HomeMy WebLinkAboutID-2711 City of Palo Alto (ID # 2711)
City Council Staff Report
Report Type: Study SessionMeeting Date: 4/16/2012
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Summary Title: Carbon Cap‐and‐Trade Overview
Title: Overview of California’s Cap‐and‐Trade Program to Reduce Greenhouse
Gas Emissions and Impacts on the Operation of Electric and Gas Utilities
From: City Manager
Lead Department: Utilities
This report is provided to the Council as background for the study session when the Regulatory
Affairs Manager of the Northern California Power Agency (NCPA) will provide an overview of
the regulations related to the cap‐and‐trade regulations adopted by the California Air
Resources Board (CARB). No Council action is required.
Executive Summary
The implementation of a cap‐and‐trade program, aimed at reducing California’s greenhouse gas
(GHG) emissions, will impact the City’s electric utility operations starting in 2013. Under the
terms of the cap‐and‐trade regulations adopted by CARB, the City of Palo Alto Utilities (CPAU)
will be allocated GHG emission allowances (defined as the authorization to emit up to one
metric ton of carbon‐dioxide equivalent per allowance). The regulation requires that CPAU
utilize the value of these allocated allowances, including proceeds from the sale of the
allowances in the auctions conducted by CARB, “exclusively for the benefit of retail [electric]
ratepayers” and consistent with the State’s GHG reduction goals. Staff will be seeking Utilities
Advisory Commission (UAC) and Council direction on utilization of the revenue generated from
the sale of the allowances.
A detailed description of the state’s overall GHG reduction goals, as adopted by Assembly Bill
32 (AB 32, 2006), and the comparative GHG reduction goals from Palo Alto’s 2007 Climate
Protection Plan are presented in Attachment A.
Starting in 2015, the City’s gas utility will also fall under the mandate to participate in the cap‐
and‐trade program, but the impact of the program on the gas utility, including any CARB
proposal for allocation of allowances to gas utilities, is not known at this time.
Discussion
In December 2011, CARB issued the final regulation for its cap‐and‐trade program. Under the
terms of the regulation, the City’s electrical distribution utility expects to be directly allocated
GHG allowances for a seven‐year period starting in year 2013 as shown below in Table 1.
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Table 1: CPAU Annual Allowances Allocation for Years 2013 to 2020
Calendar Year: 2013 2014 2015 2016 2017 2018 2019 2020
Allowance Allocation (metric tons)340,533 336,044 322,284 320,461 324,672 317,776 310,204 310,979
Once allowances are freely distributed, publicly‐owned utilities, such as CPAU, have three
options for their use:
1. Place allowances in their compliance accounts to meet compliance obligations for
generation plants they operate directly;
2. Place allowances in the compliance account of a Joint Powers Agency or public power utility
that generates power on their behalf; or
3. Make the allowances available for auction, using the proceeds of any sale to benefit the
customers they serve.
Since CPAU’s electric utility does not operate plants that have a compliance obligation, nor does
the NCPA operate plants with compliance obligations on CPAU’s behalf, the third option applies
and CPAU will sell these allowances into the auctions that CARB will be conducting on a
quarterly basis starting in November 2012. The final rules for auction participation still need to
be clarified by CARB, but staff estimates that CPAU’s allowances will have a market value of
about $5 million per year in calendar year 2013 (assuming a $15/ton allowance auction price).
Although the number of allowances allocated to CPAU’s electric utility declines between 2013
and 2020, the allowance value is expected to increase through year 2020, the last year of the
regulated period. Although the regulations are not finalized, they may provide CPAU some
flexibility in how it participates in CARB’s quarterly auctions (e.g., how many allowances are
sold at each auction). Internal controls and procedures will be established to control how to
transact in the auctions.
Utilization of Proceeds from the Sale of Allowances
The regulation for the use of the proceeds from the sale of allowances stipulates the following:
“Auction proceeds and allowance value obtained by an electrical distribution
utility shall be used exclusively for the benefit of retail ratepayers of each
electrical distribution utility, consistent with the goals of AB 32, and may not be
used for the benefit of entities or persons other than such ratepayers.”
Possible options to utilize the GHG allowance sales proceeds in Palo Alto include:
1. Purchases or investment in renewable resources;
2. Energy efficiency programs;
3. Enhanced incentives for local solar photovoltaic systems;
4. Investment in other carbon reduction activities, including the pursuit of a carbon‐
neutral electric portfolio;
5. Reduction of customers’ electric retail rate; and
6. Rebate to customers.
Staff will explore these options to utilize the allowance proceeds within the context of providing
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a benefit to electric utility ratepayers, and achieving the goals of AB 32 and the City’s Climate
Protection Plan. Staff will seek UAC and Council input on these options in the coming months.
Attachments:
Attachment A: AB32 GHG Reduction Goals and Palo Alto’s Climate Protection Plan Goals
(PDF)
Prepared By: Debra Lloyd, Manager
Department Head: Valerie Fong, Director
City Manager Approval: ____________________________________
James Keene, City Manager