California GHG Cap and Trade Program

1. California GHG Cap and Trade Program Clare Breidenich Western Power Trading Forum

2. Overview • Background • Program Scope • Electricity Imports • Allowance Distribution • Market Rules • Looking Ahead

3. Background

4. AB32 • Reduce GHG emissions to 1990 levels by 2020 • Emissions to be further reduced after 2020 • Emission reduction measures to be in place by 1/2012 • Mandatory reporting and verification of GHG emissions • Must cover emissions from all electricity consumed in state • Authorizes market-based mechanisms, but does not require • Contains safety-valve

5. Implementation Status • Regulation in force as of 2012 • Reporting • Registration • Auction • No emission obligation until 2013

6. Cap and Trade Scope

7. Program Scope • Declining annual cap on: • Electricity generation & imports, stationary combustion, energy-intensive manufacturing, petroleum refineries • As of 2015: Transportation fuels, & residential & commercial fuel consumption • CO2,CH4, N20, SF6, NF3, HFCs & PFCs • 25,000 MTCO2e annual emission threshold except non-specified power imports • Reported under Mandatory Reporting Rule • Voluntary participants: • Opt-in covered entities (incurs compliance obligation) • Voluntary associated entities (e.g. marketers, offset developers)

8. Compliance Obligation • Capped entities must surrender compliance instruments to cover emissions • 3 year compliance intervals (first period 2 years) • Retire instruments equal to 30% of previous year emissions in first two years • Remainder after 3rd year • Failure to surrender sufficient compliance instruments by deadline: • Compliance instrument penalty equal to 4 times the excess emissions • One fourth of penalty instruments may be offset credits • May be additional financial penalties, which escalate after 45 days

9. Treatment of Electricity Imports

10. Electricity Imports • All power generated and imported to state subject to program, except • Specified imports from facility that is below 25,000 MMT annual threshold • Wheel-throughs and exports that can be netted against imports within same hour • Compliance obligation falls on entity that delivers power to California (“First Jurisdictional Deliver”) • PSE on NERC tag between balancing areas • Facility operators or scheduling coordinator if no tag

11. Attribution of Emissions to Imports • Unspecified power assigned default emission rate • Initially set at .428 MT/MWH • Importers can claim facility - specific emission rate if • Facility is owned by or under contract to importer and registered as specified source, and • Power is directly delivered • Resource-shuffling prohibited • Defined as any plan, scheme or artificial to receive credit based on emission reductions that have not occurred, involving the delivery of electricity to the California grid. • Importers must submit annual attestation • Special emission rate for ‘asset-controlling suppliers’

12. Renewable Imports • Direct delivery of renewable power treated as specified import • “RPS Adjustment” for firming and shaping power, if: • Importer has contract for procurement of renewable generation or importing on behalf of entity that does • RECs generated must be used for compliance with RPS in same year firm and shaped power is claimed • Renewable resource is not located in a capped jurisdiction • Firmed and shaped power has emission rate less than default • Else power gets difference between default rate and facility specific rate

13. Allowance Distribution

14. Allowance Distribution by Purpose • Annual Caps distributed to separate pools: • One-time Carve-out for Price Containment Reserve • Allocation to electric utilities • Allocation to natural gas utilities ( as of 2015) • Allocation for covered industry sectors • Set-aside for voluntary renewable energy purchases • Any remainder to auction

15. Electric Sector Allocation • Allowances freely allocated to IOUs and POUs • IOUs must consign allowances received to ARB auction • Revenue must be used for consumer benefit, consistent with AB32 goals • POUs may consign to auction or retain to cover own compliance obligation • Generators, importers (including IOUs and other retail providers) must purchase allowances through auction or secondary market

16. Allowance Auctions and Sales • Consignment auction: • Utility-allocated allowances • Advance auction of future vintages • Price Containment Reserve (PCR) Sales: • Set-aside from annual caps • Penalty allowances • Auctions & PCR sales held quarterly • First consignment auction planned for August 15, 2012 • PCR sale 3 weeks after consignment auction

17. Consignment Auction • Format: • Sealed bid, single-round, uniform clearing price • Lots of 1000 MT • Different vintages auctioned separately • Auction Reserve price: $10/ ton initially • increases 5% annually + inflation • Open to all market participants • Must register 30 days prior • Financial assurance through bid guarantee • Purchase limits • 15% of auction volume for capped entities • Does not apply to IOUs • 4% for voluntary associated entities

18. Price Containment Reserve • Allowances sold from three equal-sized tiers: • Prices initially set at $40, $45 and $50 per ton • Increases 5% annually plus inflation • Only entities with compliance obligation may purchase • Allowances must be used for compliance • No purchase limits • Proceeds from PCR sales go to Air Pollution Control Fund

19. Market Rules

20. Transaction Rules • Holding limit on allowances (not offsets) for all participants • Set relative to annual cap; 6.02 MMT in 2012 • Does not apply to allowance in compliance accounts up to level of compliance obligation (emissions to date) • No restrictions on secondary transfers of allowances • Unlimited banking of allowances and offsets (subject to holding limit)

21. Use of Offsets • Limited use of offsets from California and other programs • 8% of compliance obligations • Of which ¼, increasing to ½, can be sectoral • Offsets subject to potential invalidation (buyer liability) up to 8 years after issuance • Currently approved offset categories • forestry; urban forestry; livestock management; and removal of ozone-depleting substances

22. Market Oversight • All participants must register in tracking system: • Disclosure of direct or indirect corporate associations & beneficial holdings • Applies for auction purchase limits and holding limits • General prohibition of manipulative or fraudulent behavior • Independent entity to be hired to monitor and report to CARB on functioning of market and behavior of participants

23. Looking Ahead

24. Expectations for 2012 • Formal Rule-making • Linkage of the California and Quebec systems • Revisions to cap and trade regulation • Resource-shuffling? • Additional offset protocols • Infrastructure development & implementation • Tracking system registration, testing and training • Market simulation • Allowance allocation and auction • Legal Challenges? • Peabody Energy • Treatment of Electricity Imports • Other