Economics should be open

January 7, 2009

My reading of the Western Climate Initiative Cap and Trade Program Draft Design Recommendations

Filed under: California, Carbon Trading, Energy — Tags: — howardchong @ 12:23 am

At¬†, there is the September 23, 2008 document titled:¬†Design Recommendations for the WCI Regional Cap-and-Trade Program. I found the document fascinating from a policy design perspective. In this blog article, I’m going to highlight three things:

  1. This is the best climate initiative so far, better than the Northeast’s RGGI and Europe’s ETS.
  2. One of the key lynchpins in this initiative is measurement and verification, which I think is a potential critical weak point.
  3. Design Features I find interesting.

Best So Far

The Wstern Climate Initiative (WCI) is the best inititaive so far because it’s aim is to cover 90% of greenhouse gas (GHG) emissions. The Northeast’s Regional Greenhouse Gas Initiative (RGGI) only covers electricity generation. Europes Emissions Trading Scheme (ETS) covers about 46% of GHG’s for the EU and is bigger than RGGI, extending coverage beyond electricity generation to cement, steel, glass, and paper production and *most* facilities that have over 20MW of combustion. (I say *most* because there are some inconsistencies about whether all manufacturing process heat is covered.)

Measurement and Verification
At first, I kinda don’t care if allocation is via auction (what I prefer in the long run) or grandfathering with or without updating. Or whether the cap is set tight or not. The reason is because the first goal of the first period is to get measurement and verification right. Currently, we don’t have a consistent protocol of measuring CO2 at the facility level, even though the measurement should be pretty easy (at least insofar as carbon must be stoichiometrically conserved when fuel is burned). Just measure the fuel inputs.

Don’t assume that this will be easy. We’re talking about tagging and tracking all fuel at some level. Envision an IRS for carbon, the Internal Carbon Service. And there will be arguments about how strict the monitoring and verification needs to be between large plants vs small plants, and whether this should be third party or government verification.

I’m not quite sure how measurement and verification has succeeded in other programs. I *think* the SO2 and NOX markets succeeded very well because they put constant emissions monitoring systems at industrial facilities. I’m not sure if there are any cost/technological impediments to doing this for CO2, but I would imagine it won’t be done. In the EU, they haven’t done emissions monitoring and instead use guidelines on how to estimate CO2 from fuel burn. Though they are currently reviewing their standards (currently each country sets its own standards). Lastly, the California Public Utilities Commissions (CPUC) has been implementing a measurement and verification program around demand side management (aka, utility initiated energy saving programs). The idea is that utilities will be paid extra for meeting energy savings goals. Though a big problem there is that energy savings are estimated and estimated using formulas much worse than fuel-burn. We’ll see how that goes. That program is also in it’s first cycle.

And if we extend to CO2E (E=equivalent) it will be even more of a pain in the ass. Do you use average values of emissions/unit-product by sector or actually measure?

Design Features I find interesting
I apologize, but my original post got cut off and I lost my other notes so I can’t quite remember what I found most interesting.

I think one interesting feature is that they allow banking but not borrowing. Ask me and I’ll look at it again to remind myself.

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