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Massachusetts and Maine Issue Draft Greenhouse Gas Cap and Trade Regulations

Comments Due in September
Beveridge & Diamond, P.C., Client Alert, August 14, 2007

For a printable PDF of this article, please click here.

The states of Massachusetts and Maine have issued draft regulations intended to implement a cap and trade system for carbon dioxide (“CO2”) emissions from power plants and  establish rules for the conduct of  CO2 allowance auctions. In Massachusetts, the regulations have been proposed jointly by the Department of Environmental Protection (“MassDEP”) and the Massachusetts Division of Energy Resources (“MassDOER”) (collectively, the “MA Draft Regulations”), and in Maine the regulations have been proposed by the Department of Environmental Protection (“MEDEP”) (the “ME Draft Regulations”).

The promulgation of these draft regulations is a significant step towards adoption of a greenhouse gas control program structured in accordance with the Regional Greenhouse Gas Initiative (RGGI). Maine Governor John Baldacci signed a memorandum of agreement to join the RGGI program in December 2005, and Massachusetts Governor Deval Patrick endorsed the RGGI program immediately upon taking office in January 2007. Apart from the pre-proposal draft regulations published in New York last December, these are the first regulatory cap and trade proposals to be published for comment in any of the ten RGGI member states.[1]  They also bring these states one step closer towards implementation of the first mandatory GHG control regime in the United States, and for that reason are likely to be a focus of attention among legislators and regulators in other jurisdictions considering such regimes, including California, the states participating in the Western Regional Climate Action Initiative, and members of Congress considering national legislation.

In Maine, the draft regulations were mandated by state legislation, LD 1851, An Act to Establish the Regional Greenhouse Gas Initiative Act of 2007, while in Massachusetts the draft regulations were issued under existing legislative authorization to MassDEP to regulate air emissions. In Maine, one public hearing has been scheduled on the proposal in September, and written testimony will be accepted by MEDEP through September 20, 2007. In Massachusetts, a number of joint public hearings with MassDEP and MassDOER have been scheduled in September, and written testimony will be accepted by the agencies through September 24, 2007.

Each RGGI member has pledged in a memorandum of agreement to adopt a regulatory program that is substantially similar to the RGGI model rule, a copy of which is available at http://www.rggi.org/modelrule.htm. The ME Draft Regulations and the MA Draft Regulations adhere closely to the RGGI model rule, but they also contain some interesting local differences.

Both sets of draft regulations apply to any fossil fuel-fired unit that serves an electric generator with a nameplate capacity equal to or greater than 25 megawatts. “Fossil fuel” is defined in both sets of regulations as natural gas, petroleum, coal, or any form of solid, liquid, or gaseous fuel derived from such material. For units in operation prior to January 1, 2005, only those that use fossil fuel to comprise more than 50% of total heat input will be subject to these rules, whereas for units commencing operation on or after January 1, 2005, all units using fossil fuel for more than 5% of total heat input will be subject to the rules. MassDEP reports that there are 32 sources in Massachusetts that are currently considered fossil fuel-fired units under this definition.

The ME Draft Regulations exempt units that supply no more than 10% of their gross electrical generation to a transmission and distribution utility on an annual basis. The MA Draft Regulations do not contain this exemption, and Mass DEP explains in its comments to the draft rule that it believes all units meeting the fossil fuel and 25 megawatt output requirements should be subject to CO2 controls. MassDEP has requested comment on this issue.

Both states are proposing to provide an incentive for the combustion of certain biomass fuels. The draft rules provide that CO2 emissions from the combustion of eligible biomass may be deducted from each unit’s CO2 emissions obligations. Eligible biomass must be sustainably harvested woody and herbaceous fuel sources that are available on a renewable or recurring basis. The ambiguity in this definition, coupled with the variety of sources that combust wood fuels in the region, will likely spur a number of comments on this topic.

In Maine, the cap and trade program regulations are proposed to become effective no earlier than January 1, 2009, but not until the date when other states having combined CO2 emissions budgets that total at least 35 million CO2 credits have wholesale electric markets administered and overseen by the same regional independent systems operator that oversees Maine’s electricity market. In Massachusetts, the program becomes effective January 1, 2009, without precondition. 

Beginning on the effective date of the programs, affected fossil fuel-fired sources will need to provide one CO2 allowance for each ton of CO2 emitted during each annual compliance period. For the first several years of the programs, from 2009 through 2014, there is a proposed budget in Maine of just under 6 million CO2 allowances, and in Massachusetts of 26.6 million CO2 allowances, with each allowance representing one ton of CO2 emissions. These budget numbers are based on current CO2 emissions in each state and are intended to cap CO2 emissions from each affected source, and from new sources, at current levels.  Beginning in 2015, the budgets in both states would decrease by 2.5 percent each year through 2018, thereby forcing a 10% reduction in CO2 emissions from fossil fuel powered electric generation sources, or the purchase of offsets by electric generators to reduce CO2 emissions at other sources. As discussed below, the use of offsets is significantly limited by the proposed rules.

The RGGI model rule does not mandate allowance allocations for CO2 credits, except that at least 25% of the allocations must go to “a consumer benefit or strategic energy purpose.” Both Maine and Massachusetts are proposing to auction (i.e., require purchase of) nearly 100% of their allocated CO2 credits, rather than allocate without charge any portion of these credits to current CO2 emitters. In Massachusetts, officials hope that this decision will raise between $25 million and $125 million each year, funds that the state intends to use for consumer benefit or strategic energy purposes, such as energy efficiency projects, peak-demand reduction, and other energy-related efforts. The decision to auction virtually all credits in both states is controversial, as it will be viewed by some as increasing energy costs in a region that already has very high costs of generation. This issue is likely to be the subject of significant public comment.

Both states envision that there will be regional auctions for the sale and distribution of CO2 credits consistent with their state emissions budgets. The MA Draft Regulations also contain procedures to hold a state-specific auction in the event there is no regional auction program available to serve the needs of the program. The Massachusetts auction program would be administered by MassDOER under the provisions of newly proposed 225 CMR 13.00.

Both states are also proposing to allow early reductions of CO2 for affected units that wish to claim credit for CO2 reductions prior to the January 1, 2009 program commencement. Neither state will provide any credit for early reductions achieved through plant shut downs.

Maine and Massachusetts also propose to adopt similar offset project provisions, based on the RGGI model rule, by providing CO2 offset allowances to projects that represent CO2 equivalent emission reductions or carbon sequestration that are real, additional, verifiable, enforceable, and permanent. Project offsets are initially proposed to be limited to five categories of projects:

(a)    Landfill methane capture and destruction;

(b)    Reduction in emissions of sulfur hexafluoride (SF6);

(c)    Sequestration of carbon due to afforestation;

(d)    Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency; and

(e)    Avoided methane emissions from agricultural manure management operations.

Only projects located in a RGGI participating state or its territorial waters, or in a state that has a cooperative agreement with the state in which the affected unit is located, will be eligible for offset credit. Massachusetts complicates the model rule requirements for out-of-state projects by requiring that (a) the external state authorities complete cooperative agreements with all the RGGI participating states in order to be eligible, and (b) projects in external states exceed a minimum threshold of 20,000 tons of annual reductions, thus eliminating smaller projects outside the RGGI region.

Consistent with the limits set in the RGGI model rule, Maine and Massachusetts both propose to impose a strict cap on the number of offset allowances that can be used by an affected unit. The offset cap is proposed at 3.3% of a unit’s required CO2 allowances, unless CO2 allowance prices exceed certain triggers. In the event the twelve month average price of a CO2 allowance exceeds $7.00 (in 2005 dollars), affected units will be allowed to increase their use of offsets up to 5% of their total compliance obligation, and if the twelve month average price of a CO2 allowance exceeds $10 (in 2005 dollars), affected units will be allowed to increase their use of offsets up to 10%, and compliance period obligations will be extended.

For more information on the Maine Draft Regulations or the Massachusetts Draft Regulations, and for assistance in preparing comments on these proposals, please contact Stephen Richmond in our Massachusetts office at srichmond@bdlaw.com or K. Russell LaMotte in our Washington, D.C. office at rlamotte@bdlaw.com.


[1] The ten RGGI states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont.