RGGI and Emission Allowance Trading Summer 2017 Update: Options for Voluntary Cooperation among RGGI and non-RGGI states
by Analysis Group | July 2017
In an update to the Analysis Group’s 2016 report on the nine-state Regional Greenhouse Gas Initiative (RGGI) trading program, Paul J. Hibbard and Ellery Berk reviewed the pros and cons of expanding the regional emissions allowance trading program, assuming the absence of a federal program.
Over the past nine years, the RGGI states have successfully operated a voluntary program for limiting CO2 emissions through mass-based allowance trading. Now, the nine states involved in the program are considering opening the door to expanded trading opportunities for power plants located both inside and outside the RGGI states.
In their report, Mr. Hibbard and Ms. Berk identify principles and objectives for program design changes that RGGI states should consider incorporating to enable broader trading. They also assess issues that other states might face as they consider how to enable generators in their states to participate in interstate carbon-trading programs, including RGGI. .
Larger Trading Region: Expanding the RGGI trading region to include more states supports least-cost compliance and provides appropriate signals to market participants for infrastructure investment and power plant operation. It also reduces the chance of market monopoly or illiquid trading. While short-term revenues may fall, the long-term efficiencies and cost decreases of broader trading will likely outweigh the impacts of short-term revenue reductions.
Trading Decisions Today Affect Future: RGGI is uniquely positioned to lead the expansion of a multi-state CO2 trading market. Decisions about key program designs and trading rules with new member states and non-member states will set a precedent for the future of emissions trading in the US.
Auction Revenue: 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.
KEY DESIGN CONSIDERATIONS FOR EXPANDING RGGI:
Program structure: RGGI Model rule or equivalent basic requirements including emissions cap, sources covered under CO2 regulation, the method of disbursing allowances, emissions report and compliance guidelines.
Allowance comparability: It is important for RGGI to proactively identify a strategy for setting comparable emissions caps and therefore creating fungible allowances with new trading partners. Price floors and/or CCR and ECR reserves affect fungibility.
Allowance distribution: 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.
Emission allowance tracking: A standardized system to track the creation, trading and retirement of emissions allowances is important to the fungibility of allowances. Non-RGGI trading partners need to track their activity through RGGI COATS or demonstrate substantial equivalence between their own independent tracking programs and COATS.
Market monitoring: RGGI requires careful monitoring of the allowance market to guard against hoarding and other forms of market manipulation. This market monitoring has not been challenging or disruptive to either administration or market, and is even more important with broader trading regions and more market participants. RGGI should consider some market oversight assurance mechanism in partner states.