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
Systems Covered?

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.

6,000

Million Metric Tons of CO2 Equivalent

5,000

4,000

3,000

2,000

Auctioned allowances

1,000

Allowances allocated free of charge (or auctioned to benefit a specified sector)

0

2012

2014

2016

2020

2024

2030

2034

2018

2022

2026

2038

2028

2032

2042

2036

2040

Year

2044

2046

2048

2050

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-

nology deployment.

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.

50%
45%
Percentage of Allowances

20% 25% 30% 35% 40%

15%
10%
Electricity sector
Natural gas LCDs
Low-income consumers (via auction)
Trade-vulnerable industries
Carbon capture and sequestration
Energy efficiency and
renewable energy programs

5%

Allowance Allocations

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