A Performance-Based Approach to Allowance Allocation for Clean Power Plan Compliance

Posted by Reports on Feb 24, 2016 12:52:00 PM

Publish Date: February 24, 2016

Under the final Clean Power Plan (CPP), the U.S. Environmental Protection Agency (EPA) gives states flexibility to reduce emissions from existing power plants in a way that best suits their individual circumstances.
One key choice is whether to meet these targets through a mass-based or a rate-based plan. States can develop cost-effective plans under either approach, but optimal outcomes depend on a number of key decisions. For states choosing to comply using a mass-based approach, the question of how to allocate emission allowances looms larger than any other policy choice.

AEE Institute’s paper, A Performance-based Approach to Allowance Allocation for Clean Power Plan Compliance, explains that allocation to affected units on the basis of historical generation — the proposed approach under EPA’s proposed mass-based Federal Plan and Model Trading Rule — is the least effective of the many options available to states. For states that decide to adopt it, the historical generation approach to allocation will limit compliance options, hamper competition, and introduce market uncertainty, which is likely to drive compliance costs higher for electricity customers relative to other allocation systems.

This paper describes one alternative, performance-based allocation, which would award allowances on a technology-neutral basis according to the emission reductions achieved in the prior year. By allowing all eligible emission reduction measures to participate on the basis of cost and value, a performance-based approach would create an open and competitive marketplace, lowering compliance costs for affected units and ratepayers alike.


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Topics: Federal Policy