The RGGI is a 10-state effort to reduce by 10 percent emissions of carbon dioxide, the heat-trapping gas most blamed for global warming, from power plants in the Northeast by 2018.
Environmentalists contend the decision by the Department of Natural Resources and Environmental Control to exempt the Delaware refinery from the program is a mistake.
"The fact of the matter is, this is a hell of a large carbon emitter," Chad Tolman of the Sierra Club's state chapter said during a recent meeting of a workgroup developing Delaware's RGGI rules.
According to DNREC, the refinery's six electrical generating units emitted more than 1.7 million tons of CO2 in 2006. State officials argue the refinery should be exempt from RGGI because the program is aimed at electric utilities -- not businesses that generate their own electricity.
"It was our expressed goal not to capture industrial facilities that might be generating their own power," said Phil Cherry, DNREC's policy and planning director.
Under RGGI -- which includes Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont -- state governments would cap the amount of carbon dioxide that power plants are allowed to discharge annually. Electricity generators would have to obtain an allowance for each ton of CO2 emitted, with excess allowances sold at a profit on the secondary market.
Delaware's annual emissions cap is set at 7.5 million tons for 2009 through 2014. The cap would gradually decrease each year after that until 2018, when it would be 6.8 million tons.
Cherry said other states also have allowed exemptions for industrial power generators, although only a handful of facilities in the region would be eligible.
The coke-fired generators owned San Antonio-based Valero provide power mostly for refinery operations, although some excess is sold to the regional power grid. Under the proposed regulations, the refinery would be exempt from RGGI as long as it sells no more than 10 percent of its electricity to the grid. In each of the past two years, it has sold less than 2 percent to the grid.
In return, the refinery would have to document its energy generation and submit a "climate action plan." While rules have yet to be developed, the plan might include details on past emissions and ideas for cutting future pollution.
Mary Kate McLaughlin, a refinery spokeswoman, said there are environmental benefits and production efficiencies from producing power on site rather than buying it off the grid.
Cherry said RGGI's real value may be in proving to the federal government that carbon dioxide emissions can be addressed without disrupting the economy.
"CO2 is not a public-health threat, it's a climate-change threat and climate change, thankfully, is a decades-long problem," he said.
"We don't need to include the refinery to prove the viability of cap-and-trade or regional efforts, and that's what we're trying to do here," he added.
DNREC Deputy Secretary David Small noted that while no technology to reduce CO2 emissions currently exists, the refinery is subject to a host of regulations governing other air pollutants. It has spent tens of millions to reduce emissions of sulfur dioxide and nitrogen oxide, he said.
"If people think we're being soft on the refinery, they need to step back and look at the bigger picture of air pollution, beyond just carbon dioxide," he said.
But environmentalists aren't convinced the refinery deserves a waiver.
"They're a huge carbon emission source; they ought to be part of the deal," said former DNREC secretary Nick DiPasquale, now conservation chair for the Delaware Audubon Society.
Michael Fiorentino, executive director of the Mid-Atlantic Environmental Law Center, noted that the refinery's six generating units have a combined capacity of about 360 megawatts, meaning it theoretically could sell about 36 megawatts to the grid annually without penalty. That could result in a windfall and competitive advantage for the refinery over utilities subject to RGGI, which applies to electricity generators with a capacity of 25 megawatts or more, he argued.
"As a policy matter, I think it's a real mistake to let the refinery off the hook," Fiorentino said.
Beside the refinery exemption, environmentalists have doubts about other proposed RGGI rules outlined in authorizing legislation that they hope will be amended. While other RGGI states plan to auction 90 percent or more of their allowances, Delaware wants to start by auctioning only 60 percent of its allowances, giving away the other 40 percent.
"That's a huge giveaway to the power generators," Tolman said.
Small argued that starting at 60 percent and increasing the auction allowance 8 percent each year will help buffer the cost impact of C02 reductions, which likely will be passed on to rate payers in the form of higher electricity prices. He noted that some states served by the grid that includes Delaware are not participating in RGGI, meaning Delaware generators selling electricity will be competing with utilities in other states that don't have to purchase carbon credits.
"There is, I think, a fairly high level of sensitivity to electricity prices," Small said, referring to sharp rate hikes in recent years following deregulation.
The authorizing bill also directs that 65 percent of the auction revenues be given to the Sustainable Energy Utility, a program set up by lawmakers to help promote energy efficiency and renewable energy technologies. Environmentalists are concerned about a proposal to allow the SEU to be administered by a for-profit entity, and about conflicts of interest involving lawmakers who control the existing oversight board and would be instrumental in choosing their replacements.
"We think the design of the SEU does not provide proper assurance of effective, efficient and conflict free-management," Fiorentino said.
While DNREC believes the SEU is the proper vehicle for using RGGI revenue to promote energy efficiency and renewable energy efforts, Cherry said the utility's governance structure needs to be resolved "sooner rather than later."
Current plans call for Delaware to have its RGGI rules in place by the end of the year and participate in its first auction early next year.