April 2013

The Regional Greenhouse Gas Initiative (RGGI), the U.S.’s first carbon cap and trade program, is expected to be modified later this year, a sign of changes to come and gives lessons to those who may design future cap and trade rules. RGGI affects large power plants in 9 Northeast states (NJ withdrew last year), mandating that each state’s plants reach its early 2000’s baseline when the rule began in 2009 (with flexibility: as emissions may be averaged over 3 year periods), then decrease gradually to 10% below baseline by 2019. Affected facilities must buy allowances from their states for all emissions, limited to the quantity of the baseline. However, due to a number of factors, including Recession-related decrease in electricity demand, GHG emissions declined right away and demand for allowances was very low, causing them to be sold at the floor price. In fact, now GHG emissions from the affected power plants have decreased by 40% from the baseline, well below the 2019 goal already. States thinking there would be a cash bonanza from sales were disappointed, a non-ideal market (for them).

The RGGI organization issued a model rule change in February 2013 to “correct” (http://www.rggi.org/docs/PressReleases/PR130207_ModelRule.pdf) the situation. The rule requires a more stringent GHG emission decline, which is expected to stimulate the price for allowances and strategies for compliance. The change would lower the overall cap to 91 million (short) tons beginning in 2014 (about 45% below the original baseline), with an additional reduction of as much as 33% from that cap by 2020.

The model rule change contains necessary actions should the cost of allowances exceed certain triggers. But instead of expanding the definition of offsets as the original rule states, the proposed change allows states to sell additional allowances, called cost containment allowances (CCAs). The original RGGI rule allows an affected facility to average allowances over 3 year periods; one can wait to purchase allowances for all 3 years at the end of the third year, for example. The draft change states that one must obtain at least 50% of the necessary allowances each year. The draft change raises the minimum (“floor”) price of an allowance in 2014 to $2.00/ton, rising 2.5% per year.

The draft model rule change must be reviewed and passed by each RGGI state by its own legislative process individually. Changes are aimed to be finalized later this year. Each state may make additional changes outside of these major ones. New York, for example, proposes to maintain its renewable energy set-aside at 700,000 tons, and potentially expand it. The comment period closes in New York on May 6, 2013. For further information, see: http://www.rggi.org/design/program_review.

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