consumer price because the suppliers of
those fuels would be covered entities that
must submit allowances. Power plants would
have to submit allowances starting in 2012,
whereas compliance by most industrial
sources is delayed until 2014 and compliance by natural gas LDCs is put off until 2016.
Are District Energy
In the ACES, district energy systems
are not directly covered entities unless
they qualify as “electricity sources” as
defined above. District systems would be
covered indirectly through the costs of
allowances built into the prices of purchased
fuel oil, or natural gas if purchased from
the gas LDC. However, gas purchased on
the wholesale market or coal users not
qualifying as an electricity source would
not be required to submit allowances.
This is a fundamentally good framework with the exception of our concerns
about CHP systems as discussed below.
However, if the upcoming legislative
process results in modifications that make
many district energy systems covered entities,
it is critical that changes in allowance allocations be made as recommended below.
For example, if the final climate change bill
regulates all sources with emissions greater
than 25,000 metric tons CO2e (the threshold generally used in the ACES as well as
Figure 1. Allowance Disposition in ACES: Free Allocation vs. Auction.
Million Metric Tons of CO2 Equivalent
Allowances allocated free of charge
(or auctioned to benefit a specified sector)
Source: FVB Energy Inc.
amounts allocated free would decline, and an
increasing percentage of the allowances
would be auctioned, as illustrated in figure 1.
Major allowance allocations are illustrated in figure 2. In addition, minor levels
of allowances are provided for: clean energy
innovation centers, advanced automobile
technology, domestic fuel production,
investment in workers, domestic adaptation, wildlife adaptation, international
adaptation, and international clean tech-
These allocations represent a huge
transfer of wealth. Projections of allowance
prices by the U.S. Environmental Protection
Agency (EPA), which many view as conservatively low, are illustrated in figure 3. The
total net present value (NPV) of the allocated allowances at a 4 percent discount
rate is $1.2 trillion. Of this total, $329 billion
would go to the electricity sector, $61 billion
to natural gas LDCs, $250 billion to low-
If the final climate change bill
regulates all sources with emis-
sions greater than 25,000 metric
tons CO2e…, over 70 percent of
district energy systems and over
95 percent of district energy
output would be capped.
a number of past bills), over 70 percent of
district energy systems and over 95 percent
of district energy output would be capped.
This level of emissions would result from
combustion of 468,000 MMBtu of natural
gas, 11,200 tons of coal or 2. 4 million gallons of No. 2 fuel oil.
Figure 2. Major Allowance Allocations in ACES.
Percentage of Allowances
Natural gas LCDs
Low-income consumers (via auction)
Carbon capture and sequestration
Energy efficiency and
renewable energy programs
To mitigate the impact on energy consumers and competitive impacts on industry,
the ACES allocates allowances for free to
a range of capped sources. Over time, the
Source: FVB Energy Inc.