Eight takeaways from a sneak peek of New York's cap

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August 30, 2023 - The New York State Department of Environmental Conservation (DEC) and the New York State Energy Research and Development Authority (NYSERDA) recently held a series of webinars on New York's proposed "Cap-and-invest" program, which is intended to help the state achieve its ambitious greenhouse gas reduction goals under the Climate Leadership and Community Protection Act (CLCPA).

This article will identify eight important takeaways from the webinars and lay out the next steps in the process of creating the Cap-and-invest program, which the agencies affectionately call "NYCI" (pronounced "Nikki").

The New York State Legislature passed the CLCPA in 2019, requiring the state to reduce greenhouse gas (GHG) emissions across its entire economy by 85% from 1990 levels by 2050. The Scoping Plan created under the CLCPA recommended the creation of a "Cap-and-Invest" plan, similar to the Regional Greenhouse Gas Initiative (RGGI) already in place in New York for the electricity sector, and California's Cap-and-Trade Program. Governor Kathy Hochul has since directed the agencies to begin developing the program under their existing statutory authority.

The agencies held a series of webinars in June to obtain public input early in the regulation drafting process. The webinars described the agencies' initial framework for the program and solicited comments from participants on a wide variety of questions. The programs raised a lot of questions — 19 pages worth, which are collected together on the state's website (capandinvest.ny.gov). So while the webinars raised more questions than they answered, they still provided some clues as to the form the program might take. Here are some key takeaways:

NYCI is expected to be implemented through three new regulations: a new 6 NYCRR Part 253 that will regulate greenhouse gas reporting, a new 6 NYCRR Part 252 that will contain the bulk of the NYCI rules, and a new 21 NYCRR 510 that will govern the auction process.

The agencies have begun the process of sketching out the terms of those regulations, but they are clearly still wrestling with how to implement such a far-reaching program. As a result, they are still seeking help from the public, especially from the industries expected to be regulated under the program.

Like other cap-and-trade programs, NYCI is expected to establish a cap on total emissions of GHGs in the state (both direct and upstream emissions) and require entities to obtain and retire emissions allowances in an amount equal to their GHG emissions.

The state made it clear that it intends to initially auction off the allowances, effectively setting a price for GHG emissions in the state. The agencies will need to carefully design and monitor the auction process to ensure that the cost of the allowances is not passed through to customers in a way that increases prices for goods and services.

The webinars made clear that the cap on GHGs will cover emissions from every source within the state and related upstream sources. But only certain companies in certain sectors of the economy will be required to purchase allowances (referred to as "obligated entities").

All others (the "non-obligated entities") will have their emissions covered by allowances that are automatically retired by the state. This, of course, begs the question as to which industries will be the "obligated entities." The agencies continue to receive public input on that issue.

Given the state's need to measure GHG emissions against the binding caps imposed by the CLCPA, it is clear that more companies will need to report their GHG emissions when the program is put in place. However, the agencies took great pains to clarify that not every entity required to report their emissions would be considered "obligated entities."

The CLCPA authorizes the use of carbon offset projects as an alternative compliance mechanism. However, the agencies made clear that they have no intention of including emissions offsets as a compliance mechanism under the new rules. This is at least partly in response to concerns that offsets allow companies to continue business as usual at certain sites, resulting in localized emission hotspots. Time will tell how long the agencies stick to this position, as offset programs become more standardized and businesses seek more options to avoid paying for allowances.

Energy Intensive and Trade Exposed industries (EITEs) are those industries that use a lot of energy and are subject to intense competition (such as cement, steel, and paper manufacturers), making them sensitive to even small cost increases.

The webinars made it clear that the agencies will make accommodations for those industries, including possibly providing them with a dedicated source of additional allowances. We anticipate that there will be intense lobbying around the ultimate definition of an EITE industry in the regulations.

You probably noticed that New York named its program a "cap-and-invest" program, and not a "cap-and-trade" program. The state is still seeking input as to whether allowances will be tradeable. The Scoping Plan raised the concern that, like offsets, trading of allowances could result in pollution hotspots, often in disadvantaged communities. Given the CLCPA's focus on providing concrete benefits to those communities, any trading program would need to address this concern in order to win approval.

In a tacit acknowledgment that the program could give rise to increased costs for New York consumers, the agencies made it clear that approximately one-third of the revenues from allowances sold would be given back to New Yorkers to offset any cost increases. The remainder would then go towards incentives aimed at lowering the cost of renewable energy projects.

The agencies did not identify how those funds would be distributed, and requested input from the public on that question. Again, given the CLCPA's focus on benefitting disadvantaged communities, we anticipate that the agencies will prioritize disbursing available funds into those communities.

To date, the state continues to accept comments on the questions posted to the NYCI website. and all other issues raised by the programs. Later this year, the agencies will conduct a second round of public outreach, at which point the design of the program will be further along (informed by comments received in the first round). The agencies will then issue formal proposed regulations and seek public comment on them before issuing the final rules sometime in 2024.

As noted above, NYCI will cover all industries operating in New York. Those companies with significant GHG emissions, transportation needs, or that deliver fuels are likely to incur material costs to obtain the required emissions allowances. To shape the rules in ways that minimize impacts to their business, affected companies should actively participate in the rulemaking process, both by submitting public comments and through direct advocacy with responsible state officials.

Peter Trimarchi is a partner in Reed Smith's New York office, who counsels clients in all aspects of environmental law, particularly in transactional matters, including financing and development of renewable energy projects. He can be reached at [email protected].