RGGI: An Experiment in Cap-and-Trade

The Kyoto Protocol entered into force in 2005 includes several parts to reduce greenhouse gas emissions, including a cap-and-trade mechanism aimed at developing a global market for reducing CO2 and other greenhouse gases (GHGs). Several countries, regions, and states have experimented with various cap-and-trade mechanisms since Kyoto. Of note, the Regional Greenhouse Gas Initiative (RGGI), established over ten years ago, is North America’s first mandatory cap-and-trade program for GHGs. The bipartisan program currently involves Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. In 2020, New Jersey is expected to rejoin the program. The program requires electric power generators who produce 25 megawatts or more to purchase allowances for their CO2 emissions. The RGGI participating states sell their CO2 allowances in a regional auction.

The RGGI directly affects the local community of Vermont, as it is one of the states that has committed to the RGGI model. As recognized in the Regional Coordinate to reduce GHGs, the Vermont state legislature recognizes that “climate change poses serious potential risks to human health and terrestrial and aquatic ecosystems globally, regionally, and in Vermont.” 30 V.S.A. § 255. Due to the lack of federal action, Vermont, along with several other states, have taken action to reduce carbon emissions for the power sector. Local action is becoming more of a trend as communities around the United States are taking a stand to fight climate change where the federal action is absent.

The Agency of Natural Resources and the Public Utility Commission (PUC) have established a cap-and-trade program that limits and then reduces the total carbon emissions by major electric generating stations. Power generating stations allocate the carbon credits that Vermont receives. The PUC can “receive, hold, bank, and sell tradable carbon credits created under this program.” 30 V.S.A. § 255. Vermont’s auction proceeds are deposited into the electric efficiency fund created under 30 V.S.A. § 209(d)(3). By reinvesting the funds gained from the cap-and-trade mechanism, Vermont has been able to improve efficiency and lower the state’s carbon footprint. From a policy perspective, the RGGI has had a positive impact on reducing greenhouse gas emissions and reinvesting in clean energy as well as increasing energy efficiency.

Across the participating states in New England and the Mid-Atlantic, the RGGI has generated over $3 billion USD from the cap-and-trade system, and most of this money has been reinvested in energy efficiency. One of the critiques of the RGGI is that the mechanism will not be truly successful until it makes meaningful reductions in carbon emissions. Most recently at the 45th RGGI Auction, the CO2 allowances sold for $5.20 per metric ton, which generated $68 million for reinvestments. Most recognize that the $5 price per metric ton of CO2 is far too low. The World Bank cites a necessary minimum price of at least $24-$30 per metric ton of CO2. California already has a price of $15 per metric ton of CO2. A minimum auction price is now being considered for RGGI. A minimum auction price is like a minimum acceptance bid on eBay. When there is low demand, the auction price can be supported by a floor price rather than the carbon selling for below market. If a minimum auction price had been agreed upon during the establishment of the RGGI, the mechanism could have likely generated much more revenue for cleaner energy. Despite its flaws, however, the RGGI is a well-established, transparent, cap-and-trade program that has had a positive impact on Vermont and the Northeastern United States.

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