Objectives and Attributes of Energy Efficiency-Based Allowances
within a Multi-Pollutant Emissions Trading System
— One of a Series of ACEEE Fact Sheets
 Objective
Provide pollution control credits to entities that implement energy
efficiency improvements that offset generation and thereby reduce
overall air emissions generation..
Proposed
Basis
Output-Based Allowance Allocation System. The U.S. Environmental
Protection Agency (EPA) would cap overall emissions of one or more
contaminants from electric-generating facilities. Permissions to
emit pollutants (allowances) would be auctioned among participating
electric generating facilities and/or awarded to them by applying
a uniform rate for the amount of electricity (in pounds per megawatt-hour
[lbs/MWh]) the facilities generate. The uniform emission rate would
be derived by dividing the desired tonnage cap by the projected
level of total electric output from participating generation.
Efficiency improvements would be granted allowances based on the
amount of "equivalent" generation avoided. For example,
a 10 MWh savings would generate allowances at least equal to the
10 MWh equivalent generation that it offsets.
Desired Attributes and Guiding Principles of Efficiency-Based
allowances
Implementation of a multi-pollutant allowance market would require
many structural and operational details to be worked out, including
specific provisions for energy efficiency-based allowances. The
ultimate success of the program would depend on the effectiveness
of these details in creating a well-functioning allowance market.
Below are desired attributes and guiding principles for developing
a multi-pollutant trading system that effectively incorporates energy
efficiency-based allowances as a compliance option.
- Minimize
transaction costs—make it easy to apply for and receive energy
efficiency-based allowances.
- Promote
investment in energy efficiency by providing an additional revenue
stream for energy efficiency projects based on their value in
achieving compliance with environmental regulation.
- Create a
market that encourages widespread participation for energy efficiency
projects and investments.
- Create a
market that yields a fair market price for energy efficiency-based
allowances. Controlling pollution through emission reductions
should generally be a least-cost option compared to the application
of post-combustion emission control technologies. The economics
of energy efficiency-based allowances should make them attractive
to generators.
- Create a
fluid, dynamic market with sufficient numbers of energy efficiency-based
allowances at fair market prices to provide generators with a
reasonably certain supply of needed allowances. Generators need
to be able to rely on the allowance markets to secure the desired
numbers of allowances to meet generators' compliance plans.
- Create a
reasonably open market for energy efficiency-based allowances.
Participation in this market should be open not just to utilities/generators,
but other entities capable of delivering and/or aggregating enough
savings to participate in this market. The market should be open
to customers, manufacturers, retailers, third parties, and others
able to implement savings, whether directly or by serving as an
aggregator.
- Create verification
protocols that provide high levels of assurance that energy efficiency
savings actually are achieved, but also are not too burdensome
or costly.
- Create a
structure and regulations governing its operation that meshes
well with the overall electricity industry structure—whether
restructured or still under "traditional" rate-based
utility regulation.
- Create a
formula for determining energy efficiency-based allowances that
accurately credits efficiency savings at generation level. The
formula should account for line losses (transmission and distribution),
which could be achieved simply by applying a national average
based on Energy Information Administration (EIA) data.
Proposed Mechanisms for Efficiency-Based Multi-Pollutant Allowance
Trading
Creating and implementing a multi-pollutant trading system would
be a complex undertaking. Experience gained from implementation
of other pollutant trading systems, such as the sulfur dioxide (SO2)
system in the United States, would greatly benefit this task. Such
experiences demonstrate that pollutant trading systems can be implemented
and that they can be effective at achieving emissions reductions.
Below are proposed mechanisms for effectively using energy efficiency-based
allowances as part of an overall multi-pollutant trading system.
- Because
many energy efficiency projects and investments are small relative
to most generation technologies, aggregation of small projects
into sufficiently large sets of projects to participate effectively
in allowance markets will be a challenge for the program. One
strategy to overcome this problem would be to encourage integrated
utilities, generation companies, or distribution companies to
serve this aggregation function. There are several advantages
to having these types of companies play this role.
- Integrated
utilities and generation companies by default will be in the
allowance trading market since they will be required to have
allowances sufficient for their electricity generation. Participation
costs would therefore be reduced for them to aggregate and
trade energy efficiency-based allowances.
- Many
integrated utilities and distribution companies have experience
with energy efficiency program structures, implementation,
measurement, and verification.
- The
allowances earned through aggregation of energy efficiency
projects have real value to the aggregator, which provides
a strong motivation for success in this area.
- Additional
transaction costs could be expensed as allowable operating
costs by the integrated utility or distribution company. This
would vary state by state, but the enabling federal legislation
could contain language that encourages states to allow cost
recovery of transaction costs in aggregating energy efficiency
projects to qualify for allowances by regulated utilities
and distribution companies.
- To provide
additional incentive for utilities and other market participants
to implement and aggregate energy efficiency projects as a means
to gain allowances, consideration should be given to attaching
a "premium" to such allowances. This would help offset
some of the transaction costs of earning allowances through aggregation
of energy efficiency projects. It also would make this option
more attractive to utilities and other parties. Providing a premium
for energy efficiency-based allowances can be justified by the
additional benefits that energy efficiency provides, including
conservation of non-renewable fuels, enhanced system reliability,
and certain stimuli to local economies, such as job creation.
- Because
multiple stakeholders would be eligible to receive energy efficiency-based
allowances, there would need to be mechanisms in place to prevent
multiple parties from claiming credit for the same measure(s).
For example, one option would be to grant allowances to end-users
who then could transfer ownership of their efficiency-based allowances
to aggregators. Such a transaction might occur at the time the
end-user receives incentives for making the efficiency investments
that generated the allowances (in states where such incentives
for energy efficiency are offered).
- There should
be a set-aside program to assure a certain minimum number
of available allowances, similar to what was done for the SO2
trading system. The set-aside would create an initial pool of
allowances that could only be awarded to qualified energy efficiency
projects. This would both provide a "jump start" to
this aspect of the market and help reduce risk and uncertainty
associated with obtaining energy efficiency-based allowances in
the market because there would be a known quantity of such allowances
available at the initiation of the program.
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