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February 14th, 2013

Northeast Carbon Cap Reduction Proposed: Valentine Folly or Gift?

by Andrew Price, President & COO

The Regional Greenhouse Gas Initiative (RGGI) is looking for some love this Valentine’s Day for its plan to reduce allowable carbon dioxide emissions by 45%. The cap on emissions would be reduced from the current 165 million short tons to 91 million short tons in 2014. The cap would fall by an additional 2.5% in 2015 and each year thereafter through 2020. Although a 45% reduction in a single year may seem like a very large request, even on Valentine’s Day, the proposed cap is set about equal to current emission levels. The price of RGGI carbon allowances has traded near the regulatory floor price of $1.93 per short ton for many years, due to a cap that has been far above actual emissions.

RGGI, the first major carbon cap-and-trade program to be implemented in the United States, covers emissions from large electric power plants in 9 northeast states including: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. (see map from RGGI.org) RGGI, which began trading allowances in 2009, had 10 members before Governor Christie pulled New Jersey out of the program in an attempt to reduce electrical rates. Both New Hampshire and Maine have also made noises about pulling out of the program at various times since RGGI was implemented.

Proponents argue that RGGI is necessary in the absence of a federal program to reduce carbon emissions that contribute to costly climate change. Cap-and-trade programs can be more efficient at reducing emissions than technology mandates, as the market based trading program allows a company to purchase the right to emit greenhouse gases if the allowances are cheaper than implementing onsite reductions. The most efficient companies can undertake more extensive reductions and sell excess credits. Opponents argue that carbon cap-and-trade increases the cost of energy, depresses economic development, and that regional programs suffers from “leakage”. Leakage occurs when non-participating states (like New Jersey or Pennsylvania) can produce power more cheaply – by avoiding the imposed carbon costs, and export that power into the cap-and-trade zone. Leakage reduces the benefits of cap-and-trade programs and is one reason why bigger is sometimes better (see also my blog on California joining with Quebec for carbon cap-and-trade).   

RGGI holds quarterly auctions of allowances. Almost all allowances are purchased by compliance entities, namely power plants that pass along the cost of the allowances in the form of higher wholesale electricity rates. Due to a recession, as well as a quick transition away from oil and coal fired power generation to natural gas and renewables, the power sector quickly exceeded RGGI’s original goal of a 10% reduction in emissions by 2018. Most auctions clear only half the allowances offered for sale. As a result, RGGI has had only a very minor impact on electric rates to-date. The dramatic cut in the emissions cap is an attempt to make RGGI relevant again.

Each state participating in RGGI determines how to use their portion of the funds generated by the sale of allowances. Certain states have returned the funds to ratepayers or used the money to help close general fund budget gaps. Other states, including Maine and Massachusetts, have used almost all funds to pay for electrical efficiency. Efficiency projects can leverage limited RGGI funds into ongoing savings, creating a multiplier effect.

Governor Lepage of Maine recently indicated he may support the lower cap proposed by RGGI, if the state legislature agrees to shift the allocation of program revenues. Governor Lepage has proposed shifting some funds away from electric efficiency to fuel conversions; the intent is to move homes and businesses from expensive oil to cheaper alternatives like natural gas, propane and wood pellets. Governor Lepage and his director of energy, Patrick Woodcock, have also asked for more of the funds to be used in direct ratepayer relief. The Republican Governor and the Democratic controlled Legislature may find common ground, at least in the proposal to shift some RGGI funding to incentivize fuel conversions. Transitioning from heating oil to alternatives like natural gas, propane and biomass offers dramatic dollar savings to Maine energy consumers and can deliver significant greenhouse gas reductions as well-surely a better Valentine’s gift than flowers or chocolate.    

(Tags: Regional Greenhouse Gas Initiative, CO2, Cap-And-Trade, Carbon, RGGI, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont, Governor Lepage, Governor Christie, Patrick Woodcock)

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