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Thursday, June 2, 2011

The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policymakers

Jonathan L. Ramseur
Specialist in Environmental Policy

The Regional Greenhouse Gas Initiative (RGGI) is the nation’s first mandatory cap-and-trade program for greenhouse gas (GHG) emissions. RGGI took effect January 1, 2009. RGGI involves 10 states—Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. The RGGI cap-and-trade system applies only to carbon dioxide (CO2) emissions from electric power plants with capacities to generate 25 megawatts or more—approximately 200 facilities. Compared to recent federal proposals, the reductions required by RGGI’s cap are relatively modest: the initial objective of RGGI is to stabilize CO2 emissions for several years (2009-2014), and then require gradual reductions, achieving a 10% decrease from the 2009 emission cap level by 2019.

The initial results of the RGGI program may be instructive to policymakers, because RGGI may serve as a possible test case for a federal cap-and-trade program, providing insights into the mechanics of various design elements and lessons of potential design pitfalls. Several of RGGI’s design elements generated considerable interest during the development and debate of federal proposals to address GHG emissions.

RGGI has encountered several design challenges that have and may continue to undermine the overall objectives of the program. First, the program’s emission cap exceeds actual emissions. This means that since the cap took effect in 2009, the cap has not compelled regulated entities to make internal emission reductions or purchase emission credits from other sources. Second, a critical design detail—electricity imports from non-RGGI states—remains unresolved. Emissions associated with imported electricity are not controlled by the RGGI program. This presents an opportunity for emissions to shift from a controlled area to an uncontrolled area, a process known as emissions leakage that could undermine the effectiveness of the RGGI program. However, recent evidence does not indicate this has occurred.

Although RGGI’s emission cap is not expected to require emission reductions in the near future, the program has had some effects. First, the cap’s existence attaches a price to the regulated entities’ CO
2 emissions. Because the cap is non-binding, this price acts like an emissions fee or carbon tax. A 2010 analysis of the RGGI program concluded that the emission allowance price accounted for approximately 3.4% of the change in the relative prices of natural gas and coal in the RGGI region between 2005 and 2009. Second, the RGGI emission allowances, which are essentially a new form of currency, have been used to support various policy objectives. Of the various objectives, RGGI states (as a group) have contributed the most—52% of auction revenues—to support energy efficiency efforts. Several RGGI studies indicate that supporting energy efficiency provides multiple benefits: emission reduction, consumer savings via lower electricity bills, and job creation.

As a group, the RGGI states represent approximately 10% of U.S. CO
2 emissions. RGGI’s emissions rank above many of the major industrial nations. But from a practical standpoint, the RGGI program’s contribution to directly reducing the global accumulation of GHG emissions in the atmosphere is arguably negligible. However, RGGI’s activities may stimulate action in other states or at the federal level: when confronted with a growing patchwork of state/regional requirements, industry stakeholders may support a singular national policy. Moreover, RGGI may create examples and/or models that serve as a test case for federal policymakers crafting more widespread applications.

Date of Report: May 24, 2011
Number of Pages: 19
Order Number: R41836
Price: $29.95

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