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Expanding the Toolkit: The Potential Role for an Emissions Containment Reserve in RGGI

by Resources for the Future | August 2017

As RGGI states began their second program review, they grappled with ongoing frequent low allowance prices, and debated design adjustments to improve trading program efficiency and effectiveness. The Series recognized a critical gap in research and commissioned independent modeling analysis of an innovative mechanism – the Emissions Containment Reserve (ECR) – that incorporates a minimum price for specified quantities of allowances under the cap and thereby introduces graduated steps into the allowance supply function.

Conducted by the expert research group Resources for the Future, this in-depth technical analysis uses simulation modeling, economic experiments and expert market testing to explore the implications of introducing an ECR and varying its design parameters. 

KEY FINDINGS:

  • An ECR will reduce the accumulation of banked allowances.

  • An ECR shares the risks and benefits of changes in demand for emissions allowances between economic and environmental interests.

  • By enabling additional emissions reductions when prices are low, an ECR helps preserve the incentive for state and local government action and individual efforts to address climate change.

  • A transparent mechanism, an ECR can reduce price volatility and provide a more predictable market environment.

  • From a behavioral perspective, an ECR does not hinder price discovery in allowance markets.

In July 2017, report author Dallas Burtraw filed extensive comments to the RGGI proceedings, based on the report, that provided greater design detail and recommendations.

The new Model Rule includes the first ECR for a carbon-trading program.

 

 

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