Northeast states have worked together for several decades to address air quality issues and, more recently, climate change. The Regional Greenhouse Gas Initiative (RGGI), the first mandatory cap-and-trade program regulating greenhouse gases in the United States, is the long-term result of these efforts. RGGI was initiated in 2003 when Republican Governor George Pataki of New York invited his counterparts in 11 states from Maine to Maryland to join in developing a regional cap-and-trade program to reduce carbon dioxide (CO2) emissions from electric power plants. All of the New England states agreed, along with Delaware and New Jersey. State officials sought to show that regulating greenhouse gas emissions would not harm consumers or the economy if a system was designed properly, and to create a model for federal action.
RGGI was designed to stabilize CO2 emissions starting in 2009 and then to cut total emissions 10 percent by 2019. Like the cap-and-trade system for sulfur dioxide (SO2) emissions that Congress enacted in amendments to the Clean Air Act in 1992, RGGI set a cap on yearly CO2 emissions from fossil fuel generation in participating states (initially, 165 million tons). All power producers covered by RGGI were required to possess enough allowances to cover their actual emissions. An allowance is a permission to emit one ton of CO2. However, instead of giving allowances to regulated entities at the start of the program, most of the RGGI allowances were auctioned off. This approach generated revenues that the RGGI states could use to advance clean energy programs.
When RGGI’s analysts set the initial emissions cap in 2005, they projected that emissions would rise between that year and 2009. Instead, emissions fell sharply during that time because of the national economic recession and retirements of old coal-fired plants. This meant that initially, the RGGI cap did not cause any generators to make emission reductions. Nonetheless, the program still had positive impacts, notably:
- The existence of a cap put a price on carbon emissions, which traded for about $2 to $3.50 per ton through 2012 (prices were low because allowances were abundant);
- Through 2014, RGGI emission allowance auctions generated more than $1.8 billion, which the states used mainly to promote energy efficiency and renewable energy; and
- State officials gained experience with emissions trading and carbon markets.
In 2013, the RGGI states overhauled the program to reflect market conditions. Starting in 2014, the regional CO2 cap was lowered 45 percent, from 165 million tons to 91 million tons, and will decline by 2.5 percent yearly from 2015 to 2020. This shift increased auction prices to approximately $5 per ton, indicating that the new cap would force covered electricity generators to reduce emissions. To contain costs, the program will make extra allowances available if prices reach certain thresholds ($6/ton in 2015, $8/ton in 2016, and $10/ton in 2017, increasing 2.5 percent yearly thereafter.)
Creating a Model
The energy and environmental regulators who developed the RGGI framework, with extensive input from stakeholders, sought to design a program that would create an efficient market for CO2 emissions and advance the broader goals of slowing climate change and advancing clean energy. Many RGGI features reflected these goals. For example, more than 90 percent of emission allowances were auctioned instead of giving them directly to regulated entities (an approach used in some other cap-and-trade programs). Auctioning most of the RGGI allowances captures the value of those allowances and makes it available to use for public benefits, such as funding energy efficiency upgrades and paying for site reuse studies on communities where coal-fired power plants are shutting down.
The new RGGI limits “lock in the CO2 pollution reductions achieved to date from power plants across the region, while also providing a path forward for additional emission reductions,” said Janet Coit, director of the Rhode Island Department of Environmental Management, when the lower cap was announced. “The program will also continue to encourage job creation by local businesses focusing on energy efficiency, and will continue to help prevent many millions of dollars from being sent out of the region in the form of fuel payments.”
RGGI also could offer member states a good structure for reaching state CO2 reduction targets cost-effectively under the U.S. EPA’s Clean Power Program. “Trading programs, like RGGI, can provide a simple, transparent, and verifiable system for compliance that allows states to work within the existing regional nature of the electricity grid,” RGGI states asserted when they commented on EPA’s proposed rule in late 2014.
This blog post was written by Jenny Weeks and Warren Leon, and was originally published in the Clean Energy States Alliance (CESA)’s 2015 report “Clean Energy Champions: The Importance of State Policies and Programs.” This report provides the first-ever comprehensive look at the ways states are advancing clean energy and suggests how to further encourage clean energy growth. For more information about CESA, please visit www.cesa.org.