|Resource shuffling prohibition under the California cap-and-trade rules|
Resource shuffling is a cap-and-trade concept that appears very vague. I am not overly upset with this fact as, apparently, the inventors of this regulatory formula i.e. Californian legislators also don’t have at present a clear and precise idea how this roughly outlined rule should be filled in with content. The said supposition is strongly supported by the presentation for the Cap-and-Trade Program Electricity Workshop held by California Air Resources Board on May 4, 2012 (available at the ARB website).
The notion of resource shuffling relates generally to First Deliverers of Electricity (for particulars see: First Deliverers of Electricity as covered entities under California cap-and-trade – a few remarks on equal treatment).
Resource Shuffling is defined in the California cap-and-trade legislation as ‘any plan, scheme, or artifice to receive credit based on emissions reductions that have not occurred, involving delivery of electricity to the California grid.’
In contrast to this vaguely designed definition, Section 95852(b)(2) of the California Final Regulation Order unambiguously prohibits resource shuffling and requires clear-cut attestation by the market participant that the company or facility has not engaged in resource shuffling.
So, if such a strictly formulated restriction is at issue, what resource shuffling prohibition will mean in practice? The answer to this question is burdened with difficulty since the California scheme is quite unique in that regard and generally there are not direct analogies in other cap-and-trades.
Some helpful hints provides a brochure ‘California Agency Unanimously Adopts Cap-and-Trade Regulations, A Review of Key Program Design Elements and Outstanding Issues’ October 25, 2011 (at www.linklaters.com) which indicates that, ‘In its simplest form, resource shuffling would prevent importing “clean” power from a neighboring state while exporting or otherwise diverting “dirty” power originally scheduled for use in California.’
The said study points out that the prohibition against resource shuffling is intended to prevent covered entities from receiving credit for emissions reductions by simply changing the location where “dirty” energy is delivered or used.
It gives an example that the resource shuffling rule will prevent a generator with a mixed portfolio of generating assets in neighbouring states from receiving credit for emissions reductions simply by shuffling dispatch points within its portfolio without reducing actual GHG emissions.
Similarly, any other importer or intermediary will not receive credit for emissions reductions simply by amending its contracts so that “dirty” power previously scheduled for delivery into California is sent to a neighbouring state and is replaced by “clean” power.
The study in question make also the hypothesis: ‘Without the prohibition against Resource Shuffling, one could envision the development of an interstate market for power swaps along California’s borders that would be characterized as swaps between California exporters of “dirty” power and California importers of “clean” power.’
Nevertheless, the precise delineation of factual circumstances that can be captured by the provision in question appears to be the one of the most uncertain interpretational questions in the California cap-and-trade regulations. The difficulties in their resolving would be magnified by the fact that, as was mentioned, there are no at present appropriate parallels for this regulatory concept in other emission trading schemes.
Certain examples of the possible difficulties are envisioned in the above-cited study:
‘For example, it is not clear under the Regulations whether an entity that switches its portfolio from a high emissions factor source to a low emissions factor source is in compliance if that high emissions factor source continues to sell its power to other market participants – including those outside of California. Since the high emissions factor source is still generating power, its emissions have not been reduced. Can the entity that swapped its power sources confidently claim it is not “Resource Shuffling” despite the fact that it has no authority to determine whether and to whom the high emissions factor sourced power is sold? To take this hypothetical to the extreme, the Regulations could permit California to pursue and sanction entities for noncompliance with the Regulations based on acts taken by third parties well beyond California’s borders.’
All the above ambiguities arise mainly from overly broad and imprecise definition for resource shuffling included in California cap-and-trade regulations and there are serious grounds for its change.
The ARB staff provided limited guidance regarding what is not resource shuffling ('safe harbor' concept -see box). Cases not covered by the attached list will have to be resolved on an ad hoc basis, ultimately by judicial judgments.
Examples of resource shuffling that have been indicated in the ARB Guidance so far are:
1. Substituting relatively lower emission electricity to replace electricity generated at a high emission power plant procured by a First Deliverer under a long-term contract or ownership arrangement, when the power plant does not meet California's EPS, and the substitution is made in order to reduce a First Deliverer's compliance obligation.
2. Assigning a long-term contract for high emission electricity specified directly above to a third party, for the purpose of reducing a compliance obligation.
In the ARB opinion expressed in the November 2012 Guidance, resource shuffling 'involves substitution of electricity from relatively lower emitting generation for electricity from relatively high emitting generation, when such substitution does not qualify under the "safe harbors" listed above. Resource shuffling is evident when a First Deliverer knowingly substitutes electricity with relatively lower emissions for electricity with relatively higher emissions as part of a plan to reduce the First Deliverer's compliance obligation under the Cap-and-Trade Regulation.'
In earlier workshop materials the instances of the resource shuffling have been named, among others, as:
- cherry picking,
- facility swapping,
So, let’s hope that by the time the prohibition against resource shuffling will be included in the EU ETS legislation, Californian carbon market resolves the most part of the problems regarding the practical application for this rule.
|Last Updated on Friday, 19 April 2013 11:55|