RGGI States Can Achieve More Reductions – Even Beyond Tightening the Cap. And, Now More Than Ever, We Need Them To.

11/10/2016 11:37 am ET
We need more reductions out of the states — now more than ever
flickr/Thomas Hawk
We need more reductions out of the states — now more than ever

In light of the shocking election of Donald Trump, a climate denier, as the next U.S. president, coupled with climate-denying GOP control of Congress, the focus of climate progress in the United States will turn even more to the states.

The Northeast and Mid-Atlantic states involved in the Regional Greenhouse Gas Initiative (RGGI) are in the midst of a review to assess what changes may be needed in the program. Massachusetts, with support from a few other states, has been encouraging discussions about making the RGGI cap more stringent, proposing to double reductions to 5% per year between 2020 and 2031. That proposal has provoked some pushback from other states, most notably Maryland, which has to navigate its participation in the PJM market. Even if RGGI does not make the cap as stringent as some states are considering, interested states can still go further in their reduction efforts – by better utilizing the revenues from the sale of allowances.

When a jurisdiction puts a price on carbon (in the form of a carbon tax or a cap with auctioned allowances), it raises revenue. From 2009-2014, the RGGI states invested more than $1 billion from allowance auction revenues into state programs to advance energy efficiency, clean and renewable energy, and greenhouse gas abatement in multiple sectors. These programs have avoided about 1.7 million short tons of CO2 emissions to date and are projected to avoid more than 15 million short tons over their lifetime (in addition to returning nearly $4.7 billion in lifetime energy bill savings to 4.6 million households and 21,400 businesses in the region).

It is a little difficult to tell, however, how many of those reductions are additional to the cap (at least for someone like me who is generally familiar with RGGI but not completely steeped in the minutiae of RGGI design and execution). RGGI is a cap solely for the electricity sector, so the investments in other sectors (e.g., transportation, forestry) would clearly be additional to the cap. The investments in energy efficiency and renewables, though, are responsible for the bulk of the RGGI-attributed emission reductions, and at least some of those are clearly reductions occurring within the cap. The more successful those programs are, the less demand there will be for emission allowances. Those are still valuable investments, likely making compliance with the RGGI caps less expensive, but it is not clear whether they generate reductions beyond the cap.

If states want to go even further in their reduction efforts than wherever the new RGGI cap ends up, some different uses of the revenue could be in order.

As I’ve noted previously, using carbon price revenue to subsidize reductions beyond what a cap (or carbon tax) alone would achieve, and doing so in a cost-effective way, could massively increase the scale and rate of emission reductions. In its most basic form, a cost-effective allowance-based price-and-subsidize system would involve establishing a cap, selling the allowances, putting the revenue into a fund, and holding a reverse auction that offers subsidies (equal to the difference between the cost of the reduction and the allowance price) to any emitter that wants to submit a bid for achieving reductions, until the funds are fully committed.

To ensure the reductions are additional to the cap, an allowance has to be retired or otherwise pulled out of the system for each subsidized reduction. Otherwise, other emitters can use those allowances instead of making reductions, which means the subsidized reductions displace other reductions in the cap and are not in fact additional (which is what the California Legislative Analyst’s Office asserts is occurring in California). Another way to pull allowances tied to additional reductions out of the system is never to auction them in the first place, which would involve collecting up-front information about abatement opportunities, contracting with emitters to make subsidized reductions, and auctioning only the amount needed to cover the remaining anticipated emissions. (Climate Law & Policy Project, which I advise, wrote about this kind of approach here with respect to compliance with the now-doomed Clean Power Plan.)

There are key differences between a cost-effective price-and-subsidize system that achieves additional reductions and what is happening in the RGGI states. For instance, RGGI states are not using reverse auctions or other mechanisms to cost-effectively subsidize reductions, nor do they limit subsidies to the difference between the carbon price and the abatement cost. And again, it is unclear how much of the spending is achieving reductions beyond the cap.

Ratcheting down the RGGI cap is important. The necessary trajectory of emission reductions is a steep downhill, and a tighter cap will help us get moving faster. However, if RGGI states want to pursue even more ambitious emission reductions – which may be desperately needed in light of likely federal inaction (at best) on climate change – they may need to re-evaluate how the RGGI revenues are invested.

Dave Grossman is the Principal of Green Light Group consulting and is a Senior Advisor to the Climate Law & Policy Project.

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