States that meet the Environmental Protection Agency’s with a mass-based market-based system should avoid doing so under a historical allocation approach, according to a report issued Thursday by Advanced Energy Economy. Under such an approach emissions allowances are awarded to affected sources on the basis of historical generation.
A historical allocation system would cause affected units to “undervalue beyond-the-fence compliance measures. In doing so, it would also inhibit fair competition across all available measures, locking in a costlier status quo. Furthermore, allocation based on historical generation would offer utilities no incentive for early compliance activity, while failing to overcome existing market barriers that discourage deployment of cost-effective measures today,” according to the report.
Instead, the report suggests states consider a performance-based allocation. “Performance-based allocation of allowances would deliver several key benefits over the historical generation approach. Most importantly, by allowing all eligible emission reduction measures to participate on the basis of cost and value, this approach would create an open and competitive marketplace,” the report says.
