The CPP offers states choosing to comply under a mass-based emission trading program discretion to decide both the methods that will be used to distribute CO2 allowances and the parties that will receive such distribution. In order to assist states with making these distribution decisions, the Midcontinent Power Sector Collaborative—a multi-sector initiative that is convened and staffed by the Great Plains Institute “to consider an optimal approach to reduce carbon emissions from existing power plants and meet Clean Power Plan requirements”—recently released a white paper entitled Key Considerations for Making Allowance Distribution Decisions.
The white paper discusses various issues states should consider when making allowance distribution determinations, including that states should consider the goals they seek to achieve through such distribution (e.g. to protect consumers, reward early action, provide financial security, etc.).
The white paper posits that emission allowances are an operating cost for the generators, regardless of whether they are obtained for free or purchased, and that the total value of allowances will be greater than the cost of reducing emissions. The paper also posits that if allowances are allocated at no cost to the generator, the “flow” of the allowance value (i.e. whether or not consumers benefit) will depend, in part, on: (i) whether the state regulates its utilities or is restructured, (ii) the utility’s ownership structure (e.g. public power, investor owned utility, merchant generator), and (iii) whether generators participate in a regional market.
The white paper also examines the opportunities and challenges associated with several different distribution options, including:
- Allocating based on historical baseline data (such as emissions);
- Using an “updating output-based” approach in which incentives or subsidies are provided based on changes that occur during the program period;
- Providing allocations to the affected entities;
- Providing allocations to load-serving entities;
- Distributing allocations directly;
- Distributing allocations through set-asides; and
- Distributing allocations through an auction process.
