Tuesday, May 2, 2017

The Regional Greenhouse Initiative - Part 3

In Part 1 and Part 2 of my posts on the Regional Greenhouse Gas Initiative (RGGI), I reviewed the money flows in the program and presented data on the remarkable decrease in carbon dioxide (CO2) emissions that we have seen since its implementation. In this post, I present some of the pros and cons of the RGGI program and some evidence that supports the assertion that RGGI has been responsible, in large part, for the decrease in regional CO2 emissions.

Based on my research, the RGGI program seems to have some positive attributes, as well as some downsides. The advantages can be listed as follows:

  • Since implementation of the program, CO2 emissions have declined significantly. See figure below.
  • The program puts a price on carbon in the electricity markets and provides incentives for us and the market to make economic choices regarding our electricity generation. Carbon pricing should lead the market to prefer lower carbon sources and thus provide economic support for low-emission sources, such as renewables.
  • It is a market-based program, which provides generators with choices. They are required to participate but they can choose to purchase allowances or make investments in lower-carbon technologies to ensure that their carbon generation falls within their share of the particular cap specified at the time.
  • The allowances generate a pool of money that is shared between participating states. This is returned to ratepayers in the form of direct rebates and used to fund energy-efficiency (EE) programs. The EE portion creates a virtuous cycle, in which carbon prices fund EE measures, which then lead to further reductions in energy use and carbon dioxide emissions.

One of the biggest criticisms leveled at the RGGI program is that the regional reductions in CO2 emissions, noted in Part 2 of this series, are not attributable to more efficient plant operations induced by the RGGI program; rather, they are due to less in-state generation, conversion to natural gas which was already underway, and a slower post-recession economy.

A recent economic study examined this issue directly and reviewed reasons behind the decline in emissions. The authors of the study highlighted the following facts:

Carbon dioxide emissions from the RGGI states have declined, but the decrease is due to a number of factors, including:
  1. The 2008/2009 Great Recession: with the economic slowdown, came reduced energy demand, less generation, and therefore fewer emissions;
  2. Low natural gas prices, created by increased supply from the implementation of fracking technology: natural gas produces less CO2 emissions per unit of generated electricity when compared with coal;
  3. State programs promoting EE project implementation or renewable energy generation, such as renewable portfolio standards;
  4. The RGGI program, which puts a price on carbon dioxide emissions.

The authors then carried out a complicated economic analysis to disentangle the effect of each factor on regional CO2 emissions. What they concluded is the following:
  • Without the impact of all the factors noted above, CO2 emissions would have been 60% higher;
  •  The bulk of decrease in emissions is, in fact, due to the RGGI program;
  • Substitution by natural gas was an important factor, but less so than the RGGI impact;
  • The impact of the recession on CO2 emissions was minor;
  • Some of the benefits of the RGGI program are undone by neighboring non-RGGI states that sell electricity into the regional power pools. Their coal-fired generation without the RGGI adder then becomes competitive and so more electricity is generated from their high-CO2-emissions plants.

This provides good evidence to support the direct impact of the RGGI program, but is just a single economic study. I look forward to seeing others.

Other criticisms of the RGGI program include the following:
  • It increases electricity costs to consumers in a region that already has high electricity rates.
  • The implications of RGGI are only now starting to kick in. After recent implementation of the Adjusted Cap, CO2 allowance prices have increased significantly and this could further impact electricity rates going forward.
  • RGGI sets up unfair competition by neighboring states that don’t have these requirements. Their costs of generation do not include RGGI costs so their electricity is cheaper and they can sell into the RGGI markets with a built-in cost advantage.
  • There are a lot of free riders – RGGI ratepayers lead by example by paying for reduced CO2 emissions, but residents of non-RGGI states benefit from the cleaner air.
  •  RGGI funds making their way to the states have been raided for other purposes, such as balancing state budgets, and are not always used to fund EE and renewable energy projects, which was the original intention of the program.
  • Carbon pricing through the RGGI program is unfair to electricity ratepayers because other regional CO2 emissions, such as those from transportation and heating, are not subject to carbon pricing.  

The argument that the RGGI program does increase the cost of electricity is valid, but it is important to put this into context. Let’s examine what the present carbon price means for individual ratepayers in terms of electricity rates. A review of RGGI state data from the Energy Information Agency (EIA) indicated the RGGI states, on average, emit 0.34 tons CO2 per MWh of generated electricity. We can then calculate that a CO2 price of $5/ton leads to an incremental cost of $1.70/MWh or 0.17 cent/kWh. If you use 600 kWh per month, this represents $1.02 in incremental costs on your bill. However, this calculation does not take into account that House Bill 1490 legislation mandated that only the first $1/ton CO2 from the CO2 emissions allowance auction proceeds could be used towards EE: anything beyond that has to be rebated directly to electricity ratepayers. As a result, most NH RGGI funds now go to direct bill rebates, so (assuming a $5/ton carbon price) ratepayers get about 80% of the RGGI costs back. If we back out the rebate, the cost to ratepayers is of the order of $0.20/month or 0.034 cents/kWh for 600 kWh/month electricity usage. This is in line with the rate impact calculations presented in the recent annual report on the RGGI program in NH. As you can see, there is an impact of RGGI on electricity rates, but the total amount paid by an individual ratepayer is tiny.

As I wrap up this three-part series on RGGI, it is clear that it is a complicated—but important—program. There is evidence that it appears to be having significant impact on regional carbon emissions, but, at the same time, it does impacts regional electricity prices; however, after including bill rebates, the utility bill impact to the average NH rate payer is tiny. A few years ago RGGI was viewed as a model program for the rest of the country and, if implementation of the EPA’s Clean Power Program had proceeded, participating states would have a considerable head start. Unfortunately, it looks like RGGI will remain a regional initiative only because there is no support from the Trump Administration for clean power or carbon pricing mechanisms. The most important development in the RGGI world is the review of the program that is currently underway, as this will set the tone for the RGGI program, carbon prices, and regional electricity rates going forward.

Until my next post, do your bit to reduce carbon emissions by remembering to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University

No comments:

Post a Comment

Please feel free to comment but note that I have added a verification step to avoid the large amount of spam that can make its way into the comment area. An annoying but necessary step these days.