Cap & Trade

1. Cap & Trade

2. Cap & Trade (Cap) • A cap commits a region or country to limits on greenhouse gas emissions (GHG) and then reduces those limits over time. • All proposals set an emissions target (cap) on sources covered by the program. • The cap is normally set in terms of a percentage reduction below a prior year’s emissions level. • For example: • 3 percent reduction below 2005 levels by 2012 • 20 percent reductions below 2005 levels by 2020

3. Cap & Trade(Covered Sources) • Covered sources are likely to include major emitting sectors: • Power plants and carbon-intensive industries, fuel producers/processors (coal mines or petroleum refineries), or some combination of both. • In almost every case, electric power producers are a covered sector. • Some sectors that emit greenhouse gases may not be covered, such as agriculture.

4. Cap & Trade (Allowances) • The emissions cap is partitioned into allowances. • Typically, one emission allowance equals the authority to emit one (metric) ton of carbon dioxide-equivalent. • A metric ton is equal to 2,200 pounds. • Why “equivalent”? Greenhouse gases other than carbon dioxide vary in their global warming potential. • Other GHG’s: methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, and perfluorocarbons. • Methane absorbs 21 times more radiant energy than carbon dioxide; nitrous oxide absorbs 310 times more radiant energy than carbon dioxide.

5. Cap & Trade (Trade) • Trade means entities may buy, sell or trade “allowances” between themselves or others. • This creates a market for “allowances.” • A trading system places a market price on allowances. • The market price should motivate industry, businesses and families to reduce GHG’s. • A well-designed trading system should encourage efficiency, innovation and lowest-cost solutions.

6. Cap & Trade (Offsets) • An offset is an activity, other than a direct emission reduction that can be done to lower GHG emissions. • An offset must be an approved, measurable activity reduction, avoidance, or sequestration of greenhouse-gas emissions from a source not covered by an emission reduction program. • Examples of offsets: • Planting trees • Paying dairy farmers for methane capture systems • Paying farmers for reduced or no-till activities • Use of offsets is normally limited (30%).

7. Cap & TradeHow does cap and trade work? • Tally greenhouse-gas emissions • Energy Information Administration (EIA) and Environmental Protection Agency (EPA) have the data. • Set a cap • 2005 has been selected as the base year; emission cap will begin in 2012 as a small percentage below 2005 levels. • Distribute allocations • Some percentage given out freely, and some will be required to be purchased or traded. • Enforce the cap • EPA will be given authority to regulate with severe penalties for non-compliance. • Step it down • Cap decreases every year to reach a 80-90 percent decrease from 2005 levels by 2050.

8. Cap and Trade Basics Baseline Tons Reductions Cap Years

9. ? How can the electricity industry respond?

11. Climate Change • Basin Electric supports reasonable climate change legislation. • We want to be a part of the solution, not part of the problem. Leadership Approach

12. Energy Diversity

13. Largest carbon capture sequestration project in the world

14. Developing New Technologies • Commercial-scale pilot carbon capture project at the Antelope Valley Station, Beulah, N.D. • Working with a technology provider • Anticipated start = 2013 • Goal = 90% CO2 removal

15. What does Cap & Trade mean to an average household? 1 metric ton carbon/month =

16. Annual Electricity Cost Increases to the Consumer$10 – $60/metric ton carbon cost $120 – $720 $240 – $1,440 $667,000 – $4 million

17. Power Supply Options Limited • Natural gas price is highly volatile • Nuclear option available but in the future • Renewables, conservation and efficiency can not yet meet full base-load need

18. 7000 6000 5000 U.S. Economy CO2 Emissions (million metric tons) 4000 3000 2000 • Flat between 2010 - 2020 • 3%/yr. decline beginning in 2020 • Results in “prism”-like CO2 constraint on electric sector 1000 0 2000 2010 2020 2030 2040 2050

19. 3500 3000 2500 2000 U.S. Electric Sector Emissions (million metric tons) Technology 1500 Efficiency Renewables Nuclear Generation 1000 Advanced Coal Generation 500 CCS PHEV 0 DER 1990 1995 2000 2005 2010 2015 2020 2025 2030 Electric Sector CO2Reduction Potential * Achieving all targets is very aggressive, but potentially feasible. EIA Base Case 2007

20. Key Elements in Legislation • Incentives for technology development • Credit for early adopters • Time to develop the technology • Price ceiling for carbon (safety valve) • Free allocations vs. auction • Regulatory certainty • All sectors must be included • Worldwide effort

21. Waxman-Markey Bill • Cap and Trade • Includes RES • $1 billion/year in CCS grants • Allocations • Offsets Henry Waxman (CA) Ed Markey (MA)

22. American Clean Energy and Security Act(Waxman-Markey) 4 Titles • Clean Energy (RES and Transmission) • Energy Efficiency • Reducing Global Warming • Transition to a Clean Energy Economy • Bill has passed out of House Energy and Commerce Committee • Still needs to go through several other committees • Vote on entire House floor

24. Waxman-Markey Climate Provisions • Targets and timetables • 17% below 2005 greenhouse gas emissions in 2020 • 83% below 2005 GHG emissions by 2050 • Allowance allocation • 85% allowances will be freely given out at beginning – more allowances will be auctioned starting in 2026 • Offsets (agriculture and forestry) • Domestic and international offsets are limited to 1 billion metric tons each of carbon per year

25. Allocations • Allocations given to Local Distribution Companies (retail sales) • Based 50 percent on sales and 50 percent on carbon intensity of electricity purchases • Allocations given to merchant generators • 5 percent of electric generator’s total • Allocations to electric consumers phased out by 2030

26. Offsets • Eligible Projects • Determined by EPA • Project Requirements • Determined by EPA • Verification • Determined by EPA • Issuance of Credits • Audits • Offset Credits • 15 percent domestic and 15 percent international • Offsets Integrity Advisory Board • 9 members established by EPA • Offset Program • Regulations promulgated by EPA w/consultation with Federal Agencies and Advisory Board

27. Performance Standards New Coal • 2009 - 2020: 50% reduction in CO2 • After 2020: 65% reduction in CO2

28. Waxman-Markey Shortcomings • Allocation formula is skewed • Some receive more than 100 percent of their needs and double allocations are given to others • Allocation should be based entirely on emissions • Allowances are fazed out too quickly • Offset Program should be administered by the U.S. Department of Agriculture • Credit for current emissions reduction (Early Action) is missing • Timing of emission reduction does not match the development and commercialization of carbon capture technology

29. Waxman-Markey Shortcomings • Auction – no restriction on the types of entities or individuals who could purchase the allocations • Safety Valve – no safety valve price is included in the bill that could mitigate the harmful economic impact on the end consumers • Research, Development & Deployment funding - inadequate to fund the necessary advancement in carbon capture technologies

30. NRECA Negotiations • NRECA will not oppose the legislation, but will stand aside and work to improve the bill in the Senate in return for: • Pelosi will not object to Rural Utilities Service funding new nuclear generation • No utility shall receive allocations that exceed 100 % of their needed emissions. • Additional small utility allocations (less than 4 million MWh) for cooperatives.

31. Questions