The Regional Greenhouse Gas Initiative: Winners and Losers

24th April 2013 By: Marc Legrand

Introduction

Created in 2009, the Regional Greenhouse Gas Initiative (“RGGI”) was the first mandatory carbon cap and trade regime in the United States.[1]  It regulates energy producers within member states Connecticut, Delaware, Massachusetts, Maryland, Maine, New Hampshire, New York, Rhode Island, and Vermont.[2]  The program places a cap on the total amount of carbon dioxide produced by fossil fuel-fired power plants of twenty-five megawatts and above.[3]  These producers must purchase carbon allowances at quarterly auctions, and are awarded a partial offset for implementing certain measures that reduce greenhouse gas emissions.[4]  RGGI is structured to operate in two phases.  From 2009 to 2014, the cap will remain fixed at 165 million short tons of carbon dioxide emitted per year.  From 2015 to 2018, the cap will be reduced by 2.5% each year for a total 10% reduction by 2018.[5]  The nine RGGI states are currently undertaking a review of the first three years of the program.[6]

On October 22, 2012, the Center for Climate Change Law at Columbia Law School hosted a forum to discuss the future of RGGI.[7]  The event addressed results from the first three years of RGGI’s existence, some perceived problems with the program, and potential solutions.  Jared Snyder, Assistant Commissioner for Air Resources, Climate Change and Energy at the New York Department of Environmental Conservation, began the event with a basic introduction to RGGI.  Susan Tierney, Managing Principal at Analysis Group, then presented results from a study tracking the financial effects of the first three years of RGGI.  Gavin Donohue, President and CEO of the Independent Power Producers of New York, shared an industry perspective on the program, and Ross Gould, Air & Energy Program Director at the Environmental Advocates of New York spoke about its strengths and weaknesses as an environmental policy.  Robert Stavins, Albert Pratt Professor of Business and Government at Harvard University’s John F.  Kennedy School of Government, concluded the forum by discussing the potential of individual sub-national climate change regimes.  The discussion was moderated by Michael Gerrard, the Andrew Sabin Professor of Professional Practice and Director of the Center for Climate Change Law at Columbia Law School.

The speakers gave a wide range of assessments of the impact of RGGI, from Mr. Snyder arguing that “by just about any measure, [RGGI] has been a success,” to Mr. Stavins stating, “I don’t think it deserves credit for much.”  This Field Report will discuss the perspective of the various speakers to determine who the winners and losers have been under the program, its effectiveness as a tool against climate change, and its future.

I.  State Governments and Consumers Have Benefited from RGGI at

the Expense of Producers

Indicating that state governments have been a clear winner under RGGI, Ms. Tierney stated that, in conducting its study on the economic impacts of RGGI, the Analysis Group “expected some of the states to have net losses.  That was not the case; every state [within RGGI] had a positive gain to the economy.”  The ability to auction off carbon allowances to power producers has created a new revenue stream, totaling just under $1.1 billion among all states in the seventeen auctions held to date.[8]

A significant portion of this revenue is reinvested towards consumers, ultimately making them another beneficiary of RGGI thus far.  Each state determines its own reinvestment priorities.  Maryland, for example, pushes a quarter of the revenue back to consumers in the form of credits on their power bills.[9]  Mr. Snyder noted that, along with investments in clean energy and green job programs, New York has invested around two-thirds of its allowance auction revenues into an energy efficiency program.[10]  This kind of investment, Ms. Tierney said, provides the “biggest bang for [the] buck.”

Initially, power producers shifted $900 million of allowance costs to consumers on their electricity bills, and, according to Ms. Tierney and Analysis Group, the price of electricity went up 0.7%.  However, the resulting energy efficiency upgrades pushed demand downwards over time, which she explained had a double effect of decreased demand, which itself reduced energy bills.

The secondary effect was that fewer plants were needed to supply the newly decreased power load.  As the power grid dispatches the cheapest electricity available, consumers were being sent electricity at a lower cost.  Ultimately, consumers in RGGI states saw their bills decrease by a total of over $2 billion during the first three years of the program, according to Ms. Tierney’s analysis.[11]  Because of these consumer savings, a decrease in fossil fuel imports, and the investment of auction proceeds, RGGI states experienced a significant net income from the program.  New York alone, Ms. Tierney’s figures showed, gained a net $326 million and 4,620 jobs in the first three years of the program.[12]

As might be expected, RGGI has been detrimental to power producers within member states, particularly producers who use coal or gas to run their plants.[13]  Mr. Stavins argued that, “what RGGI is today is a relatively modest electricity tax that is being used to fund energy efficiency programs in the states.”  The payers of the tax, as noted forcefully by Mr. Donohue, are local power producers.  To date, New York power producers have paid over $395 million for carbon allowances.[14]  While much of this cost is passed on to consumers, those consumers have benefited greatly from reinvestments in energy efficiency.  Expressing the industry’s frustration with New York’s reinvestment priorities, Mr. Donohue alleged that power producers have only received around $30 million in efficiency investments.[15]

Mr. Donohue also argued that local power producers have been placed at a competitive disadvantage by RGGI, particularly after New Jersey withdrew from the program under Governor Christie at the start of 2012.[16]  Facing a disincentive to locate in New York, producers can instead build new plants in New Jersey to service a similar market without the financial burden of RGGI.  To avoid this kind of disadvantage, producers would like to see the program expanded both geographically and into other sectors beyond power generation.

II.  The Limitations on the Impact of RGGI

There was little dispute that carbon dioxide emissions have fallen in the region since RGGI’s implementation in 2009.  Mr. Snyder reported that carbon dioxide emissions from power producers have fallen thirty percent within the region, while Mr. Donohue stated that New York producers had cut such emissions by forty percent.[17]  However, the panelists all agreed that this decline occurred, in large part, independently from RGGI.  Mr. Snyder gave a detailed breakdown of the causes for the nationwide drop in carbon dioxide emissions from 2005 to 2009, when emissions fell thirty-three percent (almost identical to the rate of decline throughout RGGI).  The single largest contributor, as repeated by the other panelists, has been the fall in natural gas prices relative to coal and oil.  This has led to extensive fuel switching by power producers, and is responsible for almost one-third of the fall in emissions.[18]  Another one-fourth is weather-related, as unusually mild winters reduced the demand for heating fuel.  Other important factors included a decrease in the supply of coal, increases in the supply of nuclear, wind, and hydrological power, and energy efficiency upgrades.  Surprisingly, the economic downturn was responsible for less than five percent of the decrease.  Despite these alternative explanations, Mr. Snyder presented numbers from the Environmental Protection Agency suggesting that the RGGI region has seen a twenty-five percent decrease in power sector emissions since 1990, while other regions and the nation as a whole have seen emissions increase by twenty percent or more.

There was a consensus among the panelists that the program could be improved going forward, although the suggestions for doing so varied.  One idea was to reduce the emissions cap, as the models predicting demand which were created before RGGI’s implementation have simply failed to mesh with reality.  Mr. Snyder reported that emissions are currently falling forty percent below the cap, making the program effectively non-binding.[19]  He remarked that reducing the cap is a focus of the current three-year review of the program, and Mr. Gould agreed this was an important step to making RGGI more meaningful as an environmental policy.  If the cap is unchanged, even a model projecting colder winters and a booming economy showed emissions remaining well below the cap beyond 2020.[20]  Even reducing the cap below projected emissions would not necessarily be as helpful as expected, however.  Mr. Snyder pointed out that power producers have been “banking” extra allowances, and these banked allowances would allow producers to keep actual emissions above a newly reduced cap.

Mr. Donohue questioned how serious an emissions reduction policy could be that only targeted power producers.  Contrary to the decrease in power sector emissions, he pointed to the fact that the transportation sector’s emissions have actually increased seventeen percent since 1990.[21]  Mr. Gould also sought an expansion of RGGI, including bringing in neighboring jurisdictions and adding caps for more greenhouse gases beyond carbon dioxide.  He also recommended that a heavier focus be placed on reinvesting in energy efficiency or renewable energy.  Mr. Donohue, on a similar note, criticized RGGI because he believed that ninety million dollars of New York’s allowance revenues was “stolen out of the account” and redirected into state deficit reduction programs instead of being applied towards RGGI’s goals.

The initial motivation for RGGI’s implementation was to stem the tide of climate change.  Less than a week before Hurricane Sandy struck, Mr. Gould noted that “extreme rainstorms and hurricanes have been happening sixty-four percent more frequently in New York since 1948” and used the damage caused by Hurricane Irene as an example.  He concluded that RGGI “can and should do more.”  Mr. Stavins gave a sober reminder that climate change is a global problem, and that individual regional policies will struggle to make meaningful progress towards solving it.  However, he suggested that, in the absence of a comprehensive national program, regional programs like RGGI can become a form of de facto national policy by linking up with other states and regions.  This could avoid some of the gridlock currently facing national policy, and would also alleviate some of the competitive harms faced by local power producers while potentially generating a very meaningful environmental benefit.

III.  The Uncertain Future of RGGI

One audience question stood out from the rest.  An hour and a half into the event, an attendee asked, “What is the future of the Regional Greenhouse Gas Initiative?”  It was a question that was largely left unanswered, as the panelists instead focused on the state of RGGI today and its strengths and weaknesses.  Its impact on climate change thus far is uncertain, and that is unlikely to change unless stakeholders agree during the current review period to significantly reduce the emissions cap.[22]  Expanding RGGI to other sectors such as transportation would likely face strong opposition, and any sort of modeling or preemption at the federal level will have to overcome the current congressional gridlock in a time where fiscal problems are at the forefront of the agenda.  For now, it seems RGGI will continue to exist primarily as a source of government revenue.  If a significant portion of this revenue continues to be dedicated to low-hanging fruit such as weatherization and other energy efficiency programs, RGGI will continue to benefit both consumers and the environment, even if it fails to reach its peak potential as a tool to combat climate change.

 


 

[1].Paul J. Hibbard et al., The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States 1 (2011), available at http://www.analysisgroup.com/uploadedFiles/Publishing/Articles/Economic_Impact_RGGI_Report.pdf.

[2].Reg’l Greenhouse Gas Initiative, About the Regional Greenhouse Gas Initiative (RGGI) 1–2 (2012) available at http://www.rggi.org/docs/Documents/RGGI_Fact_
Sheet_2012_09_28.pdf.

[3].Id.

[4].Id.

[5].Id.

[6].Beth Daley, Coalition Seeks to Reset New England Emissions Goal, Bos. Globe (Aug. 10, 2012), http://www.bostonglobe.com/lifestyle/health-wellness/2012/08/09/coalition-calls-for-stricter-northeast-climate-pact/kNwpcg54kVYXaO5RTNcVFN/story.html.

[7].See generally The Future of the Regional Greenhouse Gas Initiative, Colum. L. Sch. (Oct. 23, 2012), http://www.law.columbia.edu/media_inquiries/news_events/2012/october2012/gre
enhouse-gas-initiative; The Future of Regional Greenhouse Gas Initiative, Colum. L. Sch. (Oct. 22, 2013), http://media.law.columbia.edu/gerrard/climateF12/Future_Of_Regional_Greenho
use_Gas_Initiative_121022.mp4 (download for video of the event).

[8].Auction Results, Reg’l Greenhouse Gas Initiative, http://www.rggi.org/market/
co2_auctions/results (last visited Nov. 1, 2012).

[9].Maryland Energy Choice:  RGGI Rate Credit, Pepco, http://www.pepco.com/home/
choice/md/rggi/ (last visited Nov. 1, 2012).

[10].The Regional Greenhouse Gas Initiative Wins the 2012 CBC Prize for Public Service Innovation, Citizens Budget Commission (Feb. 7, 2012), http://www.cbcny.org/cbc-blogs/blogs/regional-greenhouse-gas-initiative-wins-2012-cbc-prize-public-service-innovation.

[11].Hibbard et al., supra note 2, at 3.

[12].Id. at 33.

[13].Id. at 5.

[14].Auction Results, supra note 8.

[15].Gavin J. Donohue, The Future of the Regional Greenhouse Gas Initiative 6 (2012), available at http://web.law.columbia.edu/sites/default/files/microsites/climate-change/Donohue%20-%20Future%20of%20RGGI%20Presentation.pdf.

[16].RGGI Withdrawal:  Frequently Asked Questions, N.J. Dep’t of Envtl. Prot., http://www.nj.gov/dep/sage/ce-rggifaq.html (last visited Nov. 1, 2012).

[17].IPPNY Statement on Announcement of Lowered Regional Greenhouse Gas Initiative (RGGI) Cap, Indep. Power Producers of N.Y. (Feb. 7, 2013), http://www.ippny.org/page/news-and-publications-2/news/ippny-statement-on-announcement-of-lowered—regional-greenhouse-gas-initiative-rggi-cap-124.html.

[18].See generally Jackson Salovaara, Coal to Natural Gas Fuel Switching and CO2 Emissions Reduction (2011), available at http://www.hks.harvard.edu/var/ezp_site/
storage/fckeditor/file/pdfs/centers-programs/centers/mrcbg/publications/awp/
Salovaara_2011.pdf.

[19].See generally Addressing Greenhouse Gas Emissions Through the Regional Greenhouse Gas Initiative, Woods Hole Research Center, http://www.whrc.org/policy/rggi.html (last visited Apr. 18, 2013).

[20].See generally Stakeholder Webinar on Program Review, Reg’l Greenhouse Gas Initiative (Aug. 13, 2012), http://www.rggi.org/docs/ProgramReview/August13/12_08_13_Reference
_Case_Results.pdf.

[21].Donohue, supra note 15, at 5.

[22].At the conclusion of a comprehensive two-year review process, RGGI states proposed reducing the 2014 carbon dioxide cap by forty-five percent from 165 million tons to 91 million tons.  RGGI States Propose Lowering Regional CO2 Emissions Cap 45%, Implementing a More Flexible Cost-Control Mechanism, Reg’l Greenhouse Gas Initiative (Feb. 7, 2013), http://www.rggi.org/docs/PressReleases/PR130207_ModelRule.pdf.

 

 

  |   VIEW PDF