A greenhouse gas cap and trade program could be designed as an “upstream” program in which producers, transporters and/or sellers of fuels or energy are required to obtain allowances; or it could be a “downstream” program in which consumers of energy are responsible for obtaining allowances for the fuels they use. An important component of either system is the point at which GHG are regulated and it whether the program structured in a manner that will prove to be workable and efficient. While it has been suggested that pipelines be the point of regulation, there are significant reasons why natural gas pipelines would be a poor selection as a point of responsibility in a GHG program.
Missed Gas
The biggest problem is that a significant amount of natural gas is consumed in the U.S. without going through a transmission pipeline. This includes gas delivered directly to LDCs, consumers that obtain gas from gathering systems and gas used for lease and plant operations. Altogether, this gas that never enters the transmission system is estimated to be as high as 2.3 tcf per year or more than 10 percent of U.S. gas consumption. To include these volumes of gas, the regulatory program would need to be expanded to include LDC with gas receipts directly from producers, gathering systems that deliver directly to consumers and lease and plant gas uses. Absent this expansion of the program, the program would be less economically efficient and less fair, because some natural gas consumers in effect would be exempted from paying for allowances.
Uncertain Cost Flow Through and Incomplete Price Signals
The second problem is that the cost of allowances purchased by the pipelines would not necessarily be passed on to gas consumers. There is a strong chance that this would occur because, pipeline rates for transmission services often are negotiated to meet competition from other gas pipelines or from alternative fuels. As a result, the cost of the allowances that could not be recovered as part of the negotiated or discounted transmission rate might have to be absorbed gas pipelines.
Should this happen, the GHG program would be less economically efficient, because price signals to consumers would be diluted. This is particularly problematic, because transportation discounts are most commonly given to power generators and large volume industrial customers, who are the energy users that most readily have the ability to implement conservation measures and to switch fuels in response to price signals. Furthermore, pipeline companies would be exposed to significant economic hardship if they were compelled to absorb these costs associated with the commodity for which they merely are providing a transportation service.
Accounting Complexity
In order to maintain compliance with the allowance system, a gas pipeline would need to account for the allowance status of all natural gas entering its system. For example, gas coming from a gathering system would need an allowance, while gas coming from another pipeline would already have an allowance from that first pipeline. This would require that accounting systems be revised to track the allowance status of gas at pipeline receipt points.
Regulatory and Legal Hurdles
Pipeline tariffs would need to be amended in order to include authorization for the collection of allowance costs as part of the rate for transporting natural gas. Such amendments to interstate pipeline tariffs would need to be approved by FERC and amendments to intrastate pipelines would need to be approved by state regulators. Beyond the initial authorization to collect allowance costs as part of the rates for pipeline transportation, there likely would be the need to update such approvals as allowance costs increased over time. Also, if pipelines were allocated some portion of their allowances (instead of having to acquire all of their allowances), there might be issues regarding how the value of those allocated allowance should be treated in the rates. Another potential problem would be whether the legal obligation to render nondiscriminatory service would create an obstacle to charging different rates for the same transportation service based on whether the customer’s natural gas yet had been allocated an allowance.
Inconsistency Across Fuels
What, if anything, would be the ramifications for interfuel competition (and for purposes of achieving the desired results of the GHG program) resulting from the fact that natural gas would be regulated at the point at which the fuel is transported while other fuels would be regulated at the point of production (or at least at a point much closer to the point of production)?