While the proposed revisions to Part 242 maintain annual base budgets for CO, the most significant proposed revision to Part 242 is the approximately 45 percent reduction in the amount of such annual base budgets. In particular, the proposed revisions to Section 242-5.1 establish that, for allocation year 2014, the Statewide CO Budget Trading Program base budget will be reduced from 64,310,805 tons to 35,228,822 tons¹. The annual base budgets under Part 242 then decrease thereafter, as follows: to 34,348,101 tons in 2015, to 33,489,399 tons in 2016, to 32,837,536 tons in 2017, to 32,016,597 tons in 2018, to 31,216,182 tons in 2019, and to 30,435,778 tons for 2020. Each year thereafter, the annual CO Budget Trading Program base budget will remain at 30,435,778 tons.

In addition to the proposed reduction in the annual CO Budget Trading Program base budgets, the proposed revisions to Part 242 also include a new Section 242-5.2 for annual CO Budget Trading Program adjusted budgets. The CO Budget Trading Program adjusted budget is defined as the annual amount of CO allowances allocated each year. In order to account for the existing private bank of CO emissions allowances already acquired, and in order to help create a binding cap, the proposed revisions to Part 242 provides for two distinct budget adjustments. The First Control Period Interim Adjustment for Banked Allowances will reduce the budget for 100 percent of the first control period private bank of allowances (vintages 2009, 2010, and 2011) held by market participants after the first control period. The first adjustment will reduce New York’s budget (the annual cap) by this amount, multiplied by New York’s portion of the RGGI regional cap (approximately 38.93 percent), in each allocation year over the seven year period 2014-2020. The Second Control Period Interim Adjustment for Banked Allowances will reduce the budget for 100 percent of the surplus 2012 and 2013 vintage allowances held by market participants as of the end of 2013. The second adjustment will reduce New York’s budget (the annual cap) by this amount, multiplied by New York’s portion of the RGGI regional cap (approximately 38.93 percent) in each allocation year over the six year period 2015-2020. These are referred to as the CO Budget Trading Program adjusted budget(s).

The proposed revisions to Part 242 also include the creation of the Cost Containment Reserve (CCR), which will help provide additional flexibility and cost containment for the Program. The CCR allocation and the rules for the sale of CO CCR allowances are set forth in subdivision 242-5.3(b) of the proposed revisions to Part 242. CO CCR allowances are separate from and additional to CO allowances allocated from the CO Budget Trading Program base and adjusted budgets. The CCR allowances will be triggered and released at auctions at $4/ton in 2014, $6/ton in 2015, $8/ton in 2016, and $10/ton in 2017. Each year after 2017 the CCR trigger price will increase by 2.5 percent.

If the CCR trigger price is reached, up to 10 million additional CCR allowances will be available for purchase at auction regionally under the RGGI program, except in 2014, when the reserve will be limited to five million allowances in the RGGI region. New York’s portion of the regional CCR is approximately 38.93 percent, such that the State’s portion of the CCR in Part 242 is limited in 2014 to 1,946,639 CO CCR allowances in 2014 and 3,893,277 CO CCR allowances in 2015 and each calendar year thereafter.

The proposed revisions to Part 242 create a new interim compliance obligation, set forth in proposed paragraph 242-1.5(c)(2). An interim control period is defined as a one-year period, consisting of each of the first and second calendar years of each three year control period. In addition to demonstrating full compliance at the end of each three-year control period, at the end of each interim control period, regulated entities must now demonstrate that they are holding CO allowances equal to at least 50 percent of their CO emissions during the previous year.

Under the proposed revisions to Part 242, the second control period, which commenced on January 1, 2012, still concludes on December 31, 2014. Likewise, under the proposed revisions to Part 242, the CO allowance transfer deadline for the second control period will remain March 1, 2015. Subsequent control periods begin on January 1st and conclude on the December 31st three years later. In each of the first two calendar years of each three year control period the owners and operators of each source subject to the revised Program shall hold a number of CO allowances available for compliance deductions, as of the CO allowance transfer deadline (midnight of March 1st or, if March 1st is not a business day, midnight of the first business day thereafter), in the source’s compliance account that is not less than 50 percent of the total tons of CO emissions for that interim control period. For example, the first interim control period will be the year 2015 and the second interim control period will be the year 2016 under the proposed revisions to Part 242, with associated CO allowance transfer deadlines of March 1, 2016 and March 2017 respectively. At the end of the control period in 2017, all sources must demonstrate full compliance and account for 100 percent of their control period emissions with an allowance transfer deadline of March 1, 2018. Under the proposed revisions to Part 242, a compliance certification report is still required at the end of each control period; however, a report is not required at the end of each interim control period. Moreover, pursuant to the proposed revisions, the so-called treble damages provision in paragraph 242-6.5(d)(1), which applies to excess emissions, will not apply to excess interim emissions.

The proposed revisions to Part 242 do not change the applicability provisions of the regulation, and maintain the limited exemption for units with electrical output to the electric grid restricted by permit conditions pursuant to subdivision 242-1.4(b). The proposed revisions do, however, eliminate the provision in paragraph 242-1.4(b)(4) to reduce the CO Budget Trading Program base budget and remove the tons equal to the exempt unit’s average annual emissions from the previous three calendar years. These allowances will now be available to the market.

The Department will continue to allocate most of the CO Budget Trading Program adjusted budget to the energy efficiency and clean energy technology account. Although New York State Energy Research and Development Authority’s (NYSERDA) CO Allowance Auction Program (21 NYCRR Part 507) will not be revised as part of this rulemaking, NYSERDA will continue to administer the energy efficiency and clean technology account so that allowances will be sold in an open and transparent allowance auction. The proceeds of the auctions will be used to promote the purposes of the energy efficiency and clean technology account and for administrative costs associated with the CO Budget Trading Program.

The Reserve Price is the minimum acceptable price for each CO allowance in a specific auction. Under the proposed revisions to Part 242, the reserve price at an auction is either the Minimum Reserve Price (MRP) or the CCR trigger price, depending on the level of demand for allowances at the auction. The proposed revisions to Part 242 provide that the MRP will be set at $2.00 in 2014 and increase by 2.5 percent each year thereafter. The provisions for a current market reserve price are eliminated under the proposed revisions.

Under the proposed revisions to Part 242, the Department has maintained the inclusion of two set-asides in subdivisions 242-5.3(c) and (d). In particular, the department shall continue to allocate 700,000 and 1,500,000 tons each year, respectively, from the CO Budget Trading Program adjusted budgets to these two set-asides.

While the amount of allowances set-aside remains the same, the revisions to Pat 242 include a proposal to modify the existing “voluntary renewable energy market set-aside” in subdivision 242-5.3(c) to include eligible biomass. This revision expands eligibility for retiring CO allowances from the set-aside to include CO budget sources that co-fire eligible biomass as a compliance mechanism. Therefore, when a CO budget source deducts CO emissions from its compliance obligation as a result of co-firing eligible biomass, the Department proposes to also allow for the retirement of the corresponding number of CO allowances from the set-aside. The proposed revisions to the Program maintain the existing provisions for voluntary renewable energy purchases. The Department will continue to retire allowances under the voluntary renewable energy market and eligible biomass set-aside for voluntary renewable energy purchases.

Similarly, while the amount of allowances set-aside remains the same, under the proposed revisions to Part 242, the long-term contract set-aside in subdivision 242-5.3(d) will continue to be available to CO budget sources that can make the necessary demonstration to the Department’s satisfaction. The changes proposed in this subdivision are merely intended to clarify the operation and administration of the set-aside, consistent with the Department’s interpretation of subdivision 242-5.3(d) pursuant to Declaratory Ruling 19-18, which the Department issued on November 5, 2009.

The proposed revisions to Part 242 delete the existing stage one and stage two triggers and associated provisions. These price triggers raised the allowable percentage of offsets to be used for compliance, allowed for the use of international CO emission credit retirements, and created the potential extension of the control period to four years. The offset price triggers and the potential extension of the control period to four years are replaced by the CCR mechanism, to provide measurable cost control in an efficient, transparent and predictable manner. For CO offset allowances, the proposed revisions retain the number of CO offset allowances that are available to be deducted for compliance with a CO budget source’s CO 2 budget emissions limitation for a control period at 3.3 percent of the CO budget source’s CO emissions for that control period.

The proposed revisions to Part 242 eliminate the provision to award early reduction allowances, in existing subdivision 242-5.2(b), as those provisions are no longer applicable. Finally, the proposed revisions to Part 200 include updated cites for the portions of Federal statute and regulations, as well as other documents, that are incorporated by reference into the proposed revisions to Part 242.

¹ This amount reflects New York State’s portion of the regional cap of 91,000,000 tons for 2014, proposed by the states participating in the Regional Greenhouse Gas Initiative (RGGI).

No changes were made to previously published Regulatory Impact Statement, Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement.

As a rule that requires a RFA, RAFA or JIS, this rule will be initially reviewed in the calendar year 2016, which is no later than the 3rd year after the year in which this rule is being adopted.

6 NYCRR Part 242, CO Budget Trading Program 6 NYCRR Part 200, General Provisions Comments Received from July 10, 2013 to September 9, 2013

The Regional Greenhouse Gas Initiative (RGGI) is a cooperative, historic effort among New York and eight Participating States¹ and is the first mandatory, market-based carbon dioxide (CO) emissions reduction program in the United States. Since its inception in 2008, RGGI has utilized a market-based mechanism to cap and cost-effectively reduce CO emissions that cause climate change. Recently, New York along with the Participating States completed a comprehensive program review and announced a proposal to lower the regional CO emissions cap established under RGGI to 91 million tons in 2014, declining 2.5 percent a year through 2020². Accordingly, New York and the Participating States committed to propose revisions, pursuant to state-specific regulatory processes, to their respective CO Budget Trading Programs to further reduce CO emissions from power plants in the region. To implement the updated RGGI program in New York State, the Department of Environmental Conservation (Department) is adopting revisions to 6 NYCRR Part 242, CO Budget Trading Program (the Program) and 6 NYCRR Part 200, General Provisions (collectively “Part 242”).

The Department proposed revisions to Part 242 on July 10, 2013. Public hearings on the proposed revisions, and the associated draft Supplemental Generic Environmental Impact Statement (SGEIS), were held in Albany on August 26, 2013, in Avon on August 27, 2013, and in New York City on August 29, 2013. The public comment period closed at 5:00 P.M. on September 9, 2013. The Department received written and oral comments from approximately 2,300 commenters on the proposed revisions to Part 242 and the draft SGEIS. All of these comments have been reviewed, summarized, and responded to by the Department.

The vast majority of the commenters generally supported the Department’s adoption of the revisions to the Program. A few commenters, primarily those affiliated with the energy industry, expressed some concerns regarding certain revisions to the Program for various reasons. Most notably, comments on specific aspects of the proposed revisions to the Program addressed alleged legal issues, the reduction in the CO emissions cap, the cost containment reserve (CCR) and set-asides, potential emissions leakage caused by the revisions to the Program, and the modeling analyses conducted in support of the revisions to the Program. Many commenters also raised issues not directly related to this rulemaking, such as CO emissions associated with electricity imports, the use and allocation of CO allowance proceeds by the New York State Energy Research and Development Authority (NYSERDA), and the need for additional policies to address climate change. The Department responded to all comments received, including those not directly related to this rulemaking.

A substantial number of comments were received that expressed support for the Program and New York’s participation and leadership in RGGI. Many of these commenters also emphasized the critical consequences of climate change and the need for actions, in addition to the Program, to reduce greenhouse gas (GHG) emissions. In response, the Department acknowledged that adequately addressing climate change requires numerous actions, including regulatory actions by multiple levels of government.

One commenter alleged that the Department’s adoption of the Program may be unconstitutional, either because the Department does not have the Legislative authority to establish the revisions to the Program, or because the Program imposes a tax. In response to the claim that the Department does not have the Legislative authority to establish the Program, the Department cited its statutory authority to establish the Program and make revisions to the Program. Principally, the Department has the power to promulgate “regulations for preventing, controlling or prohibiting air pollution, [including] controlling air contamination.” Environmental Conservation Law (ECL) section 19-0301(1)(a). Furthermore, in any such regulations, the Department may prescribe “the extent to which air contaminants may be emitted to the air by any air contamination source.” ECL section 19-0301(1)(b)(2). CO is a gas that meets the definition of “air contaminant.” ECL section 19-0107(2). As described in the Regulatory Impact Statement (RIS), CO causes “air pollution” as defined in the ECL, because it is present in the atmosphere in quantities that contribute to climate change, which is injurious to life and property in the State. ECL section 19-0107(3). Finally, CO budget sources subject to the Program are an “air contamination source” as defined in the ECL, because such power plants emit the air contaminant CO into the atmosphere. ECL section 19-0107(5).

Moreover, it is the policy of the State “to require the use of all available practical and reasonable methods to prevent and control air pollution in the [S]tate.” ECL section 19-0103. Furthermore, the Legislature has also declared a policy “to improve and coordinate the environmental plans, functions, powers and programs of the state, in cooperation with. . . regions.” ECL section 1-0101. Consistent with this policy, the Legislature has specifically authorized the Department to cooperate with other states in its promulgation of rules and regulations to prevent and control air pollution. See ECL sections 3-0301 and 19-0301. Finally, in adopting regulations regarding the prevention and control of air pollution, the Department follows the procedures set forth in ECL section 19-0303, including that any such regulation “may differ in its terms and provisions as between particular types and conditions of air pollution or of air contamination [and] particular air contamination sources.” ECL section 19-0303(2). These provisions make clear that the Program, including the Department’s adoption of revisions to the Program, is consistent with the Department’s existing statutory authority.

In response to the same commenter’s claim that the Program constitutes an unlawful tax, the Department stated that the Program does not operate as a tax, either by design or in practice. Instead, it is a cap-and-trade program that includes a regional limit on CO emissions from subject power plants. Through the revisions to the Program, the Department is not substantially altering the means by which the Program regulates emissions of CO from power plants. That is, the Program will continue to utilize an interstate market-based cap-and-trade mechanism, in order to control CO emissions from power plants. Moreover, the primary purpose and intent of the Program is to cap and reduce emissions of CO, a GHG, from subject power plants, not to raise revenue for general governmental purposes. The CO emission budget under the Program is set by the Department to minimize contribution to climate change, at a level protective of public health and the environment. In addition, the proceeds from the auction of CO allowances are used by NYSERDA to further the CO emission reduction goals of the Program, and are not primarily used for general governmental revenues. In particular, the Program sets forth that CO allowance proceeds are used to promote energy efficiency, renewable energy, and carbon abatement technologies.

This commenter also alleged that the RGGI program may violate the U.S. Constitution, including specifically the Compact Clause. The Department responded that RGGI does not constitute a compact requiring Congressional consent. This is because, for example, the 2005 RGGI Memorandum of Understanding (MOU) is merely a non-binding political agreement amongst the states to propose respective programs in their individual states, pursuant to their own independent legal processes. Moreover, among other reasons, neither the RGGI MOU nor any other agreement amongst the states serves as the legal basis for the State’s adoption of a RGGI program in New York. Instead, the Program was initially adopted, and the revisions to the Program are now being promulgated, pursuant to the Department’s existing statutory authority and consistent with the State’s own regulatory process.

Several commenters expressed concern over the potential for emissions leakage caused by the Program. This was also the single potential issue addressed in the SGEIS, consistent with the public scoping process. The Department responded by first noting that, when referring to so-called “emissions leakage,” it is important to recognize that, at least as used by the Department, this term only refers to any changes caused by the Program itself. Therefore, consistent with the Final Scope, the SGEIS only considers any emissions leakage to the extent it may be caused by the revisions to the Program itself, because that is the action subject to review under the State Environmental Quality Review Act (SEQRA). Based on the reports and studies conducted to date, there is no evidence that the existing Program (prior to the revisions) caused any emissions leakage.

Second, the Department responded by acknowledging, as described in the RIS and SGEIS, that modeling analyses project that the revisions to the Program may result in some emissions leakage. In particular, these analyses project that, over the 2014-2020 period, the revisions to the Program will cause cumulative CO emission reductions of 86 million tons across the RGGI region. Over the same period, because some emissions may shift location to areas outside of the RGGI region, modeling projects 28 million tons in cumulative CO emission reductions across the larger Eastern Interconnection region. Therefore, although potential emissions leakage may reduce the effectiveness of the Program when measured in terms of cumulative CO emission reductions across the Eastern Interconnection region, the revisions to the Program are still projected to cause overall CO emission reductions in both the RGGI region and across the larger Eastern Interconnection region. In other words, the revisions to the Program are projected to result in positive environmental impacts regardless of the potential impact of emissions leakage caused by the Program.

Furthermore, the Department also responded to concerns regarding emissions leakage by noting that, regardless of the existence of the Program or the revisions to the Program, there are already considerable CO emissions associated with electricity that is generated outside of the State and imported into the State. Although not part of this rulemaking, the Department stated that it is now engaged in an ongoing collaborative process with other Participating States and stakeholders, to identify a mechanism that could address this broader category of all CO emissions associated with electricity imports. Any potential policy that addresses CO emissions associated with imported electricity would also address the smaller category of potential emissions leakage caused by the Program.

Some commenters suggested that the emissions cap was set too high and that the Department should have evaluated lower caps. The Department responded that the Participating States proposed lowering the regional CO emissions cap to align it with current emissions levels, while accounting for allowances held by market participants through the first and second control period interim adjustments. There were calls to evaluate many different alternatives for most of the revised program elements, including the stringency of the cap. The Department determined that a regional cap of 91 million tons, coupled with the other elements contained in the revisions to the Program, best achieves the purposes of the RGGI program while also minimizing costs and impacts on ratepayers.

Some of these commenters also raised concerns that the 2.5 percent annual cap reduction should have been tied to the 2014 baseline, and that the Department should follow the lead of other Participating States in this regard. In response to these concerns, the Department noted that the 2.5 percent per year reduction methodology utilized under the revisions to the Program is consistent with the modeling conducted during RGGI Program Review. Moreover, under the revisions to the Program, the 2.5 percent reduction will continue annually through 2020, with the annual CO emissions budget remaining constant thereafter. Furthermore, the Department clarified that all other Participating States proposed the same 2.5 percent annual reduction methodology in their respective programs.

Some comments were received on the inclusion of the Cost Containment Reserve (CCR) in the revisions to the Program. The Department responded that the CCR represents a reserved quantity of allowances, in addition to the cap, that are only available if defined allowance price triggers are exceeded. The Department determined that the CCR, coupled with other program elements, best accomplishes the emission reduction goals of the Program while adding flexibility to guard against unforeseen events and to minimize any dramatic or volatile CO allowance price increases. The CCR also replaces other elements of the Program, including offset price triggers and the potential extension of the control period to four years, because of its ability to provide measurable cost control in a more immediate, efficient, transparent and predictable manner.

One comment was received regarding the behind-the-meter exemption, expressing an opinion that there should be no such exemption to the Program. The Department responded that it did not intend to remove this provision as part of the revisions to the Program. The Department included this provision to exempt industrial sources, not typically regulated in New York as electric generators, that provide little or no electrical output to the grid. This exemption is currently limited to two sources in the State, and pursuant to the terms of the Program, the amount of sources receiving the exemption cannot increase.

All of the comments received regarding the revisions to the voluntary renewable energy set-aside supported such revisions. One commenter was concerned that the retirement of allowances from this set-aside was not adequately modeled because all allowances were assumed to reach the market. The Department responded to this comment by noting that it anticipates the amount to be relatively small, and in any case, it does not anticipate that this would have a significant impact on modeling projections of CO allowance prices. Moreover, the Department believes that the modeling analyses already performed, including the existing sensitivity analyses, already account for these and other variables.

Two commenters addressed the size of the Long-term Contract (LTC) set-aside. The Department responded that it is not altering the 1.5 million allowance size of this set-aside. While the Department has received annual requests for allowances from the set-aside in excess of the 1.5 million available, the Department anticipates that the amount of allowances requested from the set-aside will decrease in the future, as existing LTCs expire. Moreover, the LTC set-aside is intended to be limited in scope, as the Department generally intends for CO allowances to be auctioned. Furthermore, none of the CO budget sources that have received CO allowances from the set-aside have recently expressed any concerns regarding the size of the set-aside.

In addition, a small number of comments were received regarding the retirement of unsold and undistributed allowances and the need for certainty in the market. The Department responded by indicating that it does not see a need for additional language addressing unsold and undistributed allowances. The revisions to the Program retain the Department’s ability to retire unsold and undistributed allowances at the end of the control period.

A number of comments were submitted questioning the modeling work done to support the revisions to the Program and the assumptions made in that modeling effort. For each comment received, the Department responded by explaining how the model worked and the rationale behind the assumptions made.

A few commenters suggested that the Program should be expanded to other generators and sectors. The Department responded by explaining that the revisions to the Program are aimed at correcting the significant over-allocation of allowances under the Program. The primary goal of the Program is to reduce CO emissions from power plants, while maintaining energy affordability and reliability. Expansion of the Program to generators smaller than 25 MW in capacity is not included in the revisions to the Program. The expansion of RGGI to other power generators may be considered as part of the next RGGI comprehensive program review, which is scheduled for 2016. The Department further acknowledged that adequately addressing climate issues requires regulation of GHG emissions from all sectors. In fact, the State and the Department are already engaged in efforts to address GHG emissions from all sectors. The Department’s Office of Climate Change continues to conduct research and develop policy as it relates to all areas of climate change. The Department is also developing its first ever base year inventory for GHG emissions and will use this to evaluate other areas to address in New York.

A couple of commenters raised concerns regarding the CO allowance auctions, including participation by noncompliance entities and the existing 25 percent bid limitation. In response, the Department noted that the CO Allowance Program regulation adopted by NYSERDA, 21 NYCRR Part 507 (Part 507), is not being revised as part of this rulemaking. Part 507 retains the ability to potentially close auctions to participation by noncompliance entities, as well as decrease the existing 25 percent bid limitation.

There were a number of comments in regard to the use of proceeds. The Department responded that the revisions to the Program do not change existing provisions which have, since the inception of the Program, provided that CO allowance proceeds be used to further the CO emission reduction objectives of the Program, through investments in energy efficiency, renewable energy, and carbon abatement technologies. NYSERDA allocates proceeds pursuant to its Operating Plan and consistent with the Program. The Department also included details on the use of proceeds and the programs that those proceeds sponsor.

Lastly, the Department responded to a number of comments by noting that all of the program elements, including the stringency of the cap, potential emission leakage, and the CCR, will be evaluated during the next RGGI program review, which will start no later than 2016. This will allow the Department and Participating States to assess the efficacy of the Program, while also tracking and participating in the development of the U.S. Environmental Protection Agency’s federal program for regulating CO emissions from new and existing electric generating sources under Section 111 of the Clean Air Act.