The Regional Greenhouse Initiative - Part 2

In Part 1 of this series of posts on the Regional Greenhouse Gas Initiative (RGGI), I reviewed how money flows from ratepayers, to the utility companies, to the electricity generators, to the participating states, and then back to the ratepayers as direct bill rebates or to investments in energy-efficiency (EE) initiatives. With an understanding of what happens to our ratepayer dollars in this program, let’s now take a look at the actual allowance caps and what has happened to regional carbon dioxide (CO₂)  emissions since the program was implemented in 2008.

The chart below presents data on the emission caps, the actual CO₂ emissions from power plants in the RGGI states, as well as the average prices achieved in the RGGI auctions of emissions allowances. The first regional cap (shown in blue) was implemented in 2009. For the first few years of the program, actual emissions (shown in green), which were already trending downward due to extensive use of natural gas generation, were substantially lower than the cap. This made compliance easy and resulted in lower prices for the allowances (as shown on the bar graph). In 2014, after a review of the program, there was a big downward adjustment in the cap and the compliance margin narrowed considerably.

The intent of the shrinking cap in cap-and-trade program is to issue fewer emission allowances every year. In theory, this should increase allowance prices and make fossil fuel operations with high CO₂ emissions, such as coal plants, the more expensive producers in the electricity marketplace. High generation prices would force these operations out of business or drive them to make changes to reduce carbon emissions. However, during the first period of the RGGI program from 2008 to 2014, when the cap was so much higher than the actual emissions, allowances prices were low (of the order of $2 to $3/ton CO₂) and RGGI participants were able to buy and bank over 120 tons of emissions allowances. This is more than one year’s worth of allowances.

The problem with these banked allowances is that they can be used at any time, so their availability puts downward pressure on the prices at auction. To take this large volume of banked credits into account and flush them out of the system, the RGGI program then implemented a further downward adjustment in the cap in 2014 – the Adjusted Cap (shown in red). With this change, actual emissions are now well above the Adjusted Cap and it is anticipated that this will increase the price for emissions allowances and draw those banked credits into the market. With these changes, allowance prices did indeed rise in 2014 and 2015; however, since 2016, when the Supreme Court suspended implementation of the Clean Power Plan and Donald Trump, with his antagonistic view of regulation,  was elected President, allowance prices have again fallen. There is also an interim review of the RGGI program underway, so participants are awaiting its outcomes and indications as to what the caps will be after 2020. The successful continuation of the RGGI program, the magnitude of the future caps, and the utilization of the banked allowances should have a significant impact on allowance prices going forward.

Carbon emissions from power plants in NH have also fallen, as is evident from the figure below, which also shows the NH-specific RGGI caps and adjusted caps.  Emissions from NH operations dropped by 67% since 2005, compared with a 56% decrease for all the RGGI states. A great deal of this improvement was driven by reduced in-state coal-fired generation. Even with the adjustment, NH CO₂ emissions were below the cap in 2016.  In the RGGI states, there are over 160 carbon-emitting generating operations that need to comply with the program, but, of the 31 generating plants in NH, only five  (Merrimack, Schiller, Newington, Granite Ridge Energy, and Essential Power Newington Energy LLC) are affected.  

In these first looks at the RGGI program, I have taken a rather simple view of the program by considering where the money flows, the cap values, and the actual CO₂ emissions. There are many interesting aspects of the program that I have not covered. These include offsets, where generators can invest in projects such as landfill methane gas capture, re-forestation, EE investments in the building sector, etc., to offset their carbon emissions. There is also a two-sided cost containment reserve – a reserve pricing mechanism that provides a floor price for carbon and a high-price trigger that allows sale of banked allowances to provide a lid on prices: in 2017, the minimum carbon price is $2.15/ton CO₂ and the high-price trigger is $10/ton CO₂. These might be good topics for future posts.

We can conclude that, since the start of the RGGI program, CO₂ emissions have decreased significantly and have been way below the established caps. This has resulted in low allowance prices and the banking of a large volume of allowances by generators that can be used in the future. This has perpetuated low emissions pricing and, to compensate, the RGGI program recently implemented an even lower Adjusted Cap, which is hoped will draw banked allowances into the market and result in higher emissions prices in the future. The RGGI program has been in place since 2008 and a lot has been learned along the way. It was viewed as a model program for other regions when the Obama Administration’s Clean Power Plan (CPP) was in play. With that plan on hold for the foreseeable future, the future of the RGGI program remains a regional matter and the program review that is presently underway is crucial to its successful continuation beyond 2020. 

In my next post, I will take a look at the reasons behind that dramatic decrease in CO₂ emissions over the past few years and the role of RGGI in this. Until then, do your part to keep emissions low by turning off the lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

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