Building Blocks: Introduction to RGGI

Building Blocks aims to provide detailed primers on technical subjects for a non-specialist audience. If there is anything we can do to make them more informative or clearer, please leave a comment.

What is RGGI?

The Regional Greenhouse Gas Initiative (RGGI) is a CO2e cap-and-trade system established for utilities (defined as power generators of 25MW peak capacity or more, about 225 plants) in the Northeastern United States. One permit carries the right to emit one ton of CO2e. Ten states are participating (New York, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Rhode Island, and Vermont).

How does the cap work?

Each state gets a certain discretion in setting its own rules for the auctions, but every state has committed to auctioning substantially all of the permits issued, instead of allocating them to different utilities. This is a major difference between the European cap-and-trade system, which allocates substantially all of the permits issued, and, as a result, the European system has depressed prices, made the allocation of permits a political issue subject to lobbying and abuses, and undermined the efficiency of a cap-and-trade system in distributing economic costs. All revenue raised by the auctions is distributed to the states for energy efficiency and renewables development projects.

What is the level of emissions reduction required in RGGI?

Utilities represent about 20% of the CO2e emissions both in the Northeast, and in the U.S. as a whole. As a result, the RGGI is a substantial step toward a comprehensive Northeastern cap-and-trade plan, and it will be hugely important both to prove that cap-and-trade can work in the U.S. and as a model for the nation and the world. Unfortunately, the cap is not very strict, with emissions frozen at 2006 levels until 2014. Then the cap will contract by 2.5% of 2006 levels from 2015-2018, resulting in a drop in emissions of 10% in this sector.

How did the first auction go?

The first RGGI auction for carbon permits was held over the weekend, and results were announced today. It went smoothly, at least. Several states did not finalize rules in time to participate, and will participate in the December auction for the first time. The six states that did participate auctioned off permits that ended up worth about $3.07 per ton of CO2e emitted, roughly one-tenth normal European prices. The $39mn the auction raised for these six states will go for subsidies and investment in renewables and renewables research. The auction sold every permit, against fears that the auction might be undersubscribed because of over-allocation (2006, the baseline year for the cap, turns out to have been a particularly bad year for CO2e emissions).

What is RGGI's role in the future of U.S. carbon regulation?

RGGI is a well-designed model for a U.S. cap-and-trade system, with a good software infrastructure, state-by-state enforcement and discretion, and almost total auctioning of permits. It is already being used as a model for the Western Climate Initiative, a regional cap-and-trade system in the western U.S. and northwestern Canada, comprising seven states and four Canadian provinces. RGGI must prove that: 1) cap-and-trade is highly economically efficient, particuarly on a large scale; 2) the markets can run smoothly and not impact the efficiency of the intraday electricity markets; 3) cap-and-trade can mitigate the economic costs of higher energy prices while redoubling the positive effects of the cap on domestic energy consumption by using its revenues for efficiency and investment.

Further Reading:

The executive summary of RGGI
News from RGGI
The model regulation that the states are following