Stakeholders, Experts Weigh in as RGGI Undertakes a Program Review

Despite the absence of a federal policy to restrict emissions of the greenhouse gases that fuel climate change, a number of U.S. states and Canadian provinces have rolled out programs to achieve this goal.  Among such efforts, the Regional Greenhouse Gas Initiative (RGGI), a market-based cap-and-trade auction system launched in late 2008 by ten Northeastern states, is the North American pioneer.[1]

Central to RGGI’s structure is a gradually declining cap on greenhouse-gas emissions from power plants within the member states, with the initial target set at a ten-percent decrease by 2018. Individual generators that exceed their share of the permitted emissions must compensate by purchasing either allowances to pollute or offsets to help fund other projects that decrease carbon dioxide (CO2) emissions.

According to the terms of RGGI’s original Memorandum of Understanding (MOU), a full program review was to be undertaken in 2012, a juncture when stakeholders could analyze the data collected during the market’s first three years and determine how the program should proceed going forward.

Stakeholders participating in the current review process along with other RGGI experts addressed an audience at Columbia University’s Center for Climate Change Law on October 22 to discuss the program’s performance and consider revisions as it moves toward its target date. Speakers described RGGI’s record of solid achievements in reduced emissions and broad economic benefits to the participating states, but also addressed elements of the program that various stakeholders believe should be adjusted.  Included in this list are the level at which the emissions cap is set, the economic sectors covered by the program, and the structure of allowance prices.

In terms of its primary goal — lowering regional CO2 emissions from power plants – RGGI can be considered a success, said Jared Snyder, the assistant commissioner for air resources, climate change and energy at the New York State Department of Environmental Conservation. While the region’s gross state product increased significantly between 2005 and now –growth that typically causes increases in emissions – the CO2 given off by power plants in the ten member states actually dropped by about 30 percent, or nearly 61 million metric tons.

The reduction far exceeded the program’s initial goal of a 10-percent drop by 2018, and as a result, prices paid for RGGI allowances have fallen from a high of $3.38 in the first ten-state auction in December 2008 to $1.93 at the seventeenth auction in September 2012. Given the larger-than-expected drop in emissions, a central question going forward is where to establish the level of a new cap. Also being considered is the possibility of setting both ceiling and floor prices for allowances so as to reduce market volatility, thereby assuring that RGGI will still drive reductions but not end up producing burdensomely high auction prices for power generators, speakers said.

Despite the substantial reductions in emissions since RGGI’s start, the cap-and-trade program itself can only take partial credit for the decline, Snyder said.

He enumerated other contributing factors, including most importantly, low natural gas prices that led to fuel switching at generating plants, as owners stopped buying more expensive, and more polluting, coal and oil to run their facilities. In addition, milder-than-usual weather reduced demand for power, he said. The economic slowdown surprisingly accounted for only 4.4 percent of the decline, far less than the impact of the increases in energy efficiency and renewable generation that have been supported by revenues from RGGI and other state clean-energy policies, Snyder said.

Perhaps the program’s most dramatic benefit has been an economic one, said Susan Tierney, a managing principal at the Analysis Group, a consultancy that addresses energy and other financial issues. Over three years, the ten participating states (before New Jersey withdrew from the program last January) saw a net gain of $1.6 billion to their economies and 16,000 new jobs, according to a 2011 report that she and other members of the group authored. Customers also will save nearly $1.1 billion on electricity bills and an additional $174 million on natural gas and heating oil bills over the next decade through the installation of energy-efficiency measures from revenues produced by RGGI auctions, she said.

While these economic gains had some impact on power companies’ bottom lines, the sector’s overall revenues still exceeded costs during the three-year period that the report studies, Tierney said.

But members of the Independent Power Producers of New York (IPPNY) are displeased at being the primary bearers of RGGI’s costs, especially because of what they see as inequities in the program’s structure, said Gavin Donohue, president and CEO of the trade association.

First, while the power sector has decreased its emissions by 36 percent for CO2, along with 86 percent for SO2 and 76 percent for NOx, other more polluting sectors are not included in RGGI’s cap, he said.

He offered the example of New York State, where over the period 1990 through 2009, emissions from the transportation sector rose  by 17.4 percent, while emissions from power plants dropped  by 40.8 percent. Other major economic players in the state, such as the industrial and commercial sectors, reduced their emissions by far smaller amounts, ranging from five to 19 percent, said Donohue.

Second, only a fraction of RGGI’s revenues are returned to the power sector, where companies might make use of funding to lower emissions directly by increasing their energy efficiency and portfolio of renewable resources, he said.

Instead, power companies must fund such improvements entirely by themselves, or purchase either approved offsets from other economic sectors or auction allowances to cover emissions beyond the cap, according to the terms of the program. Members of IPPNY believe that more of the auction money paid by power producers should be returned to them to help fund their own sector’s carbon-reducing upgrades, Donahue said.

Finally, Donohue discussed the problem of leakage that is apt to be significant if RGGI’s emissions cap going forward is dramatically lowered, he said.

Leakage may occur under circumstances where a stringent cap causes the cost of allowances to increase so high that the price of power from affected companies far exceeds the price charged by generators outside the compact’s states.  As a result, utilities may choose to import dirtier power from these less expensive competitors.

The leakage problem would both disadvantage IPPNY’s members and undermine the point of the initiative by bringing in power that produces higher greenhouse-gas emissions, he said.

Panelists agreed that a national policy is the most effective way to address leakage.  In addition, a federal law would also avert the free-rider problem, a situation in which jurisdictions that do not contribute economically to lowering emissions still enjoy the benefits of reduced pollution, panelists said. But they all acknowledged that it is unlikely that a national consensus for either a cap-and-trade system or carbon tax would emerge in the current political climate.

Instead, the future of climate-change regulation in the United States may well be a series of regional programs like RGGI, said Robert Stavins, a professor of business and government at Harvard University’s Kennedy School.

Stavins described what states can do to maximize the benefits of local or regional programs, even without a federal policy in place – in particular, by linking with other state and regional programs, and even with other countries where possible.  Such linkages would help to reduce costs, price volatility and leakage along with increasing market power, he said.

State and regional programs can also function as laboratories for policy design and in that way contribute to the future development of a federal program, said Stavins.

In this regard, how RGGI emerges from the ongoing review has important implications not only for the nine remaining signatories to the MOU but also for other cap-and-trade programs in the U.S. and Canada.

By Eleanor Saunders

[1] When RGGI began, Pennsylvania took part as an observer and New Jersey participated in the auctions until Gov. Chris Christie withdrew the state from the program, beginning January 1, 2012. For New Jersey’s withdrawal notification, see here.  California  just held its first auction on November 14 under its new cap-and-trade system, which covers more economic sectors than RGGI does, and will be joined in the market by Quebec.  Other Canadian provinces that are members of the Western Climate Initiative may also join the market in the future.

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