Potential Disincentives in Regional Emissions Trading Schemes to Implementing Distributed Energy Systems to ReduceGHG Emissions

John C. Tysseling, Ph.D., E3c, Inc., Phone 505-822-9760,

Melissa H. Roberts, M.S., E3c, Inc., Phone 505-822-9760,

Overview

For U.S. environmental policy makers, air quality improvement and in specific, the design of policies and systems to reduce the level of greenhouse gas (GHG) emissions is an issue that is prominent on both federal and state regulatory agendas. For the most part these strategies have been oriented toward auctions as part of emissions trading schemes (ETS), or cap-and-trade programs. Cap-and-trade programs must containa clear definition of measured and accountable emissions across locations and through time, accurate attribution of causes and effects in reducing regional emissions, and comprehensive guidance concerning diverse and varying operations, to avoid sending signals that may undermine decisions to invest in energy efficient a systems such as adistributed energy systems inclusive of combined heat and power (CHP) that are a valuable tool in helping to lower GHG emissions in a region. Allocations of allowances (i.e., the right to emit GHG) must follow the parties responsible for emissions reductions to avoid disincentives to those investments. According to the U.S. Energy Administration Information (EIA), the electric utility sector contributed 2,397 million metric tons of carbon dioxide equivalent (MTCDE) or approximately 40 percent of estimatedU.S. GHG emissions in 2005. Emission reduction with respect to electricity use will be a major component of ETS.

CHP, or cogeneration, generates electricity and utilizes waste steam for heating, cooling, or other processes. When CHP replaces a conventional electricity supply system, it can provide profound improvements in energy efficiency —due to more efficient use of energy and avoidance of utility distribution and transmission losses — that translate into equally profound reductions in GHG emissions. Although switching from a conventional to a CHP System approach can achieve a significant reduction in total carbon emissions, the CHP facility can also face a significant increase in its onsite emissions profile. If the CHP facility must purchase emission allowances or permits for this increase in onsite emissions, the increased cost could act as a significant deterrent or barrier to the implementation of highly efficient and effective emission reductions strategies associated with CHP Systems. Using the Western Climate Initiative (WCI) objectives and draft reduction methods (see Figure 1 below) as an example of a GHG emission cap-and-trade program, we examine potential negative economic impacts for large commercial and industrial electricity users that choose to implement an onsite generation system, specifically Combined Heat and Power (CHP).

Figure 1 – WCI Implementation Strategy: Related to Percentage Change in Carbon Emissions (by sector) Historic and Current Forecast

Methods

We demonstrate the energy efficiencies that can be gained by implementing CHP using a case study of a major university’s CHP system. We model the post-CHP implementation financial costs the university may face under a GHG emission cap-and-trade program and review several scenarios of methods that could be employed by the cap-and-trade governing body to equitably allocate emission allowances.

Results

We find economic costs associated with GHG emissions could significantly increase for a university implementing CHP in a cap-and-trade environment, but methods instituted to remedy inequitable emission allowance allocations can reduce or eliminate those increased costs and even result in financial gains.

Conclusions

Implementing a CHP system requires a significant capital investment. A strong incentive is needed to provide assurance to institutions implementing CHP that the decision to implement CHP is an environmentally and economically correct decision. Presumably, program allocations and requirements can be structured to provide this incentive by properly allocating allowances, as in our example, between the CHP facility and the utility. The urgency of the social goal will be a determinant in the magnitude of the incentive that is structured into a program. What is critical is that programs correctly identify parties responsible for reductions in the region’s overall GHG emissions and insure allowance credit for their actions is not diverted to other users because of regulatory policy distortions. Organizations can then formulate long term capital investment plans with greater reliability and certainty.

References

Abel, Amy (2007). “Electric Transmission: Approaches for Energizing a Sagging Industry,” CRS Report for Congress, Order Code RL33875, Congressional Research Service, February 2007. Report is available at

Energy Information Administration (2007). “Emissions of Greenhouse Gases,” Report #: DOE/EIA-0573. Report available at

Gehring, Markus W. and Charlotte Streck (2005), “Emissions Trading: Lessons from SOX and NOX Emissions Allowance and Credit Systems Legal Nature, Title, Transfer, and Taxation of Emission Allowances and Credits,” Environmental Law Reporter: Environmental Law Institute, Washington, DC,35:10219.

International District Energy Association (2005). “IDEA Report: The District Energy Industry,” Industrial District Energy Association. Report available at

Murray, Brian, Martin Ross and Ethan Gumerman (2007). “A Path to Greenhouse Gas Reductions in the United States: Economic Modeling of Interim National Targets,” Working Paper NI WP 07-06, Nicholas Institute for Environmental Policy Solutions, Duke University. Report available at

Shipley, Anna, Anne Hampson, Bruce Hedman and Patti Garland (2008). "Combined Heat and Power: Effective Energy Solutions for a Sustainable Future," Oak Ridge National Laboratory, Report ORNL/TM-2008/224. Report available at

Tysseling, John C. and Melissa H. Roberts (2009). “Regional GHG Cap-and-Trade: Potential Negative Impacts on Combined Heat and Power,” (working paper).

Tysseling, John C., Mary Vosevich, Benjamin R. Boersma and Jeffrey Zumwalt (2009). “Carbon Emissions Trading and Combined Heat and Power Strategies: Unintended Consequences and How They May Impact Your Institution,” Facilities Manager, March/April 2009 (in print).

Western Climate Initiative (2007). “Statement of Regional Goal,” Western Climate Initiative. Statement is available at

Western Climate Initiative (2008). “Design Recommendations for the WCI Regional Cap-and-Trade Program,” The WCI Partners. Document available at

Western Climate Initiative (2008). “Essential Requirements of Mandatory Reporting for the Western Climate Initiative, Second Draft,” WCI Reporting Subcommittee. Document available at

Western Climate Initiative (2009). “Background Document and Progress Report for Essential Requirements of Mandatory Reporting for the Western Climate Initiative,” WCI Reporting Committee. Document available at