Massachusetts Adopts Greenhouse Gas Trading Program
Beveridge & Diamond, P.C., October 24, 2006
Massachusetts has adopted regulations that create the first state sponsored greenhouse gas trading program in the United States. The trading program applies only to the six oldest and largest electric generating facilities in Massachusetts, which are the largest emitters of greenhouse gases in the state. These new regulations are the culmination of five years of planning by the Massachusetts Department of Environmental Protection (DEP).
In 2001, the DEP amended its regulations to require the six affected generating plants to cap carbon dioxide (CO2) emissions in two phases, with the first phase requiring an annual cap equal to the three year average of CO2 emissions in 1997, 1998 and 1999, and the second phase requiring reductions to no greater than 1,800 lbs of CO2 for each megawatt hour of electricity produced, on an annual average [1]. The 2001 limits left the development of a trading program to a later date. The new regulations, effective in October, 2006, create the trading program contemplated in 2001, and expand the reach of the regulations beyond CO2 to allow the trading of offset credits for all greenhouse gases listed by the Intergovernmental Panel on Climate Change as having a global warming potential [2].
Under the new program, DEP will allow the affected facilities to either reduce their CO2 emissions to the limits established in the two phases of the program, or secure greenhouse gas credits to offset their actual emissions of CO2 in each calendar year. Credits must be certified by DEP and may be established for projects which reduce, avoid or sequester emissions of greenhouse gases.
The Massachusetts trading program is initially limited to qualifying offset projects in the geographic area encompassing Massachusetts and the Northeastern states that are participating in the Regional Greenhouse Gas Initiative (RGGI) [3]. Massachusetts has for the moment declined to join the RGGI initiative, due to concerns raised by Governor Mitt Romney during the regulatory development process relating to the lack of an economic escape clause in the RGGI program in the event credits become significantly more expensive than contemplated.
As a result of these concerns, the DEP trading program contains several economic relief provisions. First, the regulations establish an offset trigger price for each calendar year, starting with $6.50/ton in 2006, and adjusted each year to reflect changes in the Consumer Price Index. DEP is required to look back each year to determine whether the offset trigger price was exceeded, or whether there were insufficient credits available for purchase at or below the offset trigger price. In the event DEP determines that either of these conditions existed, then applicants may apply for certification of greenhouse gas reduction, avoidance or sequestration projects anywhere on Earth, rather than limiting their projects to Massachusetts and the RGGI states.
As a second economic pressure relief clause, the program has a maximum credit trigger price, starting with $10.00/ton in 2006, and adjusted each year to reflect changes in the Consumer Price Index plus two percent. DEP is required to look back each year to determine whether the maximum trigger price was exceeded. If it was, the affected facilities may choose to pay into a trust fund established by the DEP the trigger price times the number of tons of emissions to be offset, instead of purchasing actual credits. DEP will then use the proceeds held by the trust to fund projects achieving greenhouse gas emissions reductions.
All greenhouse gas credits must be certified by DEP. Candidate projects must create emission reductions, avoidance, or sequestration commencing on or after January 1, 2006. All projects must demonstrate real, additional, verifiable, permanent and enforceable emissions impacts, and projects must involve at least 5,000 creditable tons.
Massachusetts has adopted a cautious first step towards greenhouse gas emission reductions by limiting the reach of its regulatory program to the six largest electric generating plants, and providing several economic escape clauses if credits become unexpectedly expensive or unavailable in the Northeast. State regulatory officials view this new program as a step towards a more extensive greenhouse gas initiative and speak excitedly about using the program as an incubator to help plan for a larger program in the future.
For those in Massachusetts who are not directly affected by the CO2 cap, there are several things to keep in mind:
- If you will be involved in a project that will reduce, avoid or sequester greenhouse gas emissions, you should determine whether there would be value in obtaining DEP certification and selling the credits. Examples of potentially qualifying projects include landfill gas combustion, methane capture, natural gas, oil and propane end-use efficiency projects, emission unit controls not otherwise required, renewable energy projects, energy conservation projects, and forestation projects. Nuclear power and underground sequestration are not eligible.
- If you are an industrial or commercial emitter of greenhouse gases, you should pay close attention to the pricing of Massachusetts credits over the next several years and you should watch carefully as DEP considers expansions in the scope and breadth of the current program. You should also watch developments in other leading states, such as California and the RGGI states in the Northeast, as it is likely that Massachusetts will use the current program as a platform from which to expand and these states will likely pursue more ambitious programs in the near future. The recently enacted Global Warming Solutions Act of 2006 in California is an obvious example.
For further information, please contact: Stephen M. Richmond, David M. Friedland, Madeleine B. Kadas, K. Russell LaMotte, Thomas Richichi, Nicholas W. van Aelstyn, David M. ("Max") Williamson or Nancy N. Young.
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[1] 310 CMR 7.29(5)(a).
[2] Intergovernmental Panel on Climate Change, Third Assessment Report (2001).
[3] The RGGI states are comprised of Connecticut, Delaware, Maine, Maryland, New Hampshire, New Jersey, New York, and Vermont.
