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A partisan debate which began on Earth Day is taking place in the US Senate: what will be the nature of the new emissions tax.

The states have individually been considering legislation, a plan which highlights the absurdity of trying to legislate atmospheric conditions on a local or even national level.

Carbon cap-and-trade policies are intended to reduce carbon emissions. Carbon based generators would be required to acquire allowances to cover their emissions. The emissions tax may be limited to CO2, or it may also include nitrous oxide and sodium oxide (NOXSOX), mercury, CO, and methane.

For commercial-scale renewable energy projects in development, the Production Tax Credit is still critical. RPS mandates adopted by over half of the US states also create demand for Renewable Energy Certificates (REC). These provide a revenue stream to generation owners. Voluntary markets (VRE) provide another source of demand for renewable energy projects. Together with the sale of electricity and demand capacity, these three additional sources of income allow projects to go forward with a predictable return on investment.

Demand for voluntary renewable energy (VRE) is motivated to a large extent by the purchasers’ desire to reduce emissions below what would be required legislatively. Cap and Trade programs therefore have the potential to thrawt demand for VRE.

The VRE market is comprised of customers of utility “green pricing programs”, customers of competitive energy providers in electric market restructured states (such as New York and New England states served by their respective ISO), and enterprise and non-profit customers that buy unbundled renewable energy credits.

NREL estimates that in 2007 US consumers made voluntary purchases of REC totaling 18 million MWh.

Compare how the VRE – REC markets encourage renewable energy projects: the voluntary market primarily supports new renewable generation for the incremental benefit provided. Since 2004, VRE demand has exceeded compliance market demand.

Voluntary demand is growing. The market grew year-on-year by 62% in 2004, 37% in ’05, 41% in ’06, and 53% in ’07. If it continues to grow at the rate of 40%, the VRE market will reach 50 million MWh by 2010.

By comparison, state RPS policies collectively call for utilities to obtain 60 million MWh of renewable electricity by 2010. Although RPS-mandated demand may outstrip voluntary demand in the future, the VRE market is significant.

In the VRE market, enterprise and non-profit purchases comprise 3/4 of the MWh transacted. These customers are trying to reach organizational emissions goals. When they purchase renewable energy in the VRE market, they have effectively reduced their emissions. These voluntary actions are in addition to what is required by statute (currently zero for all enterprise and non-profit customers/generators in NYS, up to 2 MW of generation capacity), unlike the RPS requirements placed on the regulated generating electric utilities.

In the absence of a Cap and Trade emissions tax, the generation from renewable sources displaces whatever generation is operating at the margin, which is fossil-fuel based generation, thereby reducing systemic emissions.

But if Cap and Trade emission tax is enacted, the purchase of renewable energy electricity no longer reduces emissions. This result was recently explained by the California PUC. In October of last year, the CPUC acknowledged that the VRE market would be affected by Cap and Trade. They wrote:

“Once pollutants in the electricity sector are subject to a cap, purchase of voluntary renewables (VRE) do not contribute to further reductions, because the cap determines the allowable level of emissions. ”

Global climate change discussion not withstanding, the Senate need to do some serious homework before they act.

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