Regional Greenhouse Gas Initiative

The Regional Greenhouse Gas Initiative (RGGI) is the first mandatory cap and trade program in the United States. Beginning operations on January 1, 2009, The RGGI is a multi-state, carbon dioxide emissions cap and trade program for the power sector. Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont are signatories to the RGGI.

The goal of the RGGI is to reduce CO2 emissions from the power sector by 10 percent by the end of 2018. The RGGI has set an overall regional CO2 emissions cap, which will be reduced by 2.5 percent between 2015 and 2018. Facilities covered under the RGGI are allocated CO2 emission allowances. If they reduce their emissions below their allowances, they can sell the extra allowances to plants that are emitting more than their allowances. Utilities will be able to use a CO2 allowance issued by any of the ten participating states to comply with the state program covering their facility. The idea behind the RGGI is that by putting a price on emissions, the utilities will have an incentive to reduce their emissions.

The RGGI is generally regarded as a well-designed program, but with a limited scope and modest reduction goals. It may eventually serve as a model for a more expansive regional program encompassing stricter reductions and other greenhouse gas emissions and industry sectors, as well as for a federally mandated cap and trade program.

Background

The origins of the RGGI date to April 2003 when New York Governor George Pataki invited 11 states to develop a regional cap-and-trade program for controlling green house gas emissions.¹ As a result of this effort, in December 2005, seven states -- New York, Connecticut, Delaware, Maine, New Hampshire, New Jersey and Vermont -- signed a memorandum of understanding forming the RGGI. Under the RGGI, these seven states agreed to create a regional cap-and-trade system for CO2 emissions from the power sector. Massachusetts, Rhode Island and Maryland joined the RGGI in 2007.²

In March 2006, the seven original participating states released for public comment a draft version of the model rule to assist participating states in implementing the RGGI. The states received over 1,000 pages of comments from more than 100 organizations. These comments were considered, and in August 2006, the states published a model rule designed to serve as the basis for individual state laws and regulations implementing the RGGI.³ Since August of 2006, the Model Rule has been revised three times to maintain consistency between individual state rules.⁴

How RGGI Works

RGGI is composed of individual CO2 Budget Trading Programs in each of the ten participating states. These ten programs are implemented through state regulations, based on a RGGI Model Rule, and are linked through CO2 allowance reciprocity.⁵ The RGGI is managed by RGGI Inc., a non-profit corporation that provides technical and support services to the states. ⁶

The main elements of RGGI’s cap-and-trade approach are the establishment of a CO2 emissions budget, usually referred to as a “cap”, for electric power generators; the requirement that generators hold allowances to cover their CO2 emissions; an emissions auction and trading system whereby electric power generators can buy, sell and trade CO2 emissions allowances; the use of proceeds from the allowance auctions to support energy efficiency and clean renewable energy; and the limited use of offsets to help companies meet their emissions caps.

Setting the Cap

The RGGI program includes coal-fired, oil-fired, and gas fired electric generating units that are located in any of the signatory states and that have a capacity of at least 25 megawatts. Under the RGGI, between 2009 and 2014, CO2 emissions from the power sector will be capped at 188 million short tons per year, approximately 4% above the annual average regional emissions during the period 2000-2004.⁷ Then, from 2015 and 2018, the cap will be reduced by 2.5 percent per year, resulting in overall reductions of 10 percent of from the power sector by 2019.

The memorandum of understanding divides the total emissions cap into individual budgets for each state.⁸   These budgets in short tons are:

    Connecticut -         10,695.036
    Delaware -         7, 559,787
    Maine -         5,948,902
    Maryland -         37,503.983
    Massachusetts -    26,660,204
    New Hampshire -    8,620.460
    New Jersey -        22,892,730
    New York -         64,310.805
    Rhode Island -        2,659,239
    Vermont -        1,225,830

Issuing Allowances

The states allocate allowances, sometimes referred to as permits or credits, up to the amount of the budget. Participating states will issue one allowance for each short ton of CO2 emissions allowed by the cap. Each facility will be required to have enough allowances to cover its emissions at the end of each three-year compliance period.⁹

Unlike other cap and trade programs, RGGI does not give allowances to generators for free. States sell a significant portion of allowances through an auction or other means. The states are given some latitude in how many allowances they put up for auction and how many are given away. Most states are auctioning close to 100 percent of their allowances, with Delaware auctioning 60 percent -- with a plan to auction 100% by 2014 -- Connecticut 77 percent, and Maryland 85 percent.¹⁰

The first two quarterly auctions were held for 2009 in September and December 2008, with allowance prices clearing $3.07 and $3.38, respectively. The minimum price set for the cap was $1.86. The first two auctions netted $44,071,285.¹¹

The RGGI requires at that least 25 percent of the allowances be auctioned with the proceeds allocated to “consumer benefit or strategic energy purposes,” which the MOU defines as measures to promote energy efficiency, mitigate ratepayer impacts, and develop innovative carbon emissions abatement technologies.¹²

Trading Allowances

Facilities covered by the RGGI may buy or sell allowances. If, for example, one plant emits less C02 than allowed under the cap, it could sell its surplus to a plant that exceeds its cap. Because an individual plant's emissions cannot exceed the amount of allowances it possesses, this gives both plants a financial incentive to reduce greenhouse gases. Most trading, if needed, is likely to occur toward the end of the first three-year compliance period.

Buying Offsets

RGGI allows for a limited number of offsets outside of the capped sector to be applied against an electricity generator’s CO2 emissions. Initially, the use of CO2 offset allowances is constrained to 3.3 percent of a power plant’s total compliance obligation during a control period,¹³ though this may be expanded to 5 percent and 10 percent if certain CO2 allowance price thresholds are reached and a “safety mechanism” is triggered¹⁴ as discussed below.

RGGI has developed prescriptive standards for specific project categories, to ensure that offsets are real, additional, verifiable, enforceable, and permanent. At this time, five project categories for CO2 offset allowances are eligible under the participating states’ regulations.¹⁵

Landfill methane capture and destruction
Reduction in emissions of sulfur hexafluoride (SF6) in the electric power sector
Sequestration of carbon due to afforestation;
Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector
Avoided methane emissions from agricultural manure management operations

Price Safety Mechanisms

In an effort to moderate increased costs from RGGI, the MOU contains two “safety” mechanisms that are triggered if CO2 emission allowances exceed set prices. First, if for a period of twelve months the average regional spot price for CO2 allowances equals or exceeds $7/ton (2005$), regulated facilities may use CO2 offset allowances to cover 5 percent of their emissions, as opposed to the normal threshold of 3.3 percent. Second, if the price trigger occurs twice in two consecutive 12 month-periods, registered facilities may use offsets to cover 10 percent of CO2 emissions. RGGI also allows for emissions credit retirements from a mandatory program outside the United States (e.g., Clean Development Mechanism CERs) to be used as an offset under limited circumstances.¹⁶

States also have additional price safety valves. In Maryland, for example, if an auction price reaches $7, up to 50 percent of year’s allowances will be reserved for purchase by the Maryland generators for $7 from the Maryland Department of the Environment. ¹⁷

Implementation Concerns

A number of implementation concerns have been raised about the RGGI. Most of these concerns involve the setting of the emissions cap and the possibility of “leakage” from the RGGI region.

Some observers have noted that the RGGI’s emissions cap is too high and the allowance price too low for it to provide an economic incentive for utilities to reduce the emissions.¹⁸ Environment Northeast, an advocacy group, which supports the RGGI, found that 2008 power-sector emissions in RGGI states were already 16 percent below the cap set. The report notes that one cause of reduced emissions has been high energy prices. Those prices have recently fallen quickly, and the report predicts that “emissions are unlikely to remain as low in 2009.” ¹⁹

“Leakage” involves the shifting of electricity generation from RGGI states to states not covered by the initiative, such as Pennsylvania and the Midwest. While strong energy efficiency programs could help to address the problem of leakage by reducing consumer demand for electricity, leakage is a major concern and the states of the RGGI are monitoring and evaluating the potential for the shifting of electricity generation to state not covered the RGGI cap.²⁰ In addition, the two regional independent system operators (ISOs) within the RGGI region and PJM, a regional electricity transmission organization covering Maryland and other states in the Mid-Atlantic and the Midwest, are adding emissions and leakage tracking measures to their systems.²¹

Looking Forward

Carbon Dioxide reductions during the first ten years RGGI will be modest, underscoring the need for governments to continue to develop other climate change programs that aggressively support energy conservation and alternative energy programs.

While the scope of RGGI is not as extensive as the European Union’s Emission Trading System (EU-ETS), RGGI has benefited from the experience of the EU-ETS by addressing some of the design problems in that have emerged in the Eurposean cap and trade program. For example, while the EU initially gave away its allowances, RGGI distributes most of its allowances through auctions, requiring utilities to revalue the cost of their emissions and allowing the states to raise money for energy efficiency programs. In addition, while EU member states have not agreed on specific numeric limits on the use of offsets, RGGI strictly limits their use uniformly across the region.

At the federal level, the United States does not have a cap and trade program to address GHG emissions nor mandatory carbon emission limits. This poses the threat of leakage from the RGGI region to other areas of the country. However, it also means that the successful development and implementation of RGGI could serve as a model for a future federal program.

Footnotes

¹New York Department of Environmental Conservation, Governor Pataki Announces Regional Agreement to Curb Greenhouse Gases .

²http://www.rggi.org/about/history

³http://www.rggi.org/about/history/public_comments

⁴http://www.rggi.org/model_rule_key_documents_link

⁵http://www.rggi.org/states/state_regulations

⁶http://www.rggi.org/rggi

⁷RGGI Program Overview, Footnote 4, http://www.rggi.org/about/documents,

⁸The allocations of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont are found in Regional Green House Gas Initiative Memorandum of Understanding, December 20, 2005, Section 2(c) and those of Massachusetts and Rhode Island are found in Section 5(a)(3). Maryland’s allocation is found in Second Amendment to the Regional Green House Gas Initiative Memorandum of Understanding, April 20, 2007, Section 2. See MOUs at http://www.rggi.org/about/history/mou

⁹ Regional Green House Gas Initiative Memorandum of Understanding, December 20, 2005, Section 2(E).

¹⁰ Links to state regulation provided at http://www.rggi.org/states/state_regulations. See also, http://www.env-ne.org/resources/open/p/id/685.

¹¹ http://www.rggi.org/co2-auctions/results.

¹² See footnote 9, Section 2(G).

¹³ See footnote 9, Sections 2 (F)(6).

¹⁴ Amendment to Memorandum of Understanding, August 8, 2006 Sections 4&5.

¹⁵http://www.rggi.org/offsets

¹⁶See footnote 14.

¹⁷Maryland Department of the Environment, RGGI Facts, Retreived on February 21, 2009.

¹⁸Keith Johnson, RGGI Rules: Northeast Launches First US Carbon Cap But Will it Work? Environmental Capital, September 25, 2008. Accessed on February 21, 2009.

¹⁹Environment Northeast, RGGI Emissions Trends & the Second Allowance Auction, December 15, 2008.

²⁰ http://www.rggi.org/docs/il_report_final_4_01_08.pdf