US regional emissions trading: Nothing more than a political gesture?
A pioneering market-based scheme to cut US carbon emissions holds valuable lessons but is not the template for a federal solution.
The Regional Greenhouse Gas Initiative (RGGI), an agreement among ten states in the northeastern US – including New York, New Jersey, New Hampshire and Delaware – has been formed to establish a market-based cap-and-trade programme to reduce carbon dioxide emissions from the region’s fossil-fuelled power plants.
As the 2009 deadline for implementation looms, states are working to establish what percentage of their allowances will be auctioned and determine how proceeds will be allocated for spending. This will become clearer as each state decides how much of their allowances to auction, but will vary from state to state based on that determination and the eventual market price per ton of CO2.
RGGI requires power plants in the region to cap their CO2 emissions at current levels until 2014, and cut emissions by 10% by 2018. RGGI’s December 2005 memorandum of understanding (MOU) allots certain levels of CO2 emissions to each state, which are then apportioned to power companies. Beginning in 2009, utilities in the region will have three years to buy allowances equal to their emissions.
Price predictions
Modelling done for RGGI predicts allowance prices in the initial years will be near $2 per tonne, rising to as much as $5.50 per tonne by 2024. That said, Delaware, for instance, whose cap would be about 8 million tonnes per year out of the 188 million tonnes emitted by the ten states, could expect to reap $3.8 million per year if it auctioned only the 25% minimum of its allowances required under the MOU.
Eron Bloomgarden, US director at Ecosecurities, a developer and trader of emission reductions credits, says the RGGI market is not expected to be very “demand-heavy”.
“There are significant pressures that have been institutionalized in the RGGI process which lead one to believe that prices will be kept in a very tight band – perhaps an artificially tight band,” he says. But Bloomgarden stresses RGGI’s importance as a “small, but significant first step toward developing a US carbon market”.
Clean technology development
One of RGGI’s stated goals is to use market forces to push utilities to innovate faster and make more investments in clean technologies.
By the end of 2008, each state in the pact must adopt its own regulations or laws putting RGGI into effect. New Hampshire and New Jersey, which have both recently been working to pass the required legislation to officially establish their RGGI approaches, offer good examples of the process – and the ongoing debate.
Under the RGGI agreement, at least 25% of each state’s allowances must be dedicated to strategic energy or consumer benefit purposes, such as utility customer rebates, energy efficiency and new clean energy technologies. It is up to each state to decide specific uses of the revenues for the public benefit. New Hampshire says it plans to use allowance sales funds for a massive, statewide energy-efficiency programme aimed at reducing the overall output of CO2, but concerned civic groups and business leaders are urging lawmakers to adopt specific guarantees that the money will not diverted to fill in state budget deficits.
Tariff concerns
Public Service of New Hampshire, a RGGI-affected utility, says if its state legislature passes the RGGI bill currently being considered, the average residential customer would see rates rise by $1.17 per month in 2009 and by $4.44 per month by 2018. The utility compares that with projected increases of 22 cents per month in 2009 and $1.15 per month by 2018 without RGGI.
The company has asked for safeguards within legislation to prevent the price of RGGI allowances from spiking electricity rates.
And in New Jersey, where it is estimated RGGI allowance auctions will raise $40 million to $70 million annually, critics worry about how much of the money will actually end up funding clean technology investments.
Current proposals allot 60% of the funds to the state Economic Development Authority, which critics, including Environment New Jersey and the Sierra Club, say could use the money to bankroll new power plants – even coal-fired ones. Cities and towns would get 10% with few strings attached to spending and another 10% is being allocated to the state’s department of environmental protection to manage state woodlands and restore tidal marshes, though these areas are thought to do little to store carbon or impact global warming.
20% would go to the board of public utilities for efficiency programmes and energy rate relief.
Emissions offsetting
Under the terms of RGGI, electricity generators would also be allowed to cover up to 3.3% of their total emissions, or about 50% of the reductions required by RGGI, by buying offset allowances.
The pact allows power companies regulated by RGGI to invest in offset projects for landfill methane capture and combustion; sulfur hexafluoride capture and recycling; afforestation; end-use efficiency for natural gas, propane and heating oil; methane capture from farming and reduction of fugitive emissions from natural gas transmission and distribution.
To be eligible for inclusion in RGGI, offsets must meet a five-point standard of being real, surplus, verifiable, permanent and enforceable. But Bloomgarden says there is still no clarity around a defined mechanism for ensuring projects meet the standard.
Offset projects located in one of the pact states will receive one allowance for each CO2-equivalent tonne of certified reduction, while projects located outside the pact states would receive one allowance for every two CO2-equivalent tonnes. If after the initial 14 months of any compliance period the cost of CO2 allowances exceeds seven inflation-adjusted dollars for a year, offset allowances could be awarded to projects anywhere in North America and at the ten dollar threshold, international trading programmes would be permitted.
For now, however, that means most RGGI offset projects will be conducted in the region. But while Bloomgarden confirms anticipatory interest by firms like his own in RGGI offset projects in the region, he says there is little actual RGGI-related project activity thus far.
“Given what we’ve seen on the demand side thus far, there are far more interesting things than RGGI in terms of the offset market, including California, where there is significantly more demand; the voluntary market, where a growing number of companies and individuals are looking for high-quality emission reduction credits and anticipatory demand in advance of federal legislation,” he says.
Flawed model
Clearly the true impact of efficiency and offset investments as a result of RGGI won’t be known for some time. Such regional agreements, however, can provide important learning experiences for policy makers in other states and in the nation’s capital.
But Bloomgarden says that although RGGI was a “pioneer” when it was conceived, it does not serve as a good model for the rest of the US because its focus on a single sector is too limited and its cuts are not aggressive enough.
Peter Fusaro, founder of energy services advisers Global Change Associates and a carbon markets expert, agrees.
“It’s a 10% reduction by 2019 and only affects power companies,” he says. “It’s certainly not going to be what Congress will engage on over the next few years.”
Fusaro predicts that the model for federal action in the US will more likely be California’s climate exchange law AB 32, which seeks 25% reductions and is economy-wide. The California Air Resources Board is considering establishing a cap and trade scheme for the state’s emissions from January 1 2012. RGGI, Fusaro says, was really proposed to push the Bush administration forward on climate change, and wasn’t meant to be an all-encompassing regime.
“We need the rules to be federalised to provide financial certainty for investment by business,” Fusaro says.
Global carbon trade
Thomas Farrell, president and chief executive of Dominion, the largest power producer in New England, told a recent Wall Street briefing sponsored by the Edison Electric Institute that although his company would continue its efforts to comply with RGGI, it also believed a national, economy-wide approach was the best way to address climate change.
Bloomgarden agrees, saying US “companies don’t need 18 different regional plans to comply with”, but rather a single model across the US and internationally to reduce emissions as efficiently and cost effectively as possible. And the best model to that end, he argues, is global carbon trade in a free market.
RGGI, they agree, is a good first step, but a far cry from a national model.
Useful links:
RGGI
Eco Securities
Global Change
Respond:
Write to Lisa Roner, North America Editor at Lisa.Roner@ethicalcorp.com,
or write to the Editor at zara.maung@ethicalcorp.com
.
The Regional Greenhouse Gas Initiative (RGGI), an agreement among ten states in the northeastern US – including New York, New Jersey, New Hampshire and Delaware – has been formed to establish a market-based cap-and-trade programme to reduce carbon dioxide emissions from the region’s fossil-fuelled power plants.
As the 2009 deadline for implementation looms, states are working to establish what percentage of their allowances will be auctioned and determine how proceeds will be allocated for spending. This will become clearer as each state decides how much of their allowances to auction, but will vary from state to state based on that determination and the eventual market price per ton of CO2.
RGGI requires power plants in the region to cap their CO2 emissions at current levels until 2014, and cut emissions by 10% by 2018. RGGI’s December 2005 memorandum of understanding (MOU) allots certain levels of CO2 emissions to each state, which are then apportioned to power companies. Beginning in 2009, utilities in the region will have three years to buy allowances equal to their emissions.
Price predictions
Modelling done for RGGI predicts allowance prices in the initial years will be near $2 per tonne, rising to as much as $5.50 per tonne by 2024. That said, Delaware, for instance, whose cap would be about 8 million tonnes per year out of the 188 million tonnes emitted by the ten states, could expect to reap $3.8 million per year if it auctioned only the 25% minimum of its allowances required under the MOU.
Eron Bloomgarden, US director at Ecosecurities, a developer and trader of emission reductions credits, says the RGGI market is not expected to be very “demand-heavy”.
“There are significant pressures that have been institutionalized in the RGGI process which lead one to believe that prices will be kept in a very tight band – perhaps an artificially tight band,” he says. But Bloomgarden stresses RGGI’s importance as a “small, but significant first step toward developing a US carbon market”.
Clean technology development
One of RGGI’s stated goals is to use market forces to push utilities to innovate faster and make more investments in clean technologies.
By the end of 2008, each state in the pact must adopt its own regulations or laws putting RGGI into effect. New Hampshire and New Jersey, which have both recently been working to pass the required legislation to officially establish their RGGI approaches, offer good examples of the process – and the ongoing debate.
Under the RGGI agreement, at least 25% of each state’s allowances must be dedicated to strategic energy or consumer benefit purposes, such as utility customer rebates, energy efficiency and new clean energy technologies. It is up to each state to decide specific uses of the revenues for the public benefit. New Hampshire says it plans to use allowance sales funds for a massive, statewide energy-efficiency programme aimed at reducing the overall output of CO2, but concerned civic groups and business leaders are urging lawmakers to adopt specific guarantees that the money will not diverted to fill in state budget deficits.
Tariff concerns
Public Service of New Hampshire, a RGGI-affected utility, says if its state legislature passes the RGGI bill currently being considered, the average residential customer would see rates rise by $1.17 per month in 2009 and by $4.44 per month by 2018. The utility compares that with projected increases of 22 cents per month in 2009 and $1.15 per month by 2018 without RGGI.
The company has asked for safeguards within legislation to prevent the price of RGGI allowances from spiking electricity rates.
And in New Jersey, where it is estimated RGGI allowance auctions will raise $40 million to $70 million annually, critics worry about how much of the money will actually end up funding clean technology investments.
Current proposals allot 60% of the funds to the state Economic Development Authority, which critics, including Environment New Jersey and the Sierra Club, say could use the money to bankroll new power plants – even coal-fired ones. Cities and towns would get 10% with few strings attached to spending and another 10% is being allocated to the state’s department of environmental protection to manage state woodlands and restore tidal marshes, though these areas are thought to do little to store carbon or impact global warming.
20% would go to the board of public utilities for efficiency programmes and energy rate relief.
Emissions offsetting
Under the terms of RGGI, electricity generators would also be allowed to cover up to 3.3% of their total emissions, or about 50% of the reductions required by RGGI, by buying offset allowances.
The pact allows power companies regulated by RGGI to invest in offset projects for landfill methane capture and combustion; sulfur hexafluoride capture and recycling; afforestation; end-use efficiency for natural gas, propane and heating oil; methane capture from farming and reduction of fugitive emissions from natural gas transmission and distribution.
To be eligible for inclusion in RGGI, offsets must meet a five-point standard of being real, surplus, verifiable, permanent and enforceable. But Bloomgarden says there is still no clarity around a defined mechanism for ensuring projects meet the standard.
Offset projects located in one of the pact states will receive one allowance for each CO2-equivalent tonne of certified reduction, while projects located outside the pact states would receive one allowance for every two CO2-equivalent tonnes. If after the initial 14 months of any compliance period the cost of CO2 allowances exceeds seven inflation-adjusted dollars for a year, offset allowances could be awarded to projects anywhere in North America and at the ten dollar threshold, international trading programmes would be permitted.
For now, however, that means most RGGI offset projects will be conducted in the region. But while Bloomgarden confirms anticipatory interest by firms like his own in RGGI offset projects in the region, he says there is little actual RGGI-related project activity thus far.
“Given what we’ve seen on the demand side thus far, there are far more interesting things than RGGI in terms of the offset market, including California, where there is significantly more demand; the voluntary market, where a growing number of companies and individuals are looking for high-quality emission reduction credits and anticipatory demand in advance of federal legislation,” he says.
Flawed model
Clearly the true impact of efficiency and offset investments as a result of RGGI won’t be known for some time. Such regional agreements, however, can provide important learning experiences for policy makers in other states and in the nation’s capital.
But Bloomgarden says that although RGGI was a “pioneer” when it was conceived, it does not serve as a good model for the rest of the US because its focus on a single sector is too limited and its cuts are not aggressive enough.
Peter Fusaro, founder of energy services advisers Global Change Associates and a carbon markets expert, agrees.
“It’s a 10% reduction by 2019 and only affects power companies,” he says. “It’s certainly not going to be what Congress will engage on over the next few years.”
Fusaro predicts that the model for federal action in the US will more likely be California’s climate exchange law AB 32, which seeks 25% reductions and is economy-wide. The California Air Resources Board is considering establishing a cap and trade scheme for the state’s emissions from January 1 2012. RGGI, Fusaro says, was really proposed to push the Bush administration forward on climate change, and wasn’t meant to be an all-encompassing regime.
“We need the rules to be federalised to provide financial certainty for investment by business,” Fusaro says.
Global carbon trade
Thomas Farrell, president and chief executive of Dominion, the largest power producer in New England, told a recent Wall Street briefing sponsored by the Edison Electric Institute that although his company would continue its efforts to comply with RGGI, it also believed a national, economy-wide approach was the best way to address climate change.
Bloomgarden agrees, saying US “companies don’t need 18 different regional plans to comply with”, but rather a single model across the US and internationally to reduce emissions as efficiently and cost effectively as possible. And the best model to that end, he argues, is global carbon trade in a free market.
RGGI, they agree, is a good first step, but a far cry from a national model.
Useful links:
RGGI
Eco Securities
Global Change
Respond:
Write to Lisa Roner, North America Editor at Lisa.Roner@ethicalcorp.com,
or write to the Editor at zara.maung@ethicalcorp.com
.
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