SJC decision raises emissions questions

WE ARE FACING the daunting challenge of meeting the greenhouse gas emissions reduction targets of the Global Warming Solutions Act.  And now the recent Supreme Judicial Court decision, Kain v. DEP, has confirmed those targets are legally binding.  But, unfortunately, the court’s decision may have established a principle of law that should cause serious concern about how we can meet the requirements of the Global Warming Solutions Act through the electric sector.  When the court wrote its decision, it seemed to be saying that all emissions reductions must occur within the actual borders of Massachusetts to comply with the Global Warming Solutions Act, or GWSA.  It sounds simple enough.  But if that is what the court meant, the practical implications are quite complicated.  It has the potential of rendering most of the major electric sector initiatives incapable of contributing toward GWSA compliance, even though they are actually reducing emissions in the region.  This sounds a bit alarmist. But the issue is objectively apparent when the plain language of the decision is considered in the context of how the regional electric system and associated market actually works.  Fortunately, the problem can be swiftly fixed by the Legislature, but only if the Legislature acts on it.

In order to recognize the implications of the issue, it is important to understand the regional electric system.  It is a system where electricity instantaneously flows over the transmission system across state borders.  Generation in one state serves load in other states.  Electrons flow under the laws of physics and do not recognize borders.  Emissions are caused by fossil fuel generation that is serving a combined regional electric demand, of which Massachusetts consumes almost 50 percent.  Massachusetts imports a substantial amount of that share from sources outside of the state borders.  Because Massachusetts consumes more electricity than it produces, the electricity usage within the state typically causes emissions to occur from fossil fuel generation outside of the state.  Conversely, when usage is reduced, it can cause a reduction in emissions from generation located outside of the state.  Even emissions reductions from energy efficiency programs have impacts on out-of-state generation.  Given these dynamics, recognition of regional emissions is essential to any coherent emissions-reduction program in the electric sector.  In fact, the baseline inventory of emissions against which reductions have been measured for GWSA compliance has always included out-of-state emissions caused from the import of electricity into Massachusetts.

As a practical matter, targeting emissions reductions to specific generation through the market is not feasible where there is an instantaneous ebb and flow of electricity across state borders from multiple generation sources.  When a clean energy resource of any type delivers zero-emissions energy into the grid, it typically reduces emissions in the regional system in most hours by displacing fossil fuel generation.  But the location of the displacement is not dependent upon where the delivery occurs.  It is driven by the market system run by the region’s Independent Service Operator, which dispatches generation based on economic factors and other technical issues such as transmission constraints and the need for other ancillary services.  Thus, no matter where the clean energy is delivered on the transmission or distribution system (even behind-the-meter solar), there is no assurance that it is actually causing reductions from fossil fuel generation located in Massachusetts.

This background brings us back to the Kain case.  The general ruling in Kane is already widely known.  At its core, the court essentially ruled that that the Department of Environmental Protection, or DEP, was not complying with the GWSA, because it had not implemented new regulations to address multiple sources of emissions, as required by the law. In making this ruling, the court rejected the argument that certain pre-existing programs fulfilled the mandate.  In the decision, however, the court drew some conclusions about the need for Massachusetts-based emissions reductions when discussing the Regional Greenhouse Gas Initiative, or RGGI.

RGGI is a program that is designed to reduce carbon emissions from generators across all the participating states.  There are nine states, including all of New England, who participate.  The basic principle is for each state to be allocated a budgeted amount of “emissions allowances” that limits the amount of carbon emissions from fossil fuel generation sources.  The annual amount of allowances is capped and the caps become more stringent over time.  Emissions decrease over time as the cap on aggregate allowances decrease over time.  Each generator purchases carbon emissions allowances in regional auctions and is allowed to emit up to the allowances it holds.  However, RGGI is a “cap and trade” program that allows generators with not enough allowances to trade for more allowances with participants in other states who have some to spare.

In considering whether DEP had complied with the GWSA, the SJC concluded that RGGI did not qualify as a regulation for purposes of the GWSA because it was a separate legislative initiative and not a new regulation under the GWSA.  Had the court stopped there, it might not have caused an issue of interpretation, but the court went further by adding an additional rationale:

Under the design of the program, if a Massachusetts power plant needed to purchase allowances at the quarterly RGGI auction in order to achieve compliance, and the allowances in the Massachusetts carbon dioxide budget were exhausted, the Massachusetts power plant could purchase allowances from another participating state.  Because of this feature, there is no way to ensure mass-based reductions in carbon dioxide emissions from power plants in the Commonwealth . . . .  Thus, . . . the RGGI may contribute to reductions in emissions, but does not comport with the specific requirements of [the GWSA].  Any other interpretation would diminish [the GWSA’s] purpose of achieving measurable and permanent reductions to emissions in the Commonwealth.

This general observation also was accompanied by a footnote which stated:

Accordingly, we also reject the department’s argument that regulations promulgated pursuant to [the GWSA] need not achieve greenhouse gas reductions specific to the Commonwealth, but may be regional in nature. Not only is this argument inconsistent with the statute’s central purpose of reducing emissions in the Commonwealth, but it also presumes the department has authority to promulgate regulations that have force outside the Commonwealth.

This was a startling conclusion – with significant implications for the wider electric sector.  The court’s decision leaves the distinct impression that regional emissions reductions occurring in locations physically located outside the borders of Massachusetts – even if caused by deliberate actions taken within the Commonwealth – cannot count toward emissions reductions under the GWSA.  While that is not precisely what the court said, the actual statements certainly leave one wondering.  The implications are substantial.  As a practical matter, there does not appear to be any realistic way of meeting the GWSA aggregate emissions-reduction targets unless (i) the regional emissions reductions achieved by Massachusetts’ actions in the electric sector can be counted or (ii) we ignore altogether emissions outside of the state that have been caused by imports into the state.  In fact, it would not be logical to count regional emissions attributable to Massachusetts imports in the baseline, while at the same time excluding consideration of initiatives that reduce such regional emissions.

In any event, if the court truly meant what it said, there are significant implications for any program that is designed to procure clean resources from out-of-state facilities or reduce emissions in the electric sector generally. Initiatives to promote renewable energy rely on the regional nature of the electric sector. Even our nation-leading energy efficiency programs are credited with reducing emissions from regional sources which have been taken into account for planning purposes under the GWSA.  The Renewable Portfolio Standard, or RPS, has been an important mechanism for the growth of renewable resources since its inception in 2003.  By requiring the purchase of renewable energy certificates, or RECs, from eligible renewable resources, it provides needed additional revenue for renewable projects that otherwise could not compete with traditional generation with energy revenue alone.  But the vast majority of the RECs purchased in Massachusetts typically come from out-of-state resources.  The most recent state report on the RPS indicates that 76 percent of the obligation was met with out-of-state resources in 2014.  As administered today, the annual accumulation of RECs that are purchased is accounted for as a reduction or off-set to carbon emissions for purposes of tracking compliance with the GWSA.  But now the Kain decision seems to call into question whether RECs purchased from new out-of-state sources can even count toward GWSA compliance.

Similarly, the Green Communities Act of 2008 included procurement obligations imposed on electric distribution companies, requiring long-term contracts for the purchase of RECs and energy from renewable resources up to a specified amount.  This led to contracts with out-of-state resources.  In similar fashion, the Legislature is now considering procurements of very large quantities of energy from large-scale hydro and offshore wind.  But the Kain decision now creates uncertainty.  Can the procurement of this energy under any of these initiatives count under the GWSA if they come from sources out-of-state and do not directly reduce emissions from Massachusetts power plants?  Absent legislative action, this question cannot truly be answered without further clarification by the court.

There are other practical and legal implications as well. If future initiatives try to target Massachusetts impacts alone in an interstate market, such state actions may collide with federal constitutional law.  This is what happened when the Green Communities Act of 2008 contained language limiting long-term contracts to renewable projects that were located “within the jurisdictional boundaries of the Commonwealth.”   The law was challenged in 2010, the provision deemed unlawful, and the geographical limitation suspended.

Whatever the reason for the Supreme Judicial Court’s apparent rejection of regional emissions reductions for compliance, the Legislature needs to respond.  The court’s decision may have just taken regional procurements and most other important carbon-reduction initiatives in the electric sector out of the compliance toolbox.  One may argue for a more optimistic interpretation of Kain based on the realities of regional markets or other reasoning.  But such arguments still collide with the expressed words of the Supreme Judicial Court indicating that the GWSA was intended to reduce emissions within Massachusetts, and not regionally.  We can always hope reasoned interpretation will prevail that embraces regional emissions reductions. But hoping will not bring the certainty we should have before we embark on multi-billion dollar procurement initiatives for out-of-state resources.

Fortunately, the time for a legislative clarification is ripe.  The Senate is now considering the House energy bill which contemplates substantial procurements of energy from out-of-state sources, including hydroelectricity from Canada and offshore wind from federal waters.  All it takes would be amendments that clearly tie the procurements to compliance with the GWSA. Similarly, it would be prudent to add an additional amendment making clear that regional emissions reductions caused by energy-sector initiatives employed by the state can be counted toward the emissions reduction targets under the GWSA. This could be carefully crafted so as not to disturb the core of the Kain decision that requires the state to implement sector-specific regulations.

Absent legislative clarifications, the Kain decision creates uncertainty about what the state can do in the electric sector to reach the mandatory targets. Worse yet, it could just result in more litigation in the distant future. While advocates such as the Conservation Law Foundation have reportedly dismissed any notion that regional emissions reductions would not count toward GWSA targets, another future litigant might disagree.  And that position would be far from frivolous. The hydro and offshore wind procurements would certainly reduce regional emissions, but they would not necessarily achieve “permanent and measurable reductions to emissions within the Commonwealth,” as the court required in Kain.  And legislative silence after Kain might speak volumes to a future court.  Considering all of this, shouldn’t the Legislature just clear this up while they are mandating large procurements that are supposed to help the state meet those GWSA targets?

Ron Gerwatowski is a freelance energy advisor with 29 years of experience in the energy industry. He recently served as assistant secretary for energy during the first year of the Baker-Polito Administration. After completing a year of public service, he returned to the private sector as an energy and regulatory policy consultant. He was formerly senior vice president for regulation and pricing at National Grid before retiring from the company in early 2014.