RGGI and CO2 Emissions Trading Under the Clean Power Plan
By Analysis Group | July 2016
In 2016, when the nation was moving to implement the EPA’s Clean Power Plan, the RGGI Project Series recognized the need for analysis of the design features of the RGGI carbon-trading program, to facilitate choices for states including the option to engage in carbon trading on a national basis.
Today, this report is as relevant as it was in 2016. While the federal program has been stayed by the new Administration, states continue to implement their plans to reduce carbon emissions.
This report, produced by the Analysis Group, identifies the core issues in emission-allowance trading for the RGGI program and how these can be adapted to trading w/ other states. The observations about an expanded state-to-state carbon trading market and lessons learned from the first-in-the-nation, multi-state RGGI trading program continue to inform state action
A broader market with more participants lowers the overall cost of compliance in the long term.
While short-term revenues may fall, the long-term efficiencies and cost decreases of broader trading likely outweigh the impacts of short-term revenue reductions.
Evidence proves the economic and policy benefits to RGGI states of 1) disbursing nearly all allowances into the market through a central auction mechanism; 2) returning auction revenues to the RGGI states, and; 3) using those revenues in various ways to further greenhouse gas reduction goals, address electricity cost concerns, clean energy and consumer benefit objectives such as energy efficiency, renewable energy investments and job creation.
RGGI states should focus on enabling an efficient emission-trading platform as a first-order design principle rather than focus on allowance distribution considerations. Initial distribution does not affect the value or “opportunity cost” of allowances in the market, and does not affect the aggregate cost of compliance or price of electricity generation. Allowance distribution does affect the initial allowance value, which leads to different economic outcomes.
RGGI auctions are conducted with the oversight of a market monitor, who has provided a body of evaluations and assessments that have enabled the RGGI states to have confidence in the prices and allowance-disbursement outcomes resulting from the allowance auctions. Effective market monitoring has given RGGI states comfort about underlying market-power considerations in the central market for allowances.