unsold conditional allowances: The RGGI participating states suggested that it should not be possible for “conditional allowances” –those consigned but not yet distributed via auction – to be transferred unless it is for the purposes of being sold at auction, retired or withheld as a result of the Emissions Containment Reserve.
• Inclusion of power plants with mixed fuels: In Virginia’s draft regulation, the definition of regulated entities includes power plants where fossil fuels contribute more than ten percent of the annual heat input. The RGGI Model Rule, by contrast, sets a threshold of five percent. The RGGI participating states therefore recommended that the Virginia rule be as least as stringent as the Model Rule. Defining a threshold level is important because thermal plants can be fuelled with biomass or fossil fuels alike.
  

• Including combined heat and power plants: Combined heat and power plants that primarily generate energy for use at the facility – e.g. to provide heat and electricity at an industrial plant – are exempt in Virginia’s draft regulation. In the 2017 RGGI Model Rule, facilities that provide less than ten percent of their power output to the grid (and the remainder to the facility where they are located) are exempted from compliance obligations. In their comments, the RGGI member states suggested Virginia to adopt this definition as well.

 

RGGI participating states also commented on the proposed stringency of Virginia’s cap. In Virginia’s proposed regulation, the DEQ outlined two emissions caps of 33 or 34 million short tons in 2020, which would then decline by three percent a year to 2030. Pointing to their own experience of higher-than-anticipated emissions reductions, RGGI participating states urged Virginia to adopt an ambitious cap trajectory as Virginia would be likely to have similar opportunities to reduce emissions more than expected due to new investments planned by the state in energy efficiency and renewable programs. According to their comments, setting the initial cap at a more ambitious level would be important for Virginia as allowances would be allocated freely to utilities for consignment auctions.