Exploring a New Mechanism to Cut Carbon Pollution in RGGI

The cost of cutting carbon pollution is likely to fall further in coming years. If that's the case, states in the Regional Greenhouse Gas Initiative can take advantage of those price declines, helping to cut carbon pollution faster while they save consumers money on energy and create new, clean energy jobs.
The falling cost of clean energy means that RGGI can likely cut carbon pollution at a lower cost than anticipated. Combined with a stronger cap post-2020, an ECR could help the states take advantage of those price declines to cut pollution faster.

The nine-state Regional Greenhouse Gas Initiative (RGGI) is one of the most successful climate programs ever created. And tomorrow, to help explore one of the ways we might make it even better, I’ll take part in an online panel discussion about creating a new Emissions Containment Reserve (ECR). Yes, that sounds wonkish. But here’s the basic idea: an ECR is a potential tool that could help us cut carbon pollution faster, at a lower cost. To learn more, keep reading.

(Update: You can watch our panel discussion of the ECR here.)

RGGI is a big deal. This pioneering program to cut carbon pollution from the power sector in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont was launched in 2009. And since then, it has:

All nine RGGI states have benefitted, and they can continue to do so – if they strengthen the RGGI program to ensure continued progress beyond their existing commitments to cut carbon pollution through 2020.

Over the last year, the RGGI states have been conducting a scheduled program review with the goal of committing to an additional round of carbon pollution cuts after 2020. New York’s Governor Andrew Cuomo called for a stronger RGGI last month, and the states are on track to reach an agreement this year.

Much of the focus of the states’ review has been on how quickly RGGI’s carbon cap will decline post-2020. (The cap is the limit on the amount of carbon pollution that the region’s power plants can, collectively, release per year; the current trajectory is a 2.5 percent decline per year through 2020.) The states are considering a range of potential reductions, from 2.5 percent to 5 percent per year, and in their most recent modeling presented two scenarios of 2.5 percent and 3.5 percent per year. Ideally, the states will wind up at the top of this range – 5 percent, an amount widely supported by stakeholders and one that is projected to lead to billions of dollars in energy savings and to create tens of thousands of jobs. It is also critical that the states close loopholes that could undermine RGGI’s cap, including by reforming RGGI’s Cost Containment Reserve (CCR) and accounting for excess “banked” allowances. (You can read more about these issues here.)

ECR: A Potential Innovation to Strengthen RGGI

While not a substitute for setting an ambitious post-2020 cap level or for closing existing program loopholes, the states’ proposed Emissions Containment Reserve is a new idea that could help capture even more carbon pollution reductions—beyond the post-2020 cap level the states adopt – if the costs of cutting carbon are cheaper than originally projected.

As the panel will discuss tomorrow, if designed well, an ECR could ramp up both RGGI’s climate ambition and the program’s economic benefits to the region.

The states’ concept for an ECR would work as follows. First, the states would select a post-2020 RGGI cap. The solid black line in the figure below (“Base Case”) is from a presentation by the states and depicts hypothetical costs under this cap—before any benefits, which could offset these costs, have been considered. However, as suggested by the dotted lines, the costs of future carbon reductions are uncertain. RGGI’s CCR is intended to address the risk of prices being much higher than expected, though the current CCR must be reformed to avoid undermining RGGI’s climate goals and function as intended. But RGGI does not currently have a mechanism to address lower than expected prices.

As proposed, the ECR would fill this gap. If the costs of cutting carbon pollution are lower than the states anticipated, the ECR would, in effect, require additional carbon pollution reductions beyond the states’ original cap level by withholding a certain volume of carbon allowances from the market. (Every allowance not in circulation means one less ton of carbon pollution being emitted). Because the ECR would only kick in when prices are low, the effect of this mechanism would be to capture additional low-cost pollution reduction opportunities.

There are many reasons to believe that the costs of RGGI compliance will be lower than projected in future years, and that the program will lead to net benefits to the states’ residents rather than higher costs. RGGI’s economic and public health benefits and consumer energy bill savings have already greatly exceeded its costs by billions of dollars. These experiences should give the states confidence to set an ambitious post-2020 cap level, before the ECR even enters the discussion. However, once the states have established an ambitious cap trajectory, an ECR could be another tool to help get us where we need to on climate change. As the costs of renewable energy and energy efficiency continue to fall, an ECR could help ensure that we don’t leave additional cost-effective carbon pollution savings opportunities on the table in future years.

There are many questions that still need to be answered about how an ECR would work, including the price(s) that would trigger the mechanism, the amount of pollution it could avoid, and how adding an ECR would affect the overall functioning of the RGGI market. We’ll begin to explore these issues during tomorrow’s webinar, which is being convened by Duke University’s Nicholas Institute for Environmental Policy Solutions, Resources for the Future, the Georgetown Climate Center, and the Collaborative for RGGI Progress. I hope you’ll be able to join.

(NOTE: The RGGI states are also holding a separate webinar from 1-3 p.m. EST on Wednesday, February 8th, to discuss proposed updates to the their modeling analysis of potential, post-2020 RGGI carbon reduction trajectories, including updates that take into account the falling costs of renewable energy, something that is good news for further, cost-effective carbon reductions. More details on the states’ webinar are available here [to register] and here [to access the meeting materials]. The states’ webinar is likewise free and open to the public, and will provide an opportunity to weigh in on the need to further tackle climate change. NRDC will be participating in this webinar, as well, and providing comments to the states.)

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