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The Proof Is in the Pudding

Regional Greenhouse Gas Initiative Shows Pollution Pricing Works

SOURCE: AP/Charlie Riedel

RGGI proves that a market-based price on power-sector emissions is both possible and effective in the United States.

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As Congress looks for a way to price global warming pollution at the federal level, 10 Northeastern states have already put in place a market-based carbon emissions reduction program, the Regional Greenhouse Gas Initiative, or RGGI (pronounced "Reggie"), that just completed its seventh successful auction of pollution permits. And while opponents of clean energy reform falsely claim that a cap-and-trade system would harm the economy, RGGI provides a working model and active case study of how reducing pollution can actually drive economic growth. By 2018 the 10 RGGI states will have reduced their power sector carbon emissions by 10 percent, created thousands of homegrown clean energy jobs, and driven billions of dollars of public and private investment into the clean energy technologies of the future.

RGGI proves that a market-based price on power-sector emissions is both possible and effective in the United States, and it has big implications for federal clean energy legislation. As Congress continues considering such legislation it should take a closer look at what RGGI is doing and learn from both its strengths and weaknesses.

How it works

RGGI is a first-of-its-kind agreement among 10 Northeastern and Mid-Atlantic states comprising nearly 20 percent of the U.S. economy (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Hampshire, New York, Rhode Island, and Vermont) to reduce their power-sector global warming pollution by 10 percent by 2018. This is achieved using a market-based mechanism similar to the one reportedly under consideration by the tri-partisan coalition of senators led by John Kerry (D-MA), Lindsey Graham (R-SC), and Joe Lieberman (I-CT) who are working on federal clean energy and energy independence legislation.

The system works by auctioning a limited number of carbon pollution allowances—each representing one short ton of carbon pollution—to Northeastern and Mid-Atlantic power generators each quarter. The total amount of pollution allowances sold may not exceed 188 million tons per year through 2014. After 2014 the amount of allowances shrinks gradually by 2.5 percent per year over four years for a total reduction of 10 percent by 2018. Power plants are required to submit a number of allowances equal to their total emissions at the end of each three-year compliance period. If they don’t have enough allowances to cover their emissions they must purchase more or face a penalty. If they find they have a surplus they can sell the extra allowances to other power generators who may need them.

This market-based approach to pricing pollution is the most economically efficient way to clean up our air, and it has been used successfully in the United States to reduce acid rain pollution from power plants for decades before being adapted to limit carbon dioxide by the RGGI program starting in 2008.

The states participating in RGGI announced on March 12 the successful completion of their seventh quarterly auction, where more than 41 million allowances were sold for $2.07 each, yielding $88 million for investment in the clean energy economy. While many experts consider a carbon price of $2.07 per ton too low to create strong incentives for utilities to change their ways by itself, the programs funded by this revenue are already driving investment, creating jobs, and laying critical ground for the clean energy future.

Why it is effective

The market-based carbon-reduction system in RGGI works because proceeds from allowance auctions provide a much-needed revenue source to jumpstart public and private investment in the clean energy economy. The $583 million in auction proceeds dispensed to state energy programs to date are already hard at work facilitating the deployment of clean energy technologies and energy efficiency programs that benefit consumers—reducing energy bills and creating jobs at the same time.

According to RGGI’s website:

Reinvesting auction proceeds in the region provides significant consumer benefits. Reinvestment of proceeds in local economies helps businesses and homeowners control their energy costs and creates new jobs in the clean energy sector…

End-use energy efficiency investments provide net economic benefits to ratepayers through bill savings… because the cheapest power plant is the one that never gets built.

The benefits of these investments can be seen and felt across the region, from businesses hiring workers to implement a growing variety of innovative energy efficiency and renewable energy programs to consumers benefitting from more efficient homes and buildings to rapid growth of new worker training programs.

Below are a few examples of how RGGI pollution allowance proceeds are being used to jumpstart investment in the clean energy economy. A full list of the clean energy programs being funded through auction proceeds can be found here.

  • "Expanded efficiency programs, funded in part by RGGI, are expected to create or maintain 4,000 jobs in Massachusetts over three years," said Phil Giudice, commissioner of the Massachusetts Department of Energy Resources. 
  • Programs funded with RGGI proceeds are currently supporting approximately 200 full-time jobs in New Hampshire according to the New Hampshire Public Utilities Commission, or PUC.
  • The workforce at the Center for Ecological Technology, a company that conducts efficiency work, has doubled since RGGI began, increasing from 50 to 100 full-time employees.
  • Conservation Services Group, a national energy services firm, hired 170 people last year, bringing its total workforce to almost 600, with nearly half its staff located in the RGGI region.
  • Delaware is directing 15 percent of its auction proceeds toward low-income consumers through state-administered Weatherization Assistance Program and the federally funded and state-administered Low Income Home Energy Assistance Program programs.
  • Maryland invested some of the auction proceeds to create the Home Energy Retrofit and Weatherization Workforce Training Program, a "one-stop" training source that has provided energy efficiency job training to more than 600 contractors at 13 community colleges across the state.
  • Similarly, the New York State Energy Research and Development Authority will use RGGI proceeds to "partner with constituency-based organizations, community colleges, unions, and other groups to build and expand training and certification programs for emerging workers, building remodelers, HVAC technicians, energy auditors, and engineers," according to RGGI’s press release.
  • Connecticut was able to reopen an oversold solar rebate program thanks to RGGI auction proceeds, providing a 40 percent tax cut for the installation of photovoltaic solar panels on building roofs.

Overall, the U.S. Department of Energy estimates that every $1 million invested in building weatherization creates more than 60 jobs in production and installation of energy efficient building materials and equipment, home energy assessments and weatherization, technical services, design, manufacturing, and technology development. "Every new job in this growth industry is a step toward a clean energy future for the state and region," said New Hampshire PUC Commissioner Clifton Below in a press release.

Perhaps most important, the unprecedented transparency measures implemented under RGGI have shown it is possible to trade carbon efficiently while preventing the worst practices of market manipulation and unnecessary financial speculation. Each and every allowance auction under RGGI undergoes a rigorous third party verification process that reviews the administration of the auctions and monitors the conduct of market players. In the most recent auction that took place on March 10, the Market Monitor Report found:

  • "No material evidence of collusion of manipulation by bidders."
  • "The auction was administered in a fair and transparent manner in accordance with the noticed auction procedures and limitations."
  • "The auction results were consistent with the market rules and the bids received."
  • "Sensitive information was treated appropriately by the auction administrator."
  • "There were no indications of hardware or software problems, communications issues, security breaches, or other problems with the auction platform."

The Market Monitor Report also tracks the quantity and identity of market participants and does analytics to ensure that the conditions exist for a competitive and economically efficient bid pool. In the most recent auction the Market Monitor Report found that 51 bidders competed fairly for the 40 million carbon allowances, and that no one bidder acquired more than 12 percent of the overall pool of available allowances. RGGI’s auction protocol also contains a provision that prevents any one bidder from acquiring more than 25 percent of the allowances in order to prevent market manipulation and fraud. Participation by a large number of bidders for a small slice of the overall pie of available allowances leads to the most economically efficient outcome.

Kinks in the system

Some details in RGGI could be improved despite its great success cutting carbon and growing the clean energy economy.

Most important is the low price of pollution allowances, which means less auction revenue for state clean energy and energy efficiency programs and reduced incentives for energy companies to shift away from dirty fuels. As the price of pollution goes up, it becomes increasingly profitable for companies to shift to cleaner sources of energy instead of buying allowances to pollute. This in turn drives demand for clean energy and energy efficiency equipment and attracts private investment in companies that develop these technologies. A carbon price that is too low loses out on this demand-driving effect. The likely causes of the low price are an oversupply of allowances—the power sector is not required to reduce emissions until 2014, so they buy less pollution allowances—and reduced energy demand due to the recession.

Given that a market-based system for pricing carbon had never been tried in the United States before 2008, starting the first phase with a generous allowance supply and a low price may have been a prudent choice to avoid market volatility and gain the trust of market participants and the public. A federal pollution market is also likely to have initially low prices and a gradual phase in while polluters adjust to the new system.

Another issue with RGGI is that some states, given the recession, have attempted to divert their share of auction revenues away from job-creating clean energy programs in order to fill other budget gaps. The New York Legislature considered such a move in December, and New Jersey’s new governor Chris Christie made a similar proposal as recently as March 17.

Policy experts and lawmakers who understand the importance of clean energy investments for cutting pollution and creating jobs in these states have voiced vocal opposition and denounced the maneuvers as "short sighted" and setting "horrible precedent." They make a good point—for clean energy and energy efficiency industries to blossom, policy incentives need to be transparent, long term, and certain, or "TLC," so that market players can have certainty that their investments will pay off.

"The most efficient way to scale up renewable energy sources is to get multiple investors involved, which requires TLC," said Mark Fulton, global head of climate change investment research at Deutsche Bank in an article in Global Finance.

As federal legislators turn to pricing carbon they should take steps to ensure pollution revenue investments are insulated from the pressures of annual appropriations so that they can provide a stable and secure source of funding for programs to benefit consumers, attract private investors, create jobs, and grow the clean energy economy.

Implications for federal clean energy legislation

It is important for Congress to take RGGI into account when considering federal clean energy policy for two reasons.

First, and most important, the federal government can learn from the RGGI experience by using its success as a detailed case study, adopting best practices, and avoiding pitfalls. The success of RGGI proves that market-solutions can reduce pollution while creating jobs, benefiting consumers, and driving much-needed investments in homegrown clean energy and energy efficiency.

The RGGI experience also shows that all this is possible without exposing consumers to the worst practices of financial speculators, growing the size of government, or increasing the national debt. In fact, despite the seemingly complex task of implementing a U.S. carbon market, administrative costs for RGGI are only 0.5 percent the overall emissions allowance revenue. RGGI Inc., the administrative organization that manages implementation of the program, has accomplished what many claim to be impossible with a very lean staff of just five individuals—proving that better governance does not necessarily mean bigger government or more bureaucracy.

Second, RGGI and other regional greenhouse gas trading schemes such as the Western Climate Initiative and the Midwestern Regional Greenhouse Gas Reduction Accord can serve as a temporary "Plan B" solution to our nation’s energy crisis and help spur demand and catalyze investment in clean energy technology, infrastructure, and workforce development until federal legislation can be passed.

An analysis by Point Carbon, a carbon market watchdog group, showed that a patchwork of regional carbon markets including RGGI and the Western Climate Initiative could achieve 41 percent of the United States’ pollution-reduction commitments under the Copenhagen accord by 2020 and generate as much as $100 billion in revenue for clean energy investments at the state level. While the economic benefits of comprehensive federal legislation are clear, a network of interlinked state and regional carbon markets building off the existing institutional infrastructure of RGGI, WCI, and MRGGRA could be a workable backup plan.

RGGI’s success teaches us that it is not hard to create a lean, efficient auction system to price carbon and drive clean energy investments, and that the economic and policy principles underlying such a system are well understood. Skeptical lawmakers who worry that we can’t find a market-based carbon price that reduces pollution, drives investment, benefits consumers, and creates jobs need look no further than the 10 RGGI states who are proving every day that we can.

"With each successful auction, the RGGI states continue to show that cap and trade works and can jumpstart a green economy with fewer emissions, lower electricity bills, and more jobs," says David Littell, chair of the RGGI board of directors. "RGGI has provided a roadmap to a clean energy future."

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