U.S. States & Regions

States and regions across the country are adopting climate policies, including the development of regional greenhouse gas reduction markets, the creation of state and local climate action and adaptation plans, and increasing renewable energy generation. Read More
 

California Cap and Trade

Download our California Cap-and-Trade Brief as a PDF

Summary

California recently launched its cap-and-trade program, which uses a market-based mechanism to lower greenhouse gas emissions. California’s program is second in size only to the European Union’s Emissions Trading System based on the amount of emissions covered. In addition to driving emission cuts in the ninth largest economy in the world, California’s program will provide critical experience in how an economy-wide cap-and-trade system can function in the United States.

California’s emissions trading system will reduce greenhouse gas emissions from regulated entities by more than 16 percent between 2013 and 2020. It is a central component of the state’s broader strategy to reduce total greenhouse gas emissions to 1990 levels by 2020. 

The cap-and-trade rules came into effect on January 1, 2013 and apply to large electric power plants and large industrial plants. In 2015, they will extend to fuel distributors (including distributors of heating and transportation fuels). At that stage, the program will encompass around 360 businesses throughout California and nearly 85 percent of the state’s total greenhouse gas emissions. As of January 1, 2014, California's program is linked to that of Québec.

Under a cap-and-trade system, companies must hold enough emission allowances to cover their emissions, and are free to buy and sell allowances on the open market. California held its first auction of greenhouse gas allowances on November 14, 2012. This marked the beginning of the first greenhouse gas cap-and-trade program in the United States since the group of nine Northeastern states in the Regional Greenhouse Gas Initiative (RGGI), a greenhouse gas cap-and-trade program for power plants, held its first auction in 2008.

Page Contents

Cap-and-Trade Basics

California Cap-and-Trade Details

California’s Overall Climate Change Program

Auction Revenue

California Cap and Trade in Context

Cap-and-Trade Linkage

Additional resources on other market-based GHG programs around the globe

Glossary

Additional Resources

Cap-and-Trade Basics

A cap-and-trade system is one of a variety of policy tools to reduce the greenhouse gas emissions responsible for climate change. A cap-and-trade program sets a clear limit on greenhouse gas emissions and minimizes the total costs to emitters while achieving the target. This limit is translated into tradable emission allowances (each allowance typically equivalent to one metric ton of carbon dioxide or carbon dioxide equivalent), which are auctioned or allocated to regulated emitters on a regular basis. At the end of each compliance period, each regulated emitter must surrender enough allowances to cover its actual emissions during the compliance period. The total number of available allowances decreases over time to reduce the total amount of greenhouse gas emissions. By creating a market, and a price, for emission reductions, the cap-and-trade system offers an environmentally effective and economically efficient response to climate change.

Ultimately, cap-and-trade programs offer opportunities for the most cost-effective emissions reductions. However, many challenging issues must be addressed before initiating a cap-and-trade program. Once established, a well-designed cap-and-trade market is relatively easy to implement, can achieve emission reductions goals in a cost-effective manner, and drives low-greenhouse gas innovation.

For more information on cap and trade, visit the main C2ES cap-and-trade page.

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California Cap-and-Trade Details

California’s program represents the first multi-sector cap-and-trade program in North America. Building on lessons from the northeast Regional Greenhouse Gas Initiative (RGGI) and the European Union Emission Trading Scheme (EU-ETS), the California program blends proven market elements with its own policy innovations. These policy elements, and other relevant details of California’s cap-and-trade program, are summarized in Table 1 below.
 
The California Air Resources Board (CARB) adopted the state’s cap-and-trade rule on October 20, 2011, and will implement and enforce the program. The cap-and-trade rules will first apply to electric power plants and industrial plants that emit 25,000 metric tons of carbon dioxide equivalent (CO2e) per year or more. In 2015, the rules will also apply to fuel distributors (including distributors of heating and transportation fuels) that meet the 25,000 metric ton threshold, ultimately affecting a total of around 360 businesses throughout California. The program imposes a greenhouse gas emission limit that will decrease by two percent each year through 2015, and by three percent annually from 2015 through 2020. (See Figure 2)
 
Emission allowances will be distributed by a mix of free allocation and quarterly auctions. The portion of emissions covered by free allowances will vary by industry, but initially will account for approximately 90 percent of a business’s overall emissions. The percentage of free allowances allocated to the businesses will decline over time. A business may also buy allowances from other entities that have reduced emissions below the amount of allowances held. These policy elements, and other relevant details of California’s cap-and-trade program, are summarized in Table 1 below.

Table 1: California Cap-and-Trade Details

Issue

Details and Discussion

Status of Regulation

Legal Status

California Air Resources Board (CARB) adopted final regulations on October 20, 2011. An amended regulation, featuring a variety of minor adjustments, was adopted on September 12, 2012.

Legal Authority

Authorized by California Global Warming Solutions Act of 2006 (AB 32)

AB 32 requires California to return to 1990 emission levels by 2020 (427 million metric tons (MMT) of carbon dioxide equivalent (CO2e) whereas business-as-usual would be 507 MMT)

Lawsuit: Regulation does not go far enough

The Association of Irritated Residents (AIR) sued CARB, claiming cap and trade was not fully justified as a policy decision relative to a carbon tax or direct emission limits. After adding justification to the regulatory record, the court approved CARB’s approach. 

Lawsuit: Allowance auctions constitute a taxImmediately preceding California’s first allowance auction, the California Chamber of Commerce filed a lawsuit alleging that AB 32 does not give CARB the authority to raise revenue from allowance auctions, and that all allowances must therefore be freely allocated. Alternatively, the California Chamber of Commerce argues that if AB 32 did attempt to grant this authority, it would constitute a tax, which requires approval from two-thirds of the legislature. AB 32 did not receive two-thirds approval. 

Lawsuit: Regulation goes too far

A lawsuit is anticipated that claims CARB is unconstitutionally attempting to regulate interstate commerce because the program will look outside of state borders to assign greenhouse gas reduction obligations to imported electricity. 

Start Date

Regulation went into effect on January 1, 2012

The first auction took place on November 14, 2012

Compliance obligations began on January 1, 2013

Regulation Coverage

Threshold of Coverage

Sources that emit at least 25,000 metric tons CO2e/year are subject to regulation

Gases Covered

The six gases covered by the Kyoto Protocol

(CO2, CH4, N2O, HFCs, PFCs, SF6)

Plus NF3 and other fluoridated greenhouse gases

Sectors Covered: Phase 1 (2013-2014)

Electricity generation, including imports

Industrial sources

Covers approximately 35% of California’s total greenhouse gas emissions (approximately 160 MMT)

(See Figures 1 and 2 below)

Sectors Covered: Phase 2

(2015-onward)

Includes sectors covered in Phase 1, plus:

Distributors of transportation fuel

Distributors of natural gas

Distributors of other fuel

Covers approximately 85% of California’s total greenhouse gas emissions (approximately 395 MMT)

(See Figures 1 and 2 below)

Point of Regulation

Electricity generators (within California)

Electricity importers

Industrial facility operators

Fuel distributors

Allowance Allocation

Distribution Method

 

 

Free allocation for electric utilities (not generators), industrial facilities and natural gas distributors

Free allocation amount declines over time

Other allowances must be purchased at auction or via trade

Allocation Methodology

Industry: Based on output and sector-specific emissions intensity benchmark that rewards efficient facilities, initially set at about 90% of average emissions and declining over time; free allocation to leakage-prone industries declines relatively less over time

Electricity: Based on long-term procurement plans

Natural gas: To be determined by CARB before 2015; proposed to be based on 2011 emissions

Auction

Quarterly, single round, sealed bid, uniform price

Price minimum: $10 in 2012, rising 5% annually over inflation

Investor-owned utilities must consign their free allowances to be sold at auction; must use proceeds for ratepayer benefit

Auctions will be held jointly with Québec starting in 2014

Additional information, including auction results, can be found here

Emission Targets / Allowance Availability

162.8 MMT in 2013 (electricity and industry)

394.5 MMT in 2015 (includes all covered sectors)

334.2 MMT in 2020 (15% reduction between 2015 and 2020)

(See Figure 2 below)

Market Flexibility

Banking

A participating entity may bank allowances for future use and these allowances will not expire. However, regulated entities are subject to holding limits, restricting the maximum number of allowances that an entity may bank at any time. The holding limit quantity is based on a multiple of the entity’s annual allowance budget

Borrowing

Borrowing of allowances from future years is not allowed

Offsets: Quantity

Allowed for 8% of total compliance obligation. Note that 8% refers to the total amount of allowances held by an entity; not the amount of reduction required by an entity. Thus more than 8% of the program’s reductions can occur through offsets

Offsets: Protocols

Offsets must comply with CARB-approved protocols. Protocols currently exist for: forestry, dairy digesters, ozone depleting substances projects, and urban forestry. Initially limited to projects in the U.S.; framework in place for international expansion. All offset projects developed under a CARB Compliance Offset Protocol must be listed with an ARB approved Offset Project Registry. To date the American Carbon Registry (ACR) and Climate Action Reserve are the two approved registries.

Strategic Reserve

A percentage of allowances, which increases over time from 1% to 7%, will be held in a strategic reserve by CARB in three tiers with different prices: $40, $45, $50 in 2013, rising 5% annually over inflation. Since these prices are not subject to market forces, the strategic reserve will help constrain compliance costs.

Compliance Period

3-year compliance periods (following 2-year Phase 1)

Emissions Reporting and Verification

Reporting

Capped entities must report annually (as required since 2008)

Registration

Capped entities must register with CARB to participate in allowance trading market

Verification

Reported emissions will be verified by a third party.

Compliance and Enforcement

Annual Obligation

Entities must provide allowances and/or offsets for 30% of their previous year’s emissions

Compliance Period Obligation

At the end of every compliance period, entities must provide allowances and/or offsets for balance of emissions from the entire compliance period (2 years for the first period, 3 years for the next 2 periods).

Noncompliance

If a deadline is missed or there is a shortfall, four allowances must be surrendered for every metric ton not covered in time.

Trading and Enforcement

The regulation expressly prohibits any trading involving a manipulative device, a corner of or an attempt to corner the market, fraud, attempted fraud, or false or inaccurate reports.

Violations of the regulations can result in civil or criminal penalties. Perjury statutes apply.

The program includes mechanisms to prevent market manipulation

Linking

Québec

California’s program is linked with Québec's as ofJanuary 1, 2014. Offsets and allowances can be traded across jurisdictions. The first joint auction will be held some time in 2014.

Western Climate Initiative (WCI)

Other WCI partners (British Columbia, Manitoba, Ontario) plan to eventually join the linked program as well

Other Jurisdictions

CARB is open to linking with additional state or regional programs

 

Figure 1: California Greenhouse Gas Emissions by Sector in 2011

Emissions are expressed in million metric tons of carbon dioxide equivalent (MMT CO2e) and percent of total. Total 2011 gross emissions were 448.1 MMT CO2e. Note that “Residential and Commercial” equates to heating fuel consumption, which is covered starting in 2015.

Source: CARB, Greenhouse Gas Inventory Data – Graphs

 

Figure 2: California’s greenhouse gas emission cap and business-as-usual (BAU) projections

The cap-and-trade program has a “narrow” scope in 2013 and 2014 that encompasses the electricity and industrial sectors. The program expands in 2015 to encompass transportation and heating fuels. Offsets can be used for up to eight percent of each regulated entity’s compliance obligation.

Source: CARB, California Cap-and-Trade Regulation Initial Statement of Reasons, Appendix E: Setting the Program Emissions Cap, http://www.arb.ca.gov/regact/2010/capandtrade10/capv3appe.pdf

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California’s Overall Climate Change Program

California’s cap-and-trade program is only one element of its broader climate change initiative, as authorized in the California Global Warming Solutions Act of 2006 (AB 32).  AB 32 seeks to slow climate change through a comprehensive program reducing greenhouse gas emissions from virtually all sources statewide. The Act requires CARB to develop regulations and market mechanisms that will cut the state’s greenhouse gas emissions to 1990 levels by 2020—a 25 percent reduction statewide. Figure 3 shows California’s projected greenhouse gas emissions growth in the absence of cap and trade.

Figure 3: California Greenhouse Gas Emissions in 1990, 2011, and 2020 under Business-as-Usual

Sources: 1990: California Energy Commission, Inventory of Greenhouse Gas Emissions and Sinks: 1990 to 2004, http://www.energy.ca.gov/2006publications/CEC-600-2006-013/CEC-600-2006-013-SF.PDF; CARB, California 1990 Greenhouse Gas Emissions Level and 2020 Emissions Limit, http://www.arb.ca.gov/cc/inventory/pubs/reports/staff_report_1990_level.pdf.

2011: CARB, California Greenhouse Gas Inventory for 2000-2011 – by Category as Defined in the Scoping Plan, http://www.arb.ca.gov/cc/inventory/data/tables/ghg_inventory_scopingplan_00-11_2013-08-01.pdf.

2020: CARB, Greenhouse Gas Emission Forecast for 2020: Data Sources, Methods, and Assumptions, http://www.arb.ca.gov/cc/inventory/data/tables/2020_forecast_methodology_2010-10-28.pdf.

AB 32 also requires CARB to take a variety of actions aimed at reducing the state’s impact on the climate. CARB has adopted a portfolio of measures to reduce greenhouse gas emissions in the state, including a Low Carbon Fuel Standard and a variety of energy efficiency standards. The cap under CARB’s cap-and-trade rule is flexible and can be tightened if CARB’s other measures reduce greenhouse gas emissions less than anticipated. California’s cap-and-trade program therefore acts as a backstop to ensure its overall 2020 greenhouse gas target is met. Figure 4 shows the programs CARB is implementing to achieve the goals of AB 32 and the projected impact of each.

Figure 4: Projected Reductions (in MMT CO2e) Caused by AB 32 Measures by 2020 and Share of Total

Source: CARB, Greenhouse Gas Reductions from Ongoing, Adopted and Foreseeable Scoping Plan Measures, http://www.arb.ca.gov/cc/inventory/data/tables/reductions_from_scoping_plan_measures_2010-10-28.pdf

For more information on actions taken by CARB in response to AB 32, visit the C2ES AB 32 page or the status of CARB’s AB 32 Scoping Plan.

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Auction Revenue

Although a significant number of emission allowances will be freely allocated in California’s program, many will also be sold at auction. The first year of auctions generated over $525 million in revenue for the state. The state anticipates annual auction revenue to rise over time. On September 30, 2012, Governor Jerry Brown signed two bills into law, establishing guidelines on how this annual revenue will be disbursed. The two laws do not identify specific programs that will benefit from the revenue, but they provide a framework for how the state will invest cap-and-trade revenue into local projects. California’s first quarterly cap-and-trade GHG allowance auction took place on November 14, 2012. About 29 million greenhouse gas allowances, each representing one metric ton of carbon dioxide, were auctioned off in this first auction to more than 600 approved industrial facilities and electricity generators.

The first law, AB 1532, requires that the revenue from allowance auctions be spent for environmental purposes, with an emphasis on improving air quality. The second, SB 535, requires that at least 25 percent of the revenue be spent on programs that benefit disadvantaged communities, which tend to suffer disproportionately from air pollution. The California Environmental Protection Agency will identify disadvantaged communities for investment opportunities, while the state’s Department of Finance will develop a three-year investment plan and oversee the expenditures of this revenue to mitigate direct health impacts of climate change.

More information about how the proceeds from California's cap-and-trade program will be used can be found here.

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California Cap and Trade in Context

Prior to California's program, greenhouse gas cap-and-trade programs were operating in the European Union, Australia, New Zealand, and in nine Northeastern states (the Regional Greenhouse Gas Initiative, or RGGI). As of 2013, California and Quebec have operating programs as well. Table 2 below compares key elements of the California, RGGI, EU-ETS, and Quebec cap-and-trade systems.

Table 2: Comparison of cap-and-trade programs in California, RGGI, EU-ETS, and Quebec

 

California's Greenhouse gas cap-and-trade program

Regional Greenhouse Gas Initiative (RGGI)

EU's Emissions Trading System

Quebec's Carbon Market

Population

38 million

41 million

500 Million

8 Million

Gross Regional Product

US $1.9 trillion

US $2.3 trillion

US $16 trillion

US $304 billion

Participating Jurisdictions

California

9 US States: CT, DE, MA, MD, ME, NH, NY, RI, VT

30 Nations.  Mandatory for all 27 EU members plus Norway, Iceland and Lichtenstein

Quebec

Greenhouse Gases Covered

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases

Carbon dioxide (CO2) only

Carbon dioxide (CO2), plus nitrous oxide (N2O) and perfluorocarbons (PFCs) starting in 2013

Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), sulfur hexafluoride (SF6), perfluocarbons (PFCs), nitrogen trifluoride (NF3), other fluorinated greenhouse gases

Sectors Covered

Electricity (including imports) and industry in 2013; plus ground transportation and heating fuels in 2015

Fossil fuel-fired power plants (does not include imports)

Electricity, heat and steam production, and five major industrial sectors (oil, iron and steel, cement, glass, pulp and paper) 2005-2012; plus CO2 from petrochemicals, ammonia, aviation and aluminum, N2O from acid production, and PFCs from aluminum starting in 2013

Electricity (including imports) and industry in 2013; plus ground transportation and heating fuels in 2015

Emissions Threshold

Emitters of at least 25,000 metric tons CO2e annually

Fossil fuel-fired power plants generating 25 MW or greater located within the RGGI States

Any combustion installation over 20 MW; sector-specific threshold for other sources

Emitters of at least 25,000 metric tons CO2e annually

Target

Approximately 17% below 2013 emissions by 2020

15% below 2013 emissions by 2020 

21% cut below 2005 levels by 2020

20% below 1990 levels by 2020. Considering raising target to 25%

2013 Allowance Budgets (Millions of Allowances)

162.8

165

(short tons)

2039

23.7

Maximum Emissions Covered in million metric tons of CO2 equivalent (Year of Maximum Allowance Availability)

394.5 (2015)

171 (2009) (includes New Jersey, which has since exited the program)

2039 (2013)

63.3 (2015)

Emissions Target in million metric tons of CO2 equivalent (Target Year)

334.2 (2020)

71 (2020)

1643 (2020)  -   Target may become more aggressive

51 (2020)

Status

First auction on November 14, 2012; compliance obligations began January 1, 2013

Compliance obligations began on January 1, 2009

Compliance obligations began on January 1, 2005

Compliance obligations began January 1, 2013

Allocation Method

Mixed – some free allocations for industry; auctions for others

Approximately 90% available for sale at auction, remainder up to states

Mixed - some free allocation for industry based on benchmarking; auction for power sector and others that can pass on costs; EU sets broad harmonization rules, but members have some flexibility; approximately 50% auction in 2013

Free allocation for some sectors, auctions for others

Price Floor at Auction

$10 per metric ton for both 2012 and 2013 before
rising 5% per year (plus inflation) starting in 2014. 

$1.93 per ton in 2012; increasing with consumer price index (CPI)

No Price Floor

$10 per metric ton price floor starting in 2012 and rising 5% for each year
thereafter (plus inflation)

Affiliations

Helped establish Western Climate Initiative in 2007

None

UNFCCC, Kyoto Protocol

Joined Western Climate Initiative in 2008

Linkage Status

Linked with Quebec starting in 2014

No current plans to link

Plans to link with Australia in 2018. Also helping China design their market

Linked with California in 2014

Offset Limit

Can account for 8% of a regulated entity’s compliance obligation

Can account 3.3% of a regulated entity’s compliance obligation

No limit;  considering setting limits after 2020

Can account for 8% of a regulated entity’s compliance obligation

2013 Offset Use Limit  (Millions of Offset Credits)

13

5

No limit;  considering setting limits after 2020

2.1

Types of Offset Categories

1) U.S. Forest and Urban Forest Project Resources;
2) Livestock Projects;
3) Ozone Depleting Substances Projects;
4) Urban Forest Projects

1) Landfill methane capture and destruction;
2) Reduction in emissions of sulfur hexafluoride (SF6) in the electric power sector;
3) Sequestration of carbon due to afforestation;
4) Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector;
5) Avoided methane emissions from agricultural manure management operations

1)  Clean Development Mechanism (CDM);
2) Some Joint Implementation (JI) project types are eligible, those from land use, land-use change and forestry activities are not acceptable;
Starting in 2013 (third phase), HFC and adipic acid credits will be excluded.

1)   Covered Manure Storage Facilities – CH4 Destruction;
2)  Landfill Sites – CH4 Destruction;
3)   Destruction of Ozone Depleting Substances (ODS) Contained in Insulating Foam
Recovered from Appliances

 

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Additional resources on other market-based greenhouse gas programs around the globe:

Australia

China

EU-ETS

India

New Zealand

RGGI

Quebec

South Korea

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Cap-and-Trade Linkage

California is part of the Western Climate Initiative (WCI), which also includes British Columbia, Manitoba, Ontario and Quebec. WCI partners are working together with a goal of eventually creating a linked cap-and-trade program that covers each jurisdiction. When Governor Schwarzenegger signed an agreement establishing the initiative on February 26, 2007, California became one of the original participants of the initiative. WCI Partners have developed a comprehensive initiative to reduce regional greenhouse gas emissions to 15 percent below 2005 levels by 2020. Quebec is currently the only other jurisdiction in WCI that is implementing cap and trade in the near-term, and its first compliance period began on January 1, 2013.

In October 2013 CARB and the Quebec Ministry of Sustainable Development, Environment, Wildlife, and Parks officially linked their greenhouse gas cap-and-trade programs. As a result, greenhouse gas emission allowances from California and Quebec will be interchangeable for compliance purposes starting on January 1, 2014. California and Quebec’s link represents the first multi-sector cap-and-trade program linkage in North America. The partnership aims to create a gateway and framework for greater international greenhouse gas reductions.

This step came after years of work to coordinate the two programs. CARB had to align its program with Quebec’s and prove to Governor Brown that Quebec’s program is stringent enough to meet California’s requirements. Quebec also had to draft amendments to its regulations in order to harmonize with California’s reporting scheme. Both CARB and its parallel agency in Quebec adopted regulations necessary to link their programs in spring 2013. 

WCI, Inc. Home Page

 

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Glossary

Allowance: A government-issued authorization to emit a certain amount. In greenhouse gas markets, an allowance is commonly denominated as one ton of CO2e per year. The total number of allowances distributed to all entities in a cap-and-trade system is determined by the size of the overall cap on emissions.

Allowance distribution: The process by which emissions allowances are initially distributed under an emissions cap-and-trade system. Authorizations to emit can initially be distributed in a number of ways, either through some form of auction, free allocation, or some of both.

Auctioning: A method for distributing emission allowances in a cap-and-trade system whereby allowances are sold to the highest bidder. This method of distribution may be combined with other forms of allowance distribution.

Banking: The carry-over of unused allowances or offset credits from one compliance period to the next.

Benchmarking: An allowance allocation method in which allowances are distributed based upon a specified level of emissions per unit of input or output.

Borrowing: A mechanism under a cap-and-trade program that allows covered entities to use allowances designated for a future compliance period to meet the requirements of the current compliance period. Borrowing may entail penalties to reflect a programmatic preference for near-term emissions reductions.

Business-as-Usual: In the absence of the regulation being discussed. This term is used to assess the future impacts of a regulation.

Cap and Trade: A cap-and-trade system sets an overall limit on emissions, requires entities subject to the system to hold sufficient allowances to cover their emissions, and provides broad flexibility in the means of compliance. Entities can comply by undertaking emission reduction projects at their covered facilities and/or by purchasing emission allowances (or credits) from the government or from other entities that have generated emission reductions in excess of their compliance obligations.

Carbon Dioxide Equivalent: Carbon dioxide equivalent is a measure used to compare the emissions from various greenhouse gases based upon their global warming potential. For example, the global warming potential for methane over 100 years is 21. This means that emissions of one million metric tons of methane is equivalent to emissions of 21 million metric tons of carbon dioxide.

Compliance period:  The time frame for which regulated emitters surrender enough allowances to cover their actual emissions during that time frame.

Credits: Credits can be distributed by the government for emission reductions achieved by offset projects or by achieving environmental performance beyond a regulatory standard.

Emissions Cap: A mandated constraint in a scheduled timeframe that puts a “ceiling” on the total amount of anthropogenic greenhouse gas emissions that can be released into the atmosphere.

Emissions Trading: The process or policy that allows the buying and selling of credits or allowances created under an emissions cap.

Global Warming Potential (GWP): A measure of the total energy that a gas absorbs over a particular period of time (usually 100 years), compared to carbon dioxide.

Greenhouse Gases (GHG): Greenhouse gases include a wide variety of gases that trap heat near the Earth’s surface, slowing its escape into space. Greenhouse gases include carbon dioxide, methane, nitrous oxide and water vapor and other gases. While greenhouse gases occur naturally in the atmosphere, human activities also result in additional greenhouse gas emissions. Humans have also manufactured some greenhouse gases not found in nature (e.g., hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride).

High GWP: Gases with high global warming potential (GWP). There are three major groups or types of high GWP gases: hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). These compounds are the most potent greenhouse gases. In addition to having high global warming potentials, SF6 and PFCs have extremely long atmospheric lifetimes, resulting in their essentially irreversible accumulation in the atmosphere once emitted.

Kyoto Protocol: An international agreement signed at the Third Conference of the Parties to the UN Framework Convention on Climate Change in Kyoto, Japan (December 1997). The Protocol sets binding emission targets for industrialized countries that would reduce their collective emissions by 5.2 percent, on average, below 1990 levels by 2012.

Leakage: A reduction in emissions of greenhouse gases within a jurisdiction that is offset by an increase in emissions of greenhouse gases outside the jurisdiction. For example, if a regulated facility moves across the border to continue operations unchanged rather than reducing its emissions.

Linking: Authorization by the regulator for entities covered under a cap-and-trade program to use allowances or offsets from a different jurisdiction’s regulatory regime (such as another cap-and-trade program) for compliance purposes. Linking may expand opportunities for low-cost emission reductions, resulting in lower compliance costs.

Offset: Projects undertaken outside the coverage of a mandatory emissions reduction system for which the ownership of verifiable greenhouse gas emission reductions can be transferred and used by a regulated source to meet its emissions reduction obligation. If offsets are allowed in a cap and trade program, credits would be granted to an uncapped source for the net emissions reductions a project achieves. A capped source could then acquire these credits as a method of compliance under a cap.

Price Trigger: A general term used to describe a price at which some measure will be taken to stabilize or lower allowance prices. For example, through 2013 RGGI used price triggers to expand the amount of offsets that could be used for compliance.

Program Review (RGGI): The Memorandum of Understanding among RGGI states calls for a 2012 Program Review. This Program Review, now complete, was a comprehensive evaluation of program success, program impacts, additional reductions, imports and emissions leakage, and offsets.

Scope: The coverage of a cap-and-trade system, i.e., which sectors or emissions sources will be included.

Sealed Bid (Auction): A type of auction process in which all bidders simultaneously submit sealed bids to the auctioneer, so that no bidder knows how much the other auction participants have bid.

Single Round (Auction): Bids for allowances are all solicited and settled in a single round. Auction participants can submit multiple bids for this single round. For example, a participant could bid $15 per allowance for 10,000 allowances and $20 per allowance for a separate 20,000 allowances.

Source: Any process or activity that results in the net release of greenhouse gases, aerosols, or precursors of greenhouse gases into the atmosphere.

True-up:  A submission of emission allowances equivalent to a regulated entity’s emissions during a compliance period, less what the entity has already submitted at interim deadlines.

Uniform Price (Auction): All allowances awarded in a single auction will be the same price. Allowances will be sold to bidders, beginning with the highest bid price and moving to successively lower priced bids, until all of the available allowances are sold. The bid at which all available allowances are sold becomes the settlement price and this is the price per allowance that all bidders will be charged for the allowances won in the auction.  Bids submitted at prices below the settlement price will not win any allowances.

Western Climate Initiative (WCI):  A collaboration launched in February 2007 to meet regional challenges raised by climate change. WCI is identifying, evaluating and implementing collective and cooperative ways to reduce greenhouse gases in the region. Membership in the WCI presently consists of California, British Columbia, Manitoba, Ontario, and Quebec.

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Additional Resources

C2ES: California Global Warming Solutions Act

C2ES: Climate Change 101: Cap and Trade

C2ES: Multi-State Initiatives

C2ES: Summary of Cap-and-Trade Rule Text

CARB: Latest Text of Cap-and-Trade Rule

CARB: Cap-and-Trade Home Page

CARB: Cap-and-Trade Auction Results

CARB: Cap-and-Trade Fact Sheet

CARB: Climate Change Home Page

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California load-aggregation law will encourage distributed renewable generation

Promoted in Energy Efficiency section: 
0

 

With support from the California Climate and Agriculture Network (CalCAN), a coalition of sustainable agriculture organizations, Governor Brown signed Senate Bill 594 into law on September 27, removing an important obstacle for individual customers investing in distributed renewable energy.  Specifically, SB 594 allows customers to aggregate loads (i.e., electricity demand) if they have multiple electric meters on one property, thus enabling them to invest in larger-scale, and therefore more cost-effective, renewable energy installations.  This advance makes distributed renewable energy generation more economical for certain customers and will encourage this type of energy production throughout California.

Load aggregation is beneficial to customers due to the availability of net metering. Specially programmed “net meters,” installed at homes and businesses, measure both purchased electricity and electricity exported to the grid, reducing the customer’s electricity bill by the value of exported electricity. SB 594 improves an existing net metering program, California’s Net Energy Metering (NEM), which is designed for customers who install solar, wind, biogas and fuel cell generation facilities that generate 1 MW or less of electricity. The vast majority of customers who have installed solar facilities on their properties choose to participate in the NEM program, to which the California Public Utilities Commission (PUC) has now enrolled over 40,000 customers.

Prior to SB 594, a customer could only use electricity generated on-site to offset electricity consumed at a single meter, rather than offset the electricity consumed at all locations where a customer has a meter. This was a problem for customers with large properties that have multiple electric service locations, such as farmers, ranchers and schools. If these types of customers were to install a renewable generation facility, they would not receive credit for energy generation exceeding demand at one single meter. This meant that, rather than installing one large solar array to offset the entire property’s electricity consumption, customers would likely only fully benefit from net metering if they installed individual arrays at each meter to offset consumption.  Through SB 594, however, a customer’s electricity consumption at each meter may be aggregated (through combined readings and billing from all meters within a property), thus allowing for a greater offset and creating more incentive for customers to invest in larger renewable generation facilities. 

SB 594 follows last year’s Renewable Energy Equity Act (SB 489), which opens the NEM program to all forms of renewable energy, including anaerobic digesters and other small renewable energy projects. The previous legislation only applied to wind and solar generation.   Together, these laws incentivize installation of small-scale distributed renewable energy projects in California, reduce the need for power plants and transmission infrastructure, and help the state meet its goal of 12,000 megawatts of local renewable energy capacity by 2020.  California seeks to reduce the state’s greenhouse gas emissions to 1990 levels by 2020, with over a quarter of those reductions to come from the energy sector. The state has also adopted a 33% Renewable Portfolio Standard goal. According to the PUC, the majority of customer-generators choose to participate in the NEM program to save money and offset their energy use.

 

 

For more information

Solar Power in C2ES Climate Techbook

C2ES Map of Net-Metering Programs

Press Release on SB 594 by Senator Lois Wolk 

California Senate Bill No. 594

C2ES California Global Warming Solutions Act

California passes guidelines for $1 billion of cap-and-trade revenue

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On September 30, California Governor Jerry Brown signed two bills into law, establishing guidelines on how an expected $1 billion-plus of annual revenue from the state’s cap-and–trade program will be disbursed. The two laws do not identify specific projects that will benefit from the revenue, but they provide a framework for how the state will invest cap-and-trade program revenue into local projects. California’s first quarterly cap-and-trade GHG allowance auction is set for November 14, 2012. At least 21,804,529 greenhouse gas (GHG) allowances, in this first auction, each representing one ton of carbon dioxide, will be auctioned off to over 600 approved industrial facilities and utilities.

The first law, AB 1532, requires that the revenue from allowance auctions be spent for environmental purposes, with an emphasis on improving air quality. The second, SB 535, requires that at least 25 percent of the revenue be spent on programs that benefit disadvantaged communities, which tend to suffer to a disproportionate extent from air pollution. The California Environmental Protection Agency will identify disadvantaged communities for investment opportunities, while the Department of Finance will develop a 3-year investment plan and oversee the expenditures of this revenue to mitigate direct health impacts of climate change.

These two new laws follow final regulations, adopted by the California Air Resources Board (ARB) on October 20, 2011 for a cap-and-trade program that will help the state reduce greenhouse gas emissions to 1990 levels by the year 2020. The development of California’s cap-and-trade system is authorized by the California Global Warming Solutions Act (AB 32), which was signed into law by Governor Schwarzenegger in 2006.

Beginning in 2013, cap-and-trade regulations will apply to all major industrial sources and electric utilities, and will expand in 2015 to cover the distributors of transportation fuels, natural gas, and other fuels. The amount of allowances available to these sources is set to decline by about 3 percent each year as the cap is lowered and emissions are reduced. 

 

For more information:

C2ES: California Cap-and-Trade Program Summary Table

C2ES: California Global Warming Solutions Act

California Air Resources Board: Auction Notice

California Air Resources Board: Press release for cap and trade auction

Press release: Speaker John A. Pérez's AB 1532 Greenhouse Gas Reduction Bill

Massachusetts ranked number one in energy efficiency by ACEEE

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Massachusetts topped energy efficiency rankings produced by the American Council for an Energy Efficient Economy (ACEEE) for the second year in a row. Massachusetts has been a consistent high performer according to ACEEE’s methodology; in the six years the organization has published its state energy efficiency scorecard, Massachusetts has scored among the top ten each year.

ACEEE attributes Massachusetts’s success to its continued implementation of the Green Communities Act of 2008 (GCA). Further, Massachusetts Governor Deval Patrick recently signed into law Senate Bill 2395, a piece of legislation expanding upon GCA. The law extends contracts between utilities and renewable energy firms and increases the cap on net metering.

In constructing scores, ACEEE considers a variety of state energy efficiency policies and weights them according to their potential energy savings. ACEEE updated its methodology this year, changing how some policies were scored to “better reflect potential energy savings, economic realities and changing policy landscapes.” Despite changes that increased the stringency of scoring, Massachusetts remained highly competitive along with California, Oregon, New York, and Vermont.

 

For more information:

ACEEE: State Energy Efficiency Policy Database

C2ES: Energy Sector State Policy Maps

Joint ICAP/NA2050 Public Workshop: Developing Industrial Benchmarks

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North America 2050 (NA2050), which C2ES helps facilitate, and the International Carbon Action Partnership (ICAP) co-hosted a public workshop featuring policymakers and representatives from industry, academia, and nonprofits from around the globe to share experiences and ideas on how benchmarking can be used to improve industrial energy efficiency. Power Point slides from the event are available. 

Joint ICAP/NA2050 Public Workshop

“Developing Industrial Benchmarks”

September 24, 2012 – New York

Pace University, 1 Pace Plaza, NY 10038

 

Jump to Workshop Presentations
 

Background

In major OECD countries, direct and indirect emissions of GHG from industry account for up to one-third of total end-use greenhouse gas (GHG) emissions. Policymakers at a variety of government levels are considering policies to address these emissions. Benchmarking, which assesses GHG emissions performance across facilities or against a common standard, can be used in various policy approaches, including:

·      Regulation of GHG emissions through a cap-and-trade program, along with free allocation of emissions allowances to industry sectors in proportion to output based on an emissions performance benchmark;

·      Regulatory GHG performance standards, where individual facilities are required to meet an emissions performance standard;

·      Energy efficiency targets, either regulatory or voluntary; and

·      Voluntary performance goals, in which participating companies commit to achieving a particular emissions benchmark by a particular year.

Against this background, the North American greenhouse gas (GHG) regulatory landscape has recently been evolving at both federal and sub-national levels, putting GHG emissions benchmarks up on the agenda of U.S. states and Canadian provinces committed to reducing their emissions. Beyond North America, other jurisdictions are also developing benchmarks as a means to reduce GHG emissions, particularly in the European Union as part of the revision of its emissions trading system (ETS) in preparation of Phase III.

Workshop Objectives

·      Explore approaches to developing industrial greenhouse gas emissions benchmarks that could inform either allowances allocation under a GHG cap and trade program or performance-based GHG (i.e. performance standards) regulations;

·      Gain understanding of current approaches to industry benchmarking, including those being implemented in the EU, California and elsewhere;

·      Examine international best practices to identify appropriate sectors with which to begin benchmarking and how to design benchmarks;

·      Identify benefits of coordinating benchmarking approaches, inter alia with regard to competitiveness and leakage issues;

·      Generally foster broader communication and collaboration on climate policy by the example of benchmarking; and

·      Identify possible next steps for continued collaboration between NA2050 and ICAP.

Format

1 day public workshop in New York City with presentations and participation from ICAP and NA2050 representatives and from selected experts from various backgrounds (academia, non-profit, industry). Presentations will be followed by open discussions amongst the participants. About 60 attendees are expected.

Participants

·      Representatives from ICAP members and observers engaged in and/or interested in developing benchmarks for allocation in an emissions trading system;

·      Government officials from U.S. States and Canadian provinces, e.g. from RGGI, WCI and NA2050 jurisdictions, as well as from the U.S. and Canadian federal governments;

·      Industry representatives e.g. from the refinery, steel, cement, pulp and paper sectors;

·      Representatives from the non-governmental sector and from academia.

Co-hosts:  International Carbon Action Partnership (ICAP) and the North America 2050 Initiative (NA2050)

For further information, please visit www.icapcarbonaction.com or na2050.org, or contact us at events@icapcarbonaction.com.

 

Workshop Presentations

(Presentations linked where available)

 

Welcome and introductions

Objective: Welcome speakers and participants. Outline objectives for the workshop. Provide overview of the agenda.

·           Jared Snyder, N.Y.S. Department of Environmental Conservation and ICAP Co-Chair

·           Stuart Clark and Craig Golding, NA2050 Industry Working Group Co-Chairs

Session 1: The Context/Rationale for Benchmarking

Chair: Hans Bergman, European Commission

Objective: Provide a theoretical introduction by defining the concept, key elements and rationale of benchmarking in current regulatory contexts in North America, Europe and elsewhere.

·           Franz Litz, Pace Energy and Climate Center

·           Hubert Fallmann, Austrian Federal Environment Agency

Session 2: Existing and Innovative Approaches to Benchmarking Policy around the World

Chair: Dirk Weinreich, German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety

Objective: Provide an overview of current approaches to benchmarking around the world with a focus on policymaking, while exploring similarities and differences while exploring similarities and differences among existing programs. Present the general approach to elaborating benchmarks. Discuss reasoning behind decision to utilize benchmarking and compare to alternatives. This session will also touch on potential uses of benchmarking not yet put in practice.

·           Maarten Neelis, Ecofys

·           Elizabeth Dutrow, U.S. Environmental Protection Agency

·           Ian Bingham, Arizona Department of Environmental Quality

·           Mark Wenzel, Climate Change Unit, California Environmental Protection Agency (via webcast)

Session 3: Constructing Benchmarks

Chair: Pete Erickson, Stockholm Environment Institute

Objective: Focus on the technical aspects of benchmark construction and implementation in selected industry sectors. Highlight similarities and differences among existing programs and industry sectors and why these differences exist.

·      Erika Guerra, Holcim

·      Nate Aden, World Resources Institute

·      Alan Reid, CONCAWE

Session 4: Implementation Challenges and Lessons Learned

Chair: Justin Johnson, Vermont Department of Environmental Conservation

Objective: Reflect on the challenges encountered in the implementation of benchmarks and on lessons learned, both from a regulator’s and industry’s perspective. Discuss the benefits arising from benchmarking programs, and how industries have changed their practices.

·      Jasmin Ansar, Union of Concerned Scientists

  • Perspective of non-governmental organizations on the benefits of benchmarking in decarbonizing the industry and energy sectors.

·      Christophe Ewald, French Ministry of Ecology, Sustainable Development and Energy

·      Denise Viola, Shell

  • Experience with and lessons learned from using benchmarks in the refinery sector.

·      Michelle Ward, New Zealand’s Environmental Protection Agency (via webcast)

  • NZ Experience with benchmarking for industrial allocation under the NZ ETS

·      Alexander Caroly and Jeewantha Karunarathna, Australian Department for Climate Change and Energy Efficiency (via webcast)

Session 5: Conclusions and Outlook

Chair: Judi Greenwald, Center for Climate and Energy Solutions

Objective: Lessons learned from international experiences on benchmarking application in various policy contexts, sectors and countries. Review how challenges were overcome and if those solutions are applicable in all jurisdictions.

Exchange views and discuss possible features that allow for comparable benchmarks at international scale, and appropriate sectors with which to begin benchmarking. Discuss the replicability / transferability potential of examples presented during the workshop to other policy areas, approaches and sectors.

Open discussion facilitated by session chair

 

 

New York develops tax incentives to increase solar energy capacity

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On August 17, three new pieces of legislation establishing and expanding financial incentives for solar energy projects were signed into law in New York by Governor Andrew Cuomo. Such incentives are necessary to ensure the competitiveness of solar energy production given its current high price relative to conventional sources of electrical generation. 

Bill A34B provides for a 25 percent tax credit to homeowners, up to $5000, of the cost of installation of certain solar energy equipment. The law also extends this tax credit to homeowners either leasing solar equipment or purchasing power produced by solar equipment in agreements lasting at least ten years. This law takes effect immediately and lasts 14 years. 

Bill A10620 extends a maximum $62,500 real property tax abatement of 2.5 percent between January 2013 and January 2015 for homeowners installing solar energy equipment through 2014. Bill A05522B provides for exemptions to sales taxes imposed by the state on commercial solar energy equipment and also allows for localities to provide the same exemption. These laws will take effect in January 2013. 

Governor Cuomo enumerated benefits of these incentives, stating that the laws “demonstrate the state’s commitment to reducing energy costs, growing our green energy sector, creating jobs, and protecting the environment.” The New York legislature cited the importance of these initiatives in achieving the ambitious goal set by New York’s renewable portfolio standard of generating 30 percent of the state’s electricity using renewable sources by 2015. In 2011, 24 percent of electricity consumed in New York was produced by renewable sources. 

This legislation furthers the goals of the Governor’s NY-SUN Initiative, which aims to rapidly increase solar energy generation in the state, doubling the level of photovoltaic capacity installed in 2012 and to quadruple the amount of installation in 2013 compared with 2011. These three laws represent the latest legislative tools in a larger set of policies to increase solar generating capacity including competitive grants financing large-scale commercial solar projects and noncompetitive grants funding smaller scale residential projects

 

For more information:

Climate Techbook: Solar Power

Capitol Confidential: Future Brightens for Solar Power Thanks to Legislation

California holds trial allowance auction in preparation for cap-and-trade implementation

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On August 30, 2012 the California Air Resources Board (CARB) conducted a test run of the online allowance auction system for the state’s greenhouse gas emissions trading program. The trial auction, which involved no exchange of money or allowances, was conducted to enable market participants to gain firsthand experience with the auction user interface and to allow CARB to discover and correct problems before the first real auction, scheduled to take place on November 14, 2012. The real event will involve the auctioning of 60 million allowances, each representing the right to emit one metric ton of carbon dioxide equivalent.

Auction participants were able to practice completing the online auction application, opening accounts with the financial services administrator, and having bid guarantees processed in the days before the practice auction was held. CARB further provided online training before the event. On the day of the trial run, participants had a three-hour window to submit bids. More recently, CARB surveyed participants for feedback to improve the system. CARB will not release the auction settlement price or the number of allowances sold to avoid creating improper price signals in the allowance market.

The development of a cap-and-trade system for greenhouse gases was required by the California Global Warming Solutions Act, otherwise known as AB 32, which was signed into law by former Governor Schwarzenegger in 2006. The aim of this legislation is to reduce greenhouse gas emissions in California to 1990 levels by 2020. To that end, the law also requires mandatory GHG emissions reporting, determination of baselines emissions, and establishment of early actions.

Enforcement of the cap-and-trade program begins on January 1, 2013 when electric utilities and large industrial emitters will be covered. The program will expand to include fuel distributors in 2015, eventually covering 85 percent of California’s GHG emissions. The cap is set to decline initially at a rate of two percent annually until 2014 and three percent annually thereafter until 2020. Compliance costs are minimized through trading of allowances and maintaining four percent of allowances in a reserve that will become available if the price exceeds a specified threshold. Allowances may be banked by emitters to be used in the future and compliance periods are three years long to smooth variations in allowance price and product output, respectively. To further increase flexibility, the program allows emitters to purchase a limited number of offset credits, which represent emission-reduction projects taking place outside of the cap-and-trade program. Regulated entities must report emissions annually and face penalties for exceeding allowances or missing compliance deadlines.

In developing and implementing the cap-and-trade system, California has been working closely with the Western Climate Initiative, which is providing administrative and technical support. Such state and regional climate programs capping GHG emissions are important in the absence of national cap-and-trade legislation. 

 

For more information:

C2ES: California Cap-and-Trade Program Summary Table

C2ES: California Global Warming Solutions Act

California Air Resources Board: Cap-and-Trade Program Overview

Paul Hastings, LLP: California Holds Practice Auction for its Cap-And-Trade Program

What can Hurricane Isaac teach us about climate vulnerability?


As with any single event, Hurricane Isaac doesn’t tell us anything about whether hurricanes are getting worse due to climate change. But Isaac’s impacts should be examined to teach us about our vulnerabilities to the types of extreme events scientists tell us climate change will make more common.

Federal Vehicle Standards

Light-Duty Vehicle Standards Timeline (1975-2012)

Recent Legal History

Light-Duty Vehicle Standards (Model Years 2012 to 2025)

Medium and Heavy-Duty Standards (Model Years 2014 to 2018)

Why Consumers Undervalue Fuel Economy 

Calculating Light-Duty Vehicle CAFE Then and Now

Light-Duty Vehicle Program Flexibilities 

For more information

In August 2012, the federal government adopted the second of two rules dramatically increasing the fuel economy and decreasing greenhouse gas emissions from cars and light trucks.

The first rule, adopted in April 2010, raises the average fuel economy of new passenger vehicles to 34.1 miles per gallon (mpg) for model year 2016, a nearly 15 percent increase from 2011. The second rule, finalized in August 2012, will raise average fuel economy to up to 54.5 mpg for model year 2025, for a combined increase of more than 90 percent over 2011 levels. Fuel economy could reach 54.5 mpg if the automotive industry chooses to meet the greenhouse gas target only through fuel economy improvements.

The standards were adopted by the Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) with the cooperation of major automakers and the state of California. Together, the standards represent the largest step taken by the federal government directed at climate change. Passenger vehicles were responsible for 17 percent of U.S. greenhouse gas emissions in 2011, and the August 2012 standards through 2025 will reduce the carbon intensity of these vehicles by 40 percent from 2012 to 2025.

Other important benefits include improving U.S. energy security and saving drivers money.

The rule for model years 2017 to 2025 is projected to cut annual U.S. oil imports by an additional 6 percent by 2025 from what would happen otherwise, or 400,000 barrels per day. When combined with the rule for model years 2012 to 2016, U.S. oil imports are expected to decline by over 2 million barrels per day by 2025, equivalent to one-half of the oil we import from OPEC countries each day according to EPA. 

Most of the U.S. transportation sector relies on oil as the single energy source, meaning any disruption can hurt the economy. A study by EPA and the Oak Ridge National Laboratory estimated that cutting demand for oil would produce an energy security benefit for the nation's economy of $13.91 (in 2011 dollars) for each barrel saved. In total, the rule for model years 2017 to 2025 is expected to save approximately 4 billion barrels of oil over the life of vehicles sold during this period.

Higher vehicle costs for fuel efficiency improvements will be far outweighed by fuel savings, with the average driver saving about $8,000 net over the lifetime of a model year 2025 car compared to a model year 2010 car.

Another rule adopted in August 2011 established the first-ever fuel economy and greenhouse gas standards for medium- and heavy-duty vehicles, which include tractor-trailers, large pickups and vans, delivery trucks, buses, and garbage trucks. These standards are projected to save a combined $50 billion in fuel costs, 530 million barrels of oil, and 270 million metric tons of carbon emissions over the lifetime of vehicles for model years 2014 to 2018.

President Obama directed EPA and the Department of Transportation to propose new rules by March 2015, with final implementation a year later, for medium- and heavy-duty vehicles for model years after 2018. According to a C2ES analysis, new standards could improve the fuel economy of these vehicles by an additional 15 percent, reducing annual emissions by 50 million metric tons of CO2-equivalent in 2035.

Transportation is second only to electricity generation as a source of U.S. greenhouse gas emissions.

Light-Duty Vehicle Standards Timeline (1975-2012)

The federal government has regulated fuel economy through standards for cars and light-duty trucks for decades. The 1973 Arab oil embargo prompted Congress to pass legislation in 1975 that introduced Corporate Average Fuel Economy (CAFE) standards for new passenger vehicles only. The purpose was to improve the fuel economy of the passenger vehicle fleet to reduce oil imports.

NHTSA, an agency within the U.S. Department of Transportation (DOT), administered the original CAFE program while EPA was responsible for establishing the testing and evaluation protocol for assessing compliance and calculating the fuel economy for each manufacturer. These responsibilities are the same today.

CAFE is the sales-weighted average fuel economy (in mpg) of the passenger cars or light-duty trucks for a manufacturer's fleet. See Calculating Light-Duty Vehicle CAFE Then and Now below for details of how EPA determines compliance. NHTSA fines manufacturers that are out of compliance. NHTSA has so far collected almost $819 million in fines over the life of the CAFE program.

Since 1975, a number of changes have been made to the standards. Figure 1 provides an annotated history of the U.S. CAFE standards. A number of other countries have also instituted fuel economy standards, with most establishing more aggressive targets than the United States. See here for more details.

FIGURE 1: Fuel economy standard for passenger vehicles from MY1978-2025.


Source: NHTSA Summary of Fuel Economy Performance, NHTSA MY2017-2025 Factsheet

1.     1978-1985: Congress sets car standard (1978-1985)
2.     DOT sets truck standard to max feasible (1979-1996)
3.     DOT decreased car standard (1986-1989)
4.     DOT sets car standard to 27.5 mpg (1990-2010)
5.     Congress freezes truck standards at 20.7 mpg (1997-2001)

6.     Bush Admin issues new truck targets (2005-2007)
7.     EISA changes CAFE to footprint standard (2008-present)
8.     Obama Admin issues new car & truck standards (2012-2016)
9.     Obama Admin issues new car & truck standards (2017-2025)

Recent Legal History

Under the federal Clean Air Act, California is the only state with the ability to set air emission standards for motor vehicles, as long as these standards are as stringent as the federal standards and the state receives a waiver from the EPA. Once California receives an EPA waiver, other states can adopt California's standards.

In 2002, California enacted the Clean Cars Law (AB 1493) to set vehicle emissions standards for greenhouse gases. In April 2007, the Supreme Court ruled that the EPA has the authority to regulate greenhouse gas emissions from the transportation sector under the Clean Air Act. In December 2007, a judge threw out a lawsuit by automakers attempting to block California from implementing AB 1493. The intersection of fuel economy standards and greenhouse gas emission standards was beginning to become clear (see here for more on California vehicle standards).

Back in December 2005, California had applied for an EPA waiver to implement its greenhouse gas standards. In March 2008, EPA denied California's waiver request. Upon taking office in January 2009, President Barack Obama ordered EPA to reconsider that denial.

In June 2009, EPA granted a waiver allowing California to regulate greenhouse gas emissions from vehicles within the state beginning with model year 2009. On September 15, 2009, EPA and NHTSA issued a joint proposal to establish new vehicle standards for fuel economy and greenhouse gas emissions for model years 2012 to 2016, which were finalized on April 1, 2010. The joint proposal reflected an agreement among EPA, NHTSA, California, and most major automakers. California promptly agreed to adopt the federal standards in lieu of its own separate standard; and did so again with the latest standards covering model years 2017 to 2025.

Light-Duty Vehicle Standards (Model Years 2012 to 2025)

The latest passenger vehicle standards, finalized in August 2012 and published in the Federal Register in October 2012, cover passenger cars, light-duty trucks, and medium-duty passenger vehicles, from model year 2017 to 2025. The standards build off those set in April 2010 for model years 2012 to 2016. The standards are based on the vehicle's footprint, which is a measure of vehicle size (see Calculating Light-Duty Vehicle CAFE Then and Now). 

Because NHTSA cannot set standards beyond model year 2021 due to statutory obligations and because of the rules' long time frame, a mid-term evaluation is included in the rule. Thus, standards for model years 2022 through 2025 are considered "augural" by NHTSA. The comprehensive evaluation by both EPA and NHTSA will allow for any compliance changes if necessary for the later years covered by the rule.

As seen in Table 1, the greenhouse gas standard from EPA requires vehicles to meet a target of 163 grams of carbon dioxide equivalent (CO2e) per mile in model year 2025, equivalent to 54.5 mpg if the automotive industry meets the target through only fuel economy improvements.

TABLE 1: Projected Emissions Targets under the Greenhouse Gas Standards (g CO2e/mi)

 

2012

2013

2014

2015

2016

2017

2018

Passenger Cars

261

253

246

235

225

212

202

Light Trucks

352

341

332

317

298

295

285

Combined Cars & Light Trucks

295

286

276

263

250

243

232


 

2019

2020

2021

2022

2023

2024

2025

Passenger Cars

191

182

172

164

157

150

143

Light Trucks

277

269

249

237

225

214

203

Combined Cars & Light Trucks

222

213

199

190

180

171

163

As seen in Table 2, the fuel economy standard from NHTSA requires vehicles to meet an estimated combined average of up to 48.7 mpg in 2025. This estimate is lower than the mpg-equivalent of the EPA target for 2025 mentioned above (54.5 mpg) , because it assumes that manufacturers will take advantage of flexibility available under the law designed to reduce the cost of compliance. See Light-Duty Vehicle Program Flexibilities for more information.

TABLE 2: Projected Fuel Economy Standard (mpg).

 

2012

2013

2014

2015

2016

2017

2018

Passenger Cars

33.6

34.4

35.2

36.4

38.2

39.6

41.1

Light Trucks

25

25.6

26.2

27.1

28.9

29.1

29.6

Combined Cars & Trucks

29.8

30.6

31.4

32.6

34.3

35.1

36.1


 

2019

2020

2021

2022

2023

2024

2025

Passenger Cars

42.5

44.2

46.1

48.2

50.5

52.9

55.3 

Light Trucks

30.0

30.6

32.6

34.2

35.8

37.5

39.3

Combined Cars & Trucks

37.1

38.3

40.3

42.3

44.3

46.5

48.7

 

This table is based on CAFE certification data from model year 2010, a car-truck sales split from the Energy Information Administration's Annual Energy Outlook for 2012, and future sales forecasts by JD Powers.

Medium and Heavy-Duty Standards (Model Years 2014 to 2018)

NHTSA and EPA released medium- and heavy-duty vehicle standards for model years 2014 to 2018 in August 2011. Tighter standards for these vehicles for model years after 2018 are due to be proposed by March 2015 and finalized a year later. Table 3 defines the breakdown for medium- and heavy-duty vehicles by weight.

TABLE 3: Vehicle class breakdown for medium- and heavy-duty vehicles

Class

2b

3

4

5

6

7

8

Gross Vehicle Weight Rating (lb)

8,501 – 10,000

10,001 – 14,000

14,001 – 16,000

16,001 – 19,500

19,501 – 26,000

26,001 – 33,000

>33,001

 

The medium- and heavy-duty standards for tractor-trailers, buses, etc., are the first of their kind in the world. The standards are divided into three segments:

1.       Tractor-trailers, which are responsible for almost two-thirds of fuel consumption from medium- and heavy-duty trucks, will have to achieve about a 20 percent reduction in fuel consumption by model year 2018, or about 4 gallons of fuel every 100 miles traveled. The following table defines the fuel consumption standards for tractor-trailers.

TABLE 4: Fuel Consumption Standards for Tractor-Trailers

 

Day cab

Sleeper cab

 

Class 7

Class 8

Class 8

2014–2016 Model Year Gallons of Fuel per 1,000 Ton-Mile

Low Roof

10.5

8.0

6.7

Mid Roof

11.7

8.7

7.4

High Roof

12.2

9.0

7.3

2017 Model Year and Later Gallons of Fuel per 1,000 Ton-Mile

Low Roof

10.2

7.8

6.5

Mid Roof

11.3

8.4

7.2

High Roof

11.8

8.7

7.1

 

2.       Heavy-duty pickup trucks and vans will have to improve fuel economy by model year 2018 by 10 percent for gasoline vehicles and by 15 percent for diesel vehicles, or one gallon of fuel per 100 miles traveled. The standards are phased in, increasing in stringency from model years 2014 to 2018. The standards rely on a "work" factor, which considers the vehicle's cargo capacity, towing capabilities, and whether it has 4-wheel drive. Similar to the light-duty standards, the standards are based on the manufacturer's sales mix. To provide flexibility, manufacturers can conform to the standards using one of two phase-in approaches:

FIGURE 2:

3.       Vocational vehicles (delivery trucks, buses, garbage trucks) will have to improve fuel economy by 10 percent by model year 2018, or about one gallon of fuel per 100 miles traveled. The following table defines the fuel consumption standards for vocational vehicles.

TABLE 5: Fuel Consumption Standards for Vocational Vehicles.

Regulatory subcategories

Light Heavy-Duty Class 2b-5

Medium Heavy-Duty Class 6-7

Heavy Heavy-Duty Class 8

Fuel Consumption Mandatory Standards (gallons per 1,000 ton-miles) Effective for Model Years 2017 and later

Fuel Consumption Standard

36.7

22.1

21.8

Effective for Model Years 2016

Fuel Consumption Standard

38.1

23.0

22.2

Fuel Consumption Voluntary Standards (gallons per 1,000 ton-miles) Effective for Model Years 2013 to 2015

Fuel Consumption Standard

38.1

23.0

22.2

 

NHTSA and EPA designed the standards based on the kind of work the vehicles undertake. Heavy-duty pickup trucks and vans must meet a standard specified similarly to passenger vehicles, gallons of fuel per mile and grams of CO2e per mile. The other two categories must meet a standard based on the amount of weight being hauled (fuel consumed or grams of CO2e emitted per ton of freight hauled a defined distance).

Why Consumers Undervalue Fuel Economy

U.S. fuel economy and greenhouse gas standards exist because individual drivers tend to value savings from fuel economy much less than society as a whole, which leads to more oil consumption than would occur if soceital benefits were taken into account. The benefits to society of higher fuel economy include, but are not limited to, reduced impacts on global climate, improved energy security, and overall consumer savings. But those benefits are not top of mind when a consumer buys a car.

In addition, when making purchasing decisions, most people assume a dollar today is worth more than a dollar in the future since the dollar today can be invested and grow in value over time. The value people assign to a dollar in the future compared to a dollar today is known as the discount rate, or the interest rate they would expect on a dollar invested today. For example, a discount rate of 20 percent means consumers assume they will make 20 percent interest annually on money invested today, which is unlikely. Thus, the higher the discount rate a consumer uses, the more likely a consumer is to invest that money instead of spending it on a product. Consumers can exhibit different discount rates depending on the product.

For passenger cars, David Greene from Oak Ridge National Laboratory found that the value consumers place on fuel economy savings varies widely, but empirical research reveals a discount rate between 4 and 40 percent. The discount rate that society put on fuel savings is much closer to 4 percent, meaning consumers often substantially undervalue fuel economy compared to society.

Calculating Light-Duty Vehicle CAFE Then and Now

Each automaker's fleet-wide average fuel economy consists of three potential fleets: domestic passenger cars, imported passenger cars, and light-duty trucks. (The split between domestic and imported cars exists to support domestic automobile production.) With its focus on fuel efficiency, the standard must capture the fuel economy of each vehicle traveling the same number of miles. The harmonic mean of the fleet accomplishes this task (versus the simpler arithmetic mean). That is, instead of dividing the sum of the fuel economy rates in mpg for each vehicle by the total number of vehicles (the arithmetic mean), the reciprocal of the arithmetic mean is used as follows:

 

Where Production is the number of vehicles produced for sale for each model and TARGET is the fuel economy target for the vehicle.

Before 2008, the target fuel economy was the same for all vehicles. In 2008, NHTSA changed the target to a bottom-up one based on attributes of each vehicle instead of a top-down uniform target across an entire automaker's fleet. The vehicle footprint target for light-duty trucks through model year 2016 and for automobiles through model year 2025 is determined as follows:

 

where FOOTPRINT is the product of the vehicle's wheelbase and average track width in square feet, a and b are high and low fuel economy targets that increase from 2012 to 2025 and are constant for all vehicles, and c and d are adjustment factors. Parameter c is measured in gallons per mile per foot-squared, and parameter d is measured in gallons per mile.

For light-duty trucks beginning in model year 2017, an additional variation of the TARGET calculation is considered. This additional variation establishes a "floor" term, which prevents any footprint target from declining between model years. The definitions of parameters a, b, c, and d correspond to e, f, g, h, accordingly. However, the values of these parameters are different.

 

The idea behind an attribute-based standard is that the level of difficulty of meeting the standards is the same for smaller and larger vehicles. A uniform standard, on the other hand, is easier to meet for smaller vehicles (i.e., those with a smaller footprint) than for larger vehicles.

Light-Duty Vehicle Program Flexibilities

The EPA and NHTSA programs have a number of features to make compliance for manufacturers more cost-effective, while also encouraging technological innovation like plug-in electric vehicles. Since there are two programs to comply with, the details of both programs are stipulated below.

  • Credit Trading System: Both programs include a credit system allowing manufacturers to carry efficiency and greenhouse gas credits forward by up to five years and backward up to three years to achieve compliance and avoid fines. Manufacturers can also transfer credits between cars and trucks of their fleet and trade credits with other manufacturers. Additionally, CO2 credits generated for EPA compliance from model year 2010 to 2016 can be carried forward as far as model year 2021.
  • Air Conditioning Improvements: Both programs allow manufacturers to use air conditioning (A/C) system efficiency improvements toward compliance. For the NHTSA program, credits will depend on fuel consumption reductions. The EPA program allows credits for reductions in fuel use and refrigerant leakage, as well as the use of alternative refrigerants with lower global warming potential.
  • Off-Cycle Credits: Current test procedures do not capture all fuel efficiency and greenhouse gas improvements available. Technologies that qualify for additional credit might include solar panels on hybrid vehicles, active aerodynamics, or adaptive cruise control. In addition, manufacturers can apply for credit for newer technologies not yet considered if they can provide sufficient data to EPA.
  • Zero Emission, Plug-in Hybrid, and Compressed Natural Gas Vehicle Incentives: To encourage plug-in electric vehicles, fuel cell vehicles, and compressed natural gas (CNG) vehicles, EPA has included a credit multiplier in the rule for model years 2017 to 2021. In the compliance calculation for GHG Emissions, all-electric and fuel cell vehicles count as two vehicles beginning with model year 2017 and phasing down to 1.7 by model year 2021. Plug-in hybrid electric vehicles begin with a multiplier of 1.6 in model year 2017 and phase down to a value of 1.3 by model year 2021. Electric and fuel cell vehicles sold during this period will count as emitting 0 grams of CO2e per mile. There is no multiplier for model years 2021 to 2025 and EPA limits the zero-grams credit based on vehicle sales during this period. The cap for model years 2021 to 2025 is 600,000 for companies that sell 300,000 of these vehicles from model year 2019 to 2021 and at 200,000 otherwise. Beyond that number, manufacturers of electric and fuel cell vehicles will need to account for their upstream emissions (i.e., electricity generation or hydrogen production) using accounting methodologies defined in the rule.

    EPA has also included credit multipliers for CNG equivalent to plug-in hybrid electric vehicles: 1.6 in model year 2017 and a phase down to 1.3 by model year 2021. Unlike electric and fuel cell vehicles, GHG emissions from CNG vehicles will be measured by EPA.

    In contrast, NHTSA does not believe it has the legal authority to offer credit multipliers. Existing legal authority does allow NHTSA to incentivize alternative fuels, like natural gas, however, by dividing vehicle fuel economy by 0.15; in other words, an electric, fuel cell, or CNG vehicle that has a fuel economy of 15 mpg-equivalent will be treated as a 100 mpg-equivalent vehicle.

  • Truck Hybridization: Both programs offer incentives to add battery-electric hybrid support to full-size trucks. Mild hybrid pickup trucks (15-65 percent of braking energy is recaptured) would be eligible for a per vehicle credit of 10 grams of CO2e per mile during model years 2017 to 2025 so long as the technology is incorporated into 20 percent or more of the company's model year 2017 full-size pickup production, ramping up to at least 80 percent by model year 2021. Strong hybrid pickup trucks (at least 65 percent of braking energy is recaptured) would be eligible for a credit of 20 grams of CO2e per mile per vehicle during model years 2017 to 2025 as long as the technology is used in at least 10 percent of the company's full-size pickup trucks.

For more information

Innovative financing program helps South Carolina homeowners save money through energy efficiency retrofits

Promoted in Energy Efficiency section: 
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An innovative energy-financing program has helped customers of South Carolina rural electric cooperatives to undertake energy efficiency retrofits for their homes, substantially reducing their energy use and saving money. 

Through on-bill financing (OBF), customers pay back the cost of the retrofit through monthly installments on their electricity bill. This strategy helps to expand access to costly energy retrofits to low-income residents and makes the financial benefits immediately apparent. If monthly energy savings are greater than or equal to the loan repayment, then OBF will be “bill neutral” and result in the same or lower monthly electricity bills . In addition, the financial obligation of OBF is tied to the electricity meter of each house and can be passed on to subsequent owners and residents; thus, customers only pay for the energy retrofits for as long as they live there. 

A preliminary review of South Carolina’s pilot program, called “Help my House,” found that the 125 participating households are projected to save an average of $400 each year after loan repayments. Energy use could be reduced by thirty-five percent, or approximately 11,000 kilowatt-hours each year. The retrofits, which included improvements to insulation, sealing, and heating, ventilation, and air-conditioning (HVAC) systems, cost an average of $7,200, with projected simple payback periods of 5.86 years. In addition, ninety-six percent of participants reported satisfaction with the efficiency installations and rated their homes as more comfortable after the retrofit.

The program was launched in 2011 by the Central Electric Power Cooperative, which supplies wholesale electricity to 20 rural South Carolina electric cooperatives, and the Electric Cooperatives of South Carolina, the co-ops’ marketing and policy partner, with support from the Environmental and Energy Study Institute. A full-scale OBF energy-efficiency program implemented by South Carolina cooperatives could save an estimated $270 million per year in electricity costs and create more than 7,000 jobs after 20 years, according to an analysis by Coastal Carolina University.

South Carolina utilities were authorized to offer OBF through the passage of Senate Bill 1096 in 2010. The bill eliminated the need for credit checks by tying the financial obligation to the meter rather than to the individual borrower, and allowed utilities to disconnect power if loan repayments are not made. Utilities in 22 other states offer OBF, with supporting state legislation in Illinois, Hawaii, Oregon, California, Kentucky, Georgia, Michigan, and New York.

In addition, “Help my House” was funded by a $740,000 loan from the U.S. Department of Agriculture’s (USDA) Rural Utility Service (RUS), which supports the development of electric, water, and telecommunications services in rural regions. This was the first time RUS funded an energy efficiency initiative, but more cooperatives around the country may follow South Carolina’s example. On July 17 USDA proposed a rule that would create a new RUS program to provide up to $250 million in loans for energy efficiency improvements. The proposed Energy Efficiency and Conservation Loan Program would allow rural electric cooperatives to provide energy efficiency retrofits, including those funded by OBF programs, audits, renewable energy systems, and more. 

For more information: 

Help My House Pilot Program – Summary Report

Environmental and Energy Study Institute – Fact Sheet

 
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