The Regional Greenhouse Gas Initiative:
Lessons Learned and Issues for Policy Makers
Jonathan L. Ramseur
Specialist in Environmental Policy
November 14, 2014
Congressional Research Service
7-5700
www.crs.gov
R41836
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Summary
The Regional Greenhouse Gas Initiative (RGGI) is the nation’s first mandatory cap-and-trade
program for greenhouse gas (GHG) emissions. RGGI involves nine states—Connecticut,
Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and
Vermont. The RGGI cap-and-trade system applies only to carbon dioxide (CO2) emissions from
electric power plants with capacities to generate 25 megawatts or more—approximately 168
facilities. The RGGI emissions cap took effect January 1, 2009, based on an agreement signed by
RGGI governors in 2005.
The results of the RGGI program may be instructive to policy makers. Several of RGGI’s design
elements generated considerable interest during the development and debate of federal proposals
to address GHG emissions. In particular, the program’s emission cap has received particular
attention. Since the cap took effect in 2009, it has not compelled regulated entities to make
internal emission reductions or purchase emission credits from other sources. Several factors led
to this outcome: RGGI’s cap design, an economic downturn, and a substantial shift to less carbon
intensive fuels. For instance, in 2005, RGGI states generated 33% of their electricity from coal
and petroleum, sources of energy with relatively high carbon intensity. In 2013, these sources
generated 10% of RGGI’s electricity.
To address the disparity between the cap and actual emissions, RGGI states agreed (in 2013) to
reduce the existing cap (by 45%) so that the cap level would match actual emissions. The revised
cap took effect in January 2014. RGGI’s new, more-binding cap may have vastly different effects
than its predecessor. It is uncertain how this new development may impact electricity use and
prices in the RGGI region and, in turn, the perception and support for the program.
Although actual emissions were ultimately well below the original emissions cap, the cap’s
existence attached a price to the regulated entities’ CO2 emissions. Because the cap was
nonbinding, the allowance price acted like an emissions fee or carbon tax. Although the cap likely
had limited direct impact on the region’s power plant emissions, the revenues generated from the
emission allowance sales likely had some impact on emission levels in the region.
Through 2013, RGGI states, as a group, have sold 91% of their emission allowances through
quarterly auctions. The auction proceeds—over $1.8 billion to date—have provided a new source
of revenue, which have been used to support various policy objectives. RGGI states (as a group)
have contributed the vast majority of the emission allowance value (80%) to support energy
efficiency, renewable energy, other climate-related efforts, or electricity consumer assistance.
Several RGGI studies indicate that supporting energy efficiency provides multiple benefits:
emission reduction, consumer savings via lower electricity bills, and job creation.
As a group, the nine RGGI states account for approximately 7% of U.S. CO2 emissions (and 16%
of U.S. Gross Domestic Product). RGGI’s aggregate emissions rank in the top 20 among all
nations. But from a practical standpoint, the RGGI program’s contribution to directly reducing the
global accumulation of GHG emissions in the atmosphere is arguably negligible. However,
RGGI’s activities may stimulate action in other states or at the federal level: when confronted
with a growing patchwork of state/regional requirements, industry stakeholders may support a
singular national policy. To that end, experiences in RGGI may be instructive for policy makers
seeking to craft a national program.
Congressional Research Service
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Contents
Introduction ...................................................................................................................................... 1
RGGI Overview ............................................................................................................................... 2
Emissions Cap ................................................................................................................................. 3
First Emissions Cap: 2009-2013................................................................................................ 4
RGGI Emissions and Electricity Generation ....................................................................... 4
Impacts of the Original Emissions Cap ............................................................................... 6
Revised Emissions Cap (2014-2020) ........................................................................................ 7
Emission Allowance Value Distribution .......................................................................................... 8
Allowance Auctions ................................................................................................................... 8
Allowance Value Distribution ................................................................................................. 10
Emissions Leakage ........................................................................................................................ 13
Offsets ............................................................................................................................................ 14
Cost Containment .......................................................................................................................... 15
Interaction with Federal GHG Emission Regulations ................................................................... 16
Final Observations ......................................................................................................................... 16
Figures
Figure 1. Observed Emissions Compared to the Original Emission Cap ........................................ 4
Figure 2. RGGI Emissions Compared with Electricity Sales .......................................................... 5
Figure 3. RGGI States Electricity Generation by Energy Source .................................................... 6
Figure 4. Observed Emissions Compared to the Original and Revised Emission Caps .................. 8
Figure 5. RGGI Auctions: Proceeds and Clearing Prices .............................................................. 10
Figure 6. Imported Electricity as a Percentage of Electricity Sales in RGGI States...................... 13
Tables
Table 1. Estimated Allocation of Auction Proceeds by Category .................................................. 12
Table 2. Top-Ranked Nations, U.S. States, and Selected Groups for CO2 Emissions from
Energy Consumption (2011 Data) .............................................................................................. 17
Contacts
Author Contact Information........................................................................................................... 17
Congressional Research Service
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Introduction
A number of states and local governments have taken actions to address greenhouse gas (GHG)
emissions. These efforts cover a wide spectrum, from developing climate action plans to setting
mandatory GHG emission standards.1 One of the most significant climate change developments
at the state level is the Regional Greenhouse Gas Initiative (RGGI, pronounced “Reggie”), which
is based on an agreement signed by RGGI governors in 2005. RGGI is the nation’s first
mandatory cap-and-trade program (see text box, “What Is a Cap-and-Trade System?”) for GHG
emissions, which went into effect January 1, 2009.2 RGGI currently involves nine states—
Connecticut, Delaware, Maine, Maryland,3 Massachusetts,4 New Hampshire, New York, Rhode
Island, and Vermont.5
Several of RGGI’s design elements generated considerable interest during the development and
debate of federal proposals to address GHG emissions. The initial results of the RGGI program
may be instructive to policy makers, because RGGI may serve as a possible test case for a federal
cap-and-trade program, providing insights into implementation complexities, the mechanics of
various design elements, and lessons of potential design pitfalls.
The first section of this report provides an overview of the RGGI cap-and-trade program and the
participating RGGI states. The subsequent sections discuss selected issues raised by RGGI that
may be of interest to policy makers. The final section provides some final observations that may
be instructive to policy makers.
1 For example, California is implementing regulations that address GHG emissions on multiple fronts, including a cap-
and-trade program that began in January 2013. For more information on the California cap-and-trade program, see the
California Environmental Protection Agency and Air Resources Board website at http://www.arb.ca.gov/cc/
capandtrade/capandtrade.htm.
2 Prior to the starting date of the emissions cap (January 1, 2009), RGGI held its first emission allowance auction on
September 25, 2008.
3 Maryland Governor O’Malley signed RGGI’s Memorandum of Understanding on April 20, 2007, making Maryland
the first state that was not an original RGGI participant to join the regional initiative.
4 Massachusetts and Rhode Island were involved in RGGI’s development from the beginning. However, both states’
governors declined to sign the Memorandum of Understanding in 2005. Massachusetts (different governor) and Rhode
Island (same governor) joined RGGI as participants in January 2007.
5 New Jersey participated in the program from 2009 through the end of 2011. For information on New Jersey’s
withdrawal from RGGI, see http://rggi.org/design/history/njparticipation.
Congressional Research Service
1
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
What Is a Cap-and-Trade System?
A GHG cap-and-trade system creates an overall limit (i.e., a cap) on GHG emissions from the emission sources
covered by the program. Cap-and-trade programs can vary by the sources covered. The covered sources, also
referred to as covered or regulated entities, often include major emitting sectors (e.g., power plants and carbon-
intensive industries), fuel producers/processors (e.g., coal mines or petroleum refineries), or some combination of
both.
The emissions cap is partitioned into emission allowances. Typically, in a GHG cap-and-trade system, one emission
allowance represents the authority to emit one (metric) ton of carbon dioxide-equivalent (tCO2-e). This term of
measure is used because GHGs vary by global warming potential (GWP)—an index of how much a GHG may
contribute to global warming over a period of time, typical y 100 years. GWPs are used to compare gases to CO2,
which has a GWP of 1. For example, methane’s GWP is 25, because a ton of methane is 25 times more potent a
GHG than a ton of CO2.
Under an emissions cap, covered entities with relatively low emission-reduction costs have a financial incentive to
make reductions beyond what is required, because these further reductions could be sold (i.e., traded) as emission
credits to entities that face higher costs to reduce their facility emissions. At the end of each established compliance
period (e.g., a calendar year or multiple years), covered sources surrender emission allowances (to an implementing
agency) to cover the number of tons emitted. If a source did not provide enough allowances to cover its emissions,
the source would be subject to penalties. Other mechanisms, such as banking or offsets, may be included to increase
the flexibility of the program.
The emissions cap creates a new currency—the emission allowance. Policy makers may decide to distribute the
emission allowances to covered entities at no cost (based on, for example, previous years’ emissions), sell the
al owances (e.g., through an auction), or use some combination of these strategies. The distribution of emission
allowance value is typically a source of significant debate during a cap-and-trade’s program development.
A cap-and-trade program is one policy tool for reducing GHG emissions. It is often described as a market-based
mechanism, because it (like an emissions fee or carbon tax) allows the marketplace to determine the economically
efficient solution for GHG emission reduction. Compared to more traditional approaches—requiring, for example,
specific performance standards or technologies at particular facilities—market-based mechanisms are generally
considered more cost effective. Perhaps the most successful market-based program in the environmental policy arena
is the sulfur dioxide (SO2) emissions trading system (known as the Acid Rain Program) established by the 1990
amendments to the Clean Air Act.
RGGI Overview
RGGI is a sector-specific cap-and-trade system that applies to carbon dioxide (CO2) emissions
from electric power plants6 with capacities to generate 25 megawatts or more7—168 facilities in
the 9 RGGI states.8 RGGI designers expected the initial program to be a foundation for emissions
trading and possibly expanded in future years by covering other emission sources/sectors, GHGs,
or other states. The CO2 emissions from covered entities in the RGGI states account for
approximately 20% of all GHG emissions in the RGGI states.9 The vast majority of the remaining
GHG emissions comes from fossil fuel combustion in the industrial, commercial, residential, and
transportation sectors.
6 CO2 emissions account for approximately 99% of all GHG emissions from power plants. In 2012, electricity power
plants accounted for 31% of all U.S. GHG emissions. EPA, 2014 U.S. Greenhouse Gas Inventory Report, April 2014.
7 Electricity generating units that consume on-site more than 10% of the electricity they generate (on an annual basis)
are not subject to the emissions cap. This provision applies to facilities (e.g., some refineries) that may generate
electricity for their own use.
8 For more details, see RGGI’s website at http://www.rggi.org/design/overview/regulated_sources.
9 Based on 2011 CO2 emissions data from RGGI (http://rggi.org/), excluding emissions from New Jersey, and 2011
GHG data from the World Resources Institute, Climate Analysis Indicators Tool (CAIT US), at http://cait2.wri.org.
Congressional Research Service
2
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
RGGI’s cap-and-trade program includes many of the design elements that were proposed and
debated in federal legislative proposals. Highlights include the following:
• Three-year compliance periods. At the end of a compliance period covered
entities submit one emission allowance for each ton of CO2 emissions generated.
A three-year compliance period should mitigate potential emission allowance
price swings brought on by short-term market volatility.
• Emission allowance banking. RGGI allows covered entities to bank an
unlimited number of emission allowances for future use. The opportunity to bank
emission allowances instills a substantial amount of flexibility into a trading
program, effectively making annual emissions caps flexible over time, and
reduces the absolute cost of compliance.
• Offsets use. An offset is a measurable reduction, avoidance, or sequestration of
GHG emissions from a source not covered by an emission reduction program. To
a limited degree (discussed below), covered entities may submit offsets in lieu of
the emission allowances needed to satisfy compliance obligations.
• Emission allowance auctions. With some variance among the states, particularly
in the early years, a substantial percentage (91%) of emission allowances have
been distributed through quarterly auctions (discussed below). The auctions
include a reserve price, which sets a price floor for emission allowances.
• Consumer benefit allocation. RGGI states agreed that at least 25% of the
emission allowance value would be distributed “for a consumer benefit or
strategic energy purpose.”10 Allowance value distributions from RGGI states
have exceeded this minimum requirement (discussed below).
• Cost Containment. In 2014, RGGI states established a “cost containment
reserve” (CCR),11 which provides additional allowances to be sold at auction if
certain price thresholds are met.
Emissions Cap
Although RGGI is one of the more aggressive state programs addressing GHG emissions, the
program’s first emission cap exceeded actual emissions since its inception in 2009. As discussed
below, this result was unintentional. The first cap never compelled regulated entities to make
internal emission reductions or purchase emission credits (or offsets).
After a program review in 2012, RGGI states agreed to lower the emissions cap by 45%. This
change took effect in January 2014. This section includes a discussion of both the initial
emissions cap and the revised emissions cap.
10 RGGI Memorandum of Understanding (MOU), Section 2 (G)(1), December 5, 2005. Subsequent amendments were
made to the MOU, but not to this section.
11 The CCR replaced other cost containment mechanisms: initially, RGGI provided an additional year to demonstrate
compliance if emission allowance prices reach a certain level, and covered entities were able to cover a greater
proportion of their emissions with offsets.
Congressional Research Service
3
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
First Emissions Cap: 2009-2013
When the RGGI states crafted the first emissions cap, the initial objective of the cap was to
stabilize CO2 emissions for several years (2009-2014) at the expected 2009 levels (based on
assumptions made in 2005), and then require gradual reductions, achieving a 10% decrease from
the 2009 emission cap level by 2019. During the emissions cap construction in 2005,12 RGGI
designers set the 2009 emissions cap about 4% above the average emission levels observed
between 2000 and 2002. RGGI designers anticipated that power plant CO2 emissions would
gradually increase, so that actual levels would approximately match the cap set for 2009—188
million short tons of CO2 (mtCO2). As illustrated in Figure 1, actual emissions did not meet these
projections, but decreased substantially.
Figure 1. Observed Emissions Compared to the Original Emission Cap
200
)
ns 180
t to 160
or 140
sh
n 120
illio
m 100
s (
80
on
New Jersey left RGGI at the end
60
of 2011, lowering the original cap
ssi
and total emissions
40
Emi 2 20
CO
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Observed Emissions (2000-2013)
Original Emission Cap (2009-2020)
Source: Prepared by CRS with data from the fol owing: observed state emission data (2000-2013) provided by
RGGI, at http://www.rggi.org.
RGGI Emissions and Electricity Generation
Several studies indicated that the RGGI CO2 emission decreases (2005-2011) were due (to some
degree) to long-term, structural changes, such as changes in RGGI’s electricity generation
portfolio and energy efficiency improvements.13 A comparison between the emission decline and
12 States from the Northeast and Mid-Atlantic regions began to discuss a cooperative effort to reduce carbon dioxide
emissions in 2003. Subsequent meetings and workshops culminated in a Memorandum of Understanding (MOU) that
was signed by most RGGI state governors in December 2005.
13 See RGGI modeling results and analysis at http://www.rggi.org/design/program_review/materials-by-topic/
modeling; Environment Northeast, RGGI’s Past and Future: Emissions Trends and Potential Reforms, 2012. Prior
analyses include New York State Energy Research and Development Authority, Relative Effects of Various Factors on
RGGI Electricity Sector CO2 Emissions: 2009 Compared to 2005, Draft White Paper, November 2010; and
Environment Northeast, RGGI Emissions Trends, June 2010.
Congressional Research Service
4
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
electricity use in the RGGI states supports this notion. As Figure 2 indicates, RGGI electricity
retail sales (a proxy for electricity use) decreased by 5% between 2005 and 2011, while CO2
emissions from in-state electricity generation decreased by 36% during the same period. This
disparity suggests that factors others than temporal economic conditions were the primary
influence for the CO2 emissions decrease.14
Figure 2. RGGI Emissions Compared with Electricity Sales
200
500
Mi
s)
l
n 180
450
lion
rt to 160
400
Me
o 140
350
ga
sh
n
w
120
300
at
illio
m 100
250
t Ho
s ( 80
200
ur
n
New Jersey left RGGI at
s
sio 60
the end of 2011,
150
E
is
lowering emissions and
lec
m 40
electricity sales
100
E
tr
2
20
50
ici
CO
t
0
-
y
0
1
2
3
4
5
6
7
8
9
0
1
2
3
200
200
200
200
200
200
200
200
200
200
201
201
201
201
Observed Emissions (2000-2013)
Electricity Retail Sales (2000-2013)
Source: Prepared by CRS with data from the fol owing: observed state emission data (2000-2013) provided by
RGGI at http://www.rggi.org; electricity sales from Energy Information Administration, Retail Sales of Electricity.
Figure 3 compares RGGI’s electricity generation portfolio between 2005 and 2013. The figure
depicts a substantial decline in carbon intensive electricity generation over that time frame.
Electricity is generated from a variety of energy sources, which vary significantly by their ratio of
CO2 emissions per unit of energy. For example, a coal-fired power plant emits almost twice as
much CO2 (per unit of energy) as a natural gas-fired facility.15 Some energy sources (e.g.,
hydropower, nuclear, wind, or solar) are generally considered to be zero-emission sources. In
2005, RGGI states generated 33% of their electricity from coal and petroleum, sources of energy
with relatively high carbon intensity. In 2013, these sources generated 10% of RGGI’s electricity.
During that time, sources with relatively lower carbon intensities—natural gas, nuclear, and
hydroelectric—increased their contributions to RGGI’s electricity portfolio. In particular,
electricity generation from natural gas increased from 25% to 39% over that time frame.
14 A comparison using the most recent data (i.e., 2005 vs. 2013) is more complicated because New Jersey left RGGI at
the end of 2011. Regardless, such a comparison indicates a similar trend: electricity sales decreased by 24%, while
emissions decreased by 53%.
15 The Energy Information Administration website provides a table listing the amount of CO2 generated per unit of
energy for different energy sources, at http://www.eia.doe.gov/oiaf/1605/coefficients.html.
Congressional Research Service
5
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Figure 3. RGGI States Electricity Generation by Energy Source
2005 Compared to 2013
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Coal
Petroleum Natural Gas
Nuclear
Hydro
Other
2005
2013
Source: Prepared by CRS; data from Energy Information Administration.
Notes: The “other” category includes wood and other biomass, wind, solar, and other gases.
The 2005 percentages include New Jersey electricity, but the 2013 percentages do not.
Impacts of the Original Emissions Cap
Although RGGI’s original emission cap did not directly require emission reductions (due to
unexpected emission levels, discussed above), the cap still had impacts. First, the cap’s existence
attached a price to the regulated entities’ CO2 emissions. The price was relatively low (as
discussed below), because of the abundance of emission allowances. A 2010 analysis of the RGGI
program found that the emission allowance price accounted for approximately 3.4% of the change
in the price difference between natural gas and coal in the RGGI region between 2005 and 2009.16
Second, the cap’s emission allowances were (and continue to be) a new form of currency. The
emission allowance value can be used to support various policy objectives, including (as is the
case with RGGI) energy efficiency and renewable energy investments. Some would argue that
RGGI’s greatest impact so far is to provide a relatively reliable funding source for such efforts.
Several RGGI studies indicate that supporting energy efficiency provides multiple benefits:
emission reduction, consumer savings via lower electricity bills, and regional job creation.17 One
of these studies argues this allowance value distribution strategy (e.g., use of RGGI auction
revenue) “creates wider benefit than any other use of allowance value.”18 As discussed below,
such efforts play a role in determining the effectiveness of the program.
16 New York State Energy Research and Development Authority (prepared for RGGI Inc.), Relative Effects of Various
Factors on RGGI Electricity Sector CO2 Emissions: 2009 Compared to 2005, Draft White Paper, November 2010.
17 See RGGI Inc., Investment of Proceeds from RGGI CO2 Allowances, February 2011 and Environment Northeast,
Economy-wide Benefits of RGGI: Economic Growth through Energy Efficiency, March 2011.
18 Environment Northeast, Economy-wide Benefits of RGGI: Economic Growth through Energy Efficiency, March
(continued...)
Congressional Research Service
6
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Revised Emissions Cap (2014-2020)
Following a 2012 design review of the RGGI program,19 the RGGI states agreed to substantially
reduce the emissions cap from 165 mtCO2 to 91 mtCO2. RGGI designers based the new cap level
(91 mtCO2) on their projection of 2012 emissions. The emission projection was fairly accurate, as
actual 2012 emissions were 92 mtCO2.
The revised cap took effect in January 2014. The emissions cap will decrease each year by 2.5%
between 2015 and 2020. RGGI states have not established a cap beyond 2020.
In addition, RGGI states decided to adjust the new cap further to account for the substantial
amount of banked emission allowances held by RGGI entities between 2009 and 2013.20 In 2014,
RGGI designers determined that these banked emissions accounted for 140 mtCO2, a
considerable amount when compared to the 91 mtCO2 emission cap of 2014. Thus, the cap
adjustments, which are applied each year between 2014 and 2020, are considerable. In some
years, the adjustments lower the cap more than 20 mtCO2, equating to 28% decrease.
Figure 4 illustrates (1) the observed emissions between 2000 and 2013; (2) the original emissions
cap (2009-2013); and (3) the revised emissions cap (2014-2020), which includes the 2014
adjustments. The figure suggests that the revised (and adjusted) emissions cap will likely have a
different impact on the RGGI states than the original emissions cap. For example, the more
stringent cap has led to substantially higher emission allowance prices, as discussed below.
(...continued)
2011.
19 In its original Memorandum of Understanding (December 20, 2005), RGGI states agreed to conduct a
“comprehensive review” of the RGGI program in 2012.
20 Between 2009 and 2013, the emissions cap exceeded actual emissions, providing an opportunity for entities to obtain
more allowances than they need to meet current compliance obligations. These allowances can be purchased and held
(i.e., banked) for future use.
Congressional Research Service
7
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Figure 4. Observed Emissions Compared to the Original and Revised Emission Caps
200
s)
n 180
rt to 160
o 140
sh
n 120
illio
m 100
s (
n
80
New Jersey left RGGI at the end of
io
2011, lowering the original cap and
60
iss
total emissions
40
Em 2 20
CO
0
000
001
002
003
004
005
006
007
008
009
010
011
012
013
014
015
016
017
018
019
020
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
Observed Emissions (2000-2013)
Original Emission Cap (2009-2013)
Revised Emissions Cap (2014-2020)
Source: Prepared by CRS; projected emission data from RGGI modeling results, available at
http://www.rggi.org/design/program_review.
Emission Allowance Value Distribution
When designing a cap-and-trade program, one of the more controversial and challenging
questions for policy makers is how, to whom, and for what purpose to distribute the emission
allowances. In general, RGGI states have answered the “how question” by employing auctions to
distribute the vast majority of allowances.21 Perhaps the more important question for policy
makers is what to do with the emission allowance value—in the case of RGGI, allowance value
predominately means auction revenues.
Allowance value includes revenues generated through allowance auctions or by giving the
allowances away at no charge to either covered or noncovered entities. A covered entity recipient
could use the allowances for compliance purposes, sell the allowances in the marketplace, or bank
the allowances for future use. To realize the value of allowances received, a noncovered entity
recipient would need to sell the allowances in the marketplace, either through a broker or directly
to a covered entity.
Allowance Auctions
As a group, the RGGI states offered 91% of their budgeted emission allowances at auction
between 2008 and 2013. Some of the offered allowances were not sold and were subsequently
21 The percentage of allowances sold at auction has varied by state, particularly in the early years when some states
chose to provide a proportion of free allowances to covered entities.
Congressional Research Service
8
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
retired. Other allowances were sold at fixed prices or distributed to various entities to support a
variety of objectives.22
RGGI’s auctions may be of particular interest to Congress, because this approach was part of
several proposed cap-and-trade systems from former Congresses.23 Each RGGI auction is
conducted in one round with a sealed-bid, uniform price format.24 Participants may submit
multiple, confidential bids for a certain number of allowances at a specific price. The price paid
by all bidders is the highest rejected bid (i.e., the second-highest bid). For example, consider a
hypothetical auction, in which the supply of allowances is 20 units. The highest bidder offers $10
per allowance for 15 allowances. The second highest bidder offered $9 per allowance for 10
allowances. Under RGGI’s auction structure, the highest bidder would receive 15 allowances at
$9/allowance, and the second-highest bidder would receive 5 allowances at $9/allowance. The
price paid by all successful bidders is known as the clearing price.
In addition, RGGI auctions include a reserve price, below which the seller refuses to part with the
item for sale (i.e., emission allowance). The reserve price started at $1.86 in 2008, increasing to
$2.00 in 2014.25 In a large volume, multi-unit auction that is expected to have substantial
participation (i.e., high demand for emission allowances), a reserve price would all but guarantee
a revenue stream. A reserve price may address certain logistical concerns, such as bidder
collusion, that may be associated with auctions. In addition, a reserve price may provide
assurance to parties making emission reductions that the reductions will have a minimal value in
the allowance market.
The RGGI program has held 25 auctions as of the date of this report. In general, many have
viewed the auctions as successful in terms of price discovery,26 transparency, transaction costs,
and other logistical issues.
Another typical measure of auction success is revenue generation. After 25 auctions, the
cumulative proceeds total over $1.8 billion. Figure 5 illustrates the auctions’ results. As the figure
indicates, the clearing price equaled the reserve price in auctions conducted between June 2010
and December 2012, reflecting the abundance of emission allowances in the market. Moreover,
during this time period, approximately 40% of the allowances offered for sale were not
purchased. RGGI states retired the vast majority of these unsold allowances.27 During this period,
the reserve price acted like an emissions fee or carbon tax.28 As discussed below, the revenue
22 See RGGI “Allowance Allocation” at http://rggi.org/market/tracking/allowance-allocation.
23 See, e.g., CRS Report R40556, Market-Based Greenhouse Gas Control: Selected Proposals in the 111th Congress,
by Larry Parker, Brent D. Yacobucci, and Jonathan L. Ramseur.
24 For information on other auction formats, see Charles Holt et al., Auction Design for Selling CO2 Emission
Allowances Under the Regional Greenhouse Gas Initiative, 2007, prepared for RGGI Working Group staff.
25 The reserve price is scheduled to increase by 2.5% each year after 2014.
26 In a cost-effective emissions trading program, the allowance price should mirror (or closely follow) the marginal cost
of emission reduction—that is, the cost of reducing the last, most expensive ton. An effective auction should help
identify the allowance price that is near to the marginal cost of reduction. See, for example, Charles Holt et al., Auction
Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative, 2007, prepared for RGGI
Working Group staff.
27 See RGGI allowance allocation data, at http://www.rggi.org/market/co2_auctions/allowance_allocation.
28 CRS Report R42731, Carbon Tax: Deficit Reduction and Other Considerations, by Jonathan L. Ramseur, Jane A.
Leggett, and Molly F. Sherlock.
Congressional Research Service
9
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
raised by the auctions may lead to emission reduction by supporting energy efficiency and
renewable energy projects.
However, in 2013, the auction results changed dramatically, reflecting upcoming changes in the
RGGI program. Following the February 2013 proposal to substantially reduce the emissions cap
in 2014, the clearing prices began to exceed the reserve prices (Figure 5). The past two auctions
have resulted in clearing prices of approximately $5/ton, a dramatic increase from prices in 2012.
Figure 5. RGGI Auctions: Proceeds and Clearing Prices
September 2008-September 2014
$140
$6
$120
$5
s)
n
$100
$4 Price (
millio
in
$80
s (
$3 $/t
$60
C
ceed
O2
$2 )
Pro
n
$40
io
ct
u
$1
A
$20
$0
$0
p 2008
2008
2009
p 2009
2009
2010
p 2010
2010
2011
p 2011
2011
2012
p 2012
2012
2013
p 2013
2013
2014
p 2014
e
ar 2009
e
ar 2010
e
ar 2011
e
ar 2012
e
ar 2013
e
ar 2014
e
S
Dec
M
Jun
S
Dec
M
Jun
S
Dec
M
Jun
S
Dec
M
Jun
S
Dec
M
Jun
S
Dec
M
Jun
S
Auction Proceeds
Auction Clearing Price
Reserve Price
Source: Prepared by CRS; data from RGGI Inc., at http://www.rggi.org/.
Note: The reserve price has risen from $1.86 in 2008 to $2.00 in 2014.
Allowance Value Distribution
When deciding to whom or for what purpose to distribute the emission allowance value, policy
makers face trade-offs that could have considerable consequences.29 In both RGGI’s 2005
Memorandum of Understanding and subsequent Model Rule,30 states agreed that at least 25% of
emission allowance value would be allocated for a “consumer benefit or strategic energy
29 For more discussion of these issues, see CRS Report RL34502, Emission Allowance Allocation in a Cap-and-Trade
Program: Options and Considerations, by Jonathan L. Ramseur.
30 RGGI documents are available at http://www.rggi.org/.
Congressional Research Service
10
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
purpose.”31 As of June 2013, estimates indicate that RGGI states (as a group) have more than
doubled this minimum commitment, allocating more than 70% of the emission allowance value to
support energy efficiency, renewable energy, energy consumer assistance, and other climate
change efforts.32
Table 1 provides estimates of auction revenue value distribution by state from Auction 1
(September 2008) through Auction 20 (June 2013). As mentioned above, RGGI auction revenues
have accounted for approximately 90% of emission allowance value. As the table indicates, 50%
of the revenues have been (or will be) allocated to support energy efficiency activities or
renewable energy; 14% to support other climate change-related activities; and 16% to provide
assistance to energy consumers.
The figures in the table also demonstrate that allowance value distribution decisions are subject to
change. For example, after initially allotting auction proceeds to energy efficiency efforts, several
states (New Jersey and New York) transferred auction proceeds to address state budget deficits.
Environmental groups criticized the actions of these states, but the state policy makers argued that
the transfers were necessary.
These developments highlight a cap-and-trade design issue for federal policy makers: how much
flexibility (if any) should be built into a strategy to distribute emission allowance value. For
example, should crafters include provisions that authorize modifying (without legislation) an
enacted distribution approach, perhaps based on specific criteria?
31 See RGGI Model Rule, issued August 15, 2006, p. 42; and RGGI Memorandum of Understanding, Section G(1),
signed by participating state governors December 20, 2005.
32 Based on the percentage of allowances sold at auction (RGGI allowance allocation data, at http://www.rggi.org/
market/co2_auctions/allowance_allocation) and estimates of state allocation of auction revenues (Environment
Northeast, RGGI Auction Tracker: State Allocations and Spending Plans, June 2013).
Congressional Research Service
11
Table 1. Estimated Allocation of Auction Proceeds by Category
Auction 1 – Auction 20 (June 2013), Millions of Dollars
Energy
Efficiency
and/or
Other Climate
State Budget
Renewable
Change-
Consumer
Program
Deficit
Other
State
Energy
Related Efforts
Assistance
Administration
Reduction
Purposes
Connecticut
74
6
Delaware
31
4
4
Maine
40
0.2
1.6
Maryland 67
21
181
9
Massachusetts
171
43
4
New Hampshire
49
1
3
New Jersey
44
10
5
65
New York
179
160
64
90
7
Rhode Island
20
0.7
Vermont
10
0.2
Total 685
195
224
96
158
7
Percentage
50% 14% 16%
7% 12% 1%
of total
revenues
Source: Prepared by CRS; data from Environment Northeast, RGGI Auction Tracker: State Allocations and Spending Plans, June 2013.
Notes: The above table includes broad categories created by CRS. The Environment Northeast report provides a more detailed breakdown of emission allowance value
distribution.
New York’s $64 million in “program administration” includes state government activities, RGGI administrative costs, and RGGI program evaluation. In 2009, New York
transferred $90 million in RGGI auction proceeds to the General Fund “to improve New York’s long-term fiscal health.” See New York State Energy Research and
Development Authority, “Use of Auction Proceeds,” at http://www.nyserda.ny.gov/Energy-and-the-Environment/Regional-Greenhouse-Gas-Initiative/Auction-Proceeds.aspx.
New Jersey left the program at the end of 2011. The New Jersey data are included for comparison purposes.
CRS-12
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Emissions Leakage
A critical design detail—electricity imports from non-RGGI states—remains unresolved,
presenting an opportunity for “emissions leakage.” Emissions leakage could undermine the
effectiveness of the RGGI program. Leakage can occur when an emissions reduction program
does not include all sources contributing to the environmental problem. Increases in emissions
from uncovered sources may reduce emission achievements from covered sources. This is a
concern with the RGGI program, because the RGGI regime does not regulate emissions from
electricity generated outside the region (e.g., in Pennsylvania) and then used within the region
(i.e., “imported electricity”).
As illustrated in Figure 6, the percentage of electricity imported (compared to electricity sales) in
the RGGI states has fluctuated over time. Between 1990 and 2005, the percentage of imported
electricity ranged from 5% to 11%. Over the past five years, the percentage of imported
electricity has remained on the high end of this range. In 2013, the percentage increased to 13%,
the highest observed to date. This recent increase correlates with the increase in emission
allowance prices in RGGI auctions (Figure 5).
Figure 6. Imported Electricity as a Percentage of Electricity Sales in RGGI States
1990-2013
14%
12%
10%
8%
6%
4%
RGGI Milestones:
2005 - States sign Memorandum of Understanding
2009 - Cap takes effect
2%
2013 - States agree to lower cap
0%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Source: Prepared by CRS; data from Energy Information Administration.
Notes: Electricity imports calculated by subtracting total electricity generation from total electricity sales.
Although the emissions cap became effective January 1, 2009, RGGI held its first emission al owance auction in
September 2008.
New Jersey data are included between 1990 and 2011, but excluded in 2012 and 2013.
Congressional Research Service
13
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Emissions leakage can occur if imported electricity replaces RGGI in-state electricity generation,
because emissions from in-state electricity are covered under the cap; emissions from imported
electricity are not. In such a scenario, the quantity of leakage would depend on the sources of
electricity generation involved in the tradeoff. For example, maximum leakage would occur if
imported electricity from a coal-fired power plant replaced in-state electricity generated from a
zero-emission source.
A RGGI working group issued a final report on leakage in March 2008. Among the four
recommendations, the working group concluded that states should monitor for emissions leakage
and evaluate whether more direct measures should be considered at a later date.33 After its 2012
Program Review, RGGI participants seemed to reach a similar conclusion, stating that
the states commit, over the course of the next year, to engage in a collaborative effort ... to
identify and evaluate potential imports tracking tools, conduct further modeling to ascertain
energy and price implications of any potential policy on emissions associated with imported
electricity, and pursue additional legal research necessary, leading to a workable, practicable,
and legal mechanism to address emissions associated with imported electricity.34
With the onset of the revised emissions cap in 2014, emissions leakage may receive further
attention in the near future, especially if the percentage of imported electricity remains relatively
high, compared to historical levels.
Offsets
Federal policy makers may be interested in RGGI’s treatment of offsets. An offset is a measurable
reduction, avoidance, or sequestration of GHG emissions from a source not covered by an
emission reduction program.35 RGGI limits offsets to 3.3% of a source’s allowance submission, a
relatively low percentage compared California’s cap-and-trade system36 and some federal
proposals.37 Under RGGI’s original Model Rule (2009-2013), the offset ceiling percentage could
increase to 5% or 10% if the market price of an allowance exceeds $7 or $10 (in 2005 dollars,
adjusted annually), respectively. However, as part of the design review in February 2013, RGGI
states replaced this provision with the new Cost Containment Reserve, discussed below.
RGGI uses a standards approach—as opposed to performance-based system—for developing
offsets: projects must satisfy a set of detailed requirements (specific to a project type) and be
33 Possible measures included carbon adders, procurement emissions rates, or load-based caps. See RGGI Emissions
Leakage Multi-State Staff Working Group to the RGGI Agency Heads, Potential Emissions Leakage and the Regional
Greenhouse Gas Initiative (RGGI), (March 2008), at http://www.rggi.org/about/documents.
34 RGGI, RGGI 2012 Program Review: Summary of Recommendations to Accompany Model Rule Amendments,
February 2013, at http://www.rggi.org/design/program-review.
35 If allowed as a compliance option in a cap-and-trade system, offsets have the potential to provide considerable cost
savings and other benefits. However, offsets have generated considerable controversy, primarily over the concern that
illegitimate offsets could undermine the ultimate objective of a cap-and-trade program: emission reduction. For more
discussion see CRS Report RL34436, The Role of Offsets in a Greenhouse Gas Emissions Cap-and-Trade Program:
Potential Benefits and Concerns, by Jonathan L. Ramseur.
36 California’s cap-and-trade program allows entities to use offsets to cover up to 8% of their allowance submission
(Section 95854 of California’s cap-and-trade regulations, at http://www.arb.ca.gov/cc/capandtrade/capandtrade.htm).
37 For example, H.R. 2454 (“Waxman-Markey”) in the 111th Congress would have allowed offsets to satisfy 27% of a
facility’s compliance obligation in 2016.
Congressional Research Service
14
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
certified by a third party. In contrast to recent federal proposals, which often allow a wide array of
project types, RGGI limits offset projects to five types, which must be located in RGGI states:
• landfill methane reduction;
• sulfur hexafluoride reductions from specific industrial activities;
• forest sequestration projects,38 including afforestation,39 reforestation,40 improved
forest management, and avoided forest conversion;
• specific energy efficiency projects; and
• avoided methane from manure management practices.
Some offset projects raise concerns, because they may not represent real emission reductions. For
offsets to be credible, a ton of CO2-equivalent emissions from an offset project should equate to a
ton reduced from a RGGI power plant. If illegitimate offset credits flow into an emissions trading
program, the program would fail to achieve its primary goal—emission reduction.
Regardless, according to the RGGI offsets tracking database, no offset projects have been
developed under the RGGI program.41 This is likely related to the low emission allowance price
and the nonconstraining emissions cap.
Cost Containment
As part of the 2012 design review, RGGI states decided to alter the cost containment provisions
in the RGGI program. Under the original Model Rule (2009-2013), potential cost concerns were
addressed by allowing for the use of additional offsets if emission allowance prices reached
specific levels. The revised Model Rule, which took effect in 2014, eliminated this approach and
added a cost containment reserve (CCR) to the cap-and-trade system. The CCR provides
additional allowances—5 million in 2014 and 10 million each year thereafter—if certain price
thresholds are met during one of the quarterly allowance auctions:
• $4/ton in 2014;
• $6/ton in 2015;
• $8/ton in 2016; and
• $10/ton in 2017, increasing 2.5% each year thereafter.
The March 2014 auction triggered (Figure 5), for the first time, RGGI’s cost containment
reserve, which allowed for the sale of an additional 5 million allowances, all of which were
purchased. Unlike some allowance reserve systems in other programs and proposals,42 allowances
from CCR are not borrowed from future years, thus effectively increasing the cap if triggered.
38 Under the original Model Rule, only afforestation projects were allowable.
39 In general, this activity refers to planting trees where none were previously growing.
40 In general, this activity refers to planting trees on former forest sites that were recently cleared.
41 See http://www.rggi.org.
42 For example, H.R. 2454 (“Waxman-Markey”) in the 111th Congress included a “strategic reserve” of allowances
borrowed from future years. The reserve would be triggered at particular price points. California’s cap-and-trade
(continued...)
Congressional Research Service
15
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
Interaction with Federal GHG Emission Regulations
An issue for both federal and state policy makers is how RGGI’s emission program would
interact with EPA proposed regulations that apply to existing power plants. On June 18, 2014, the
Environmental Protection Agency (EPA) published in the Federal Register a proposed
rulemaking43 under Section 111(d) of the Clean Air Act.44 The proposal would establish CO2
emission guidelines for states to use when developing plans that address CO2 emissions from
existing fossil fuel-fired electric generating units.45
Although EPA’s proposed rule measures state compliance in terms of a CO2 emissions rate, EPA
allows states considerable flexibility in terms of meeting its emissions rate goals. For example,
EPA’s new regulations would allow states to meet their CO2 emissions rate goals using mass-
based reduction programs such as cap-and-trade systems. Moreover, states can meet their goals
individually or collaborate with other states to create (or use existing) multistate plans. EPA
provides states with additional time to prepare multistate plans.
Regardless, it is uncertain whether the scope and stringency of the RGGI program would be
sufficient to meet the targets in EPA’s proposed rule. First, RGGI’s existing emission cap stops at
2020. Second, the new CCR has the potential to provide up to 10 million tons of additional
allowances each year, making an analysis more challenging.
Final Observations
The nature of the RGGI program changed significantly in 2014. Comparing the first five years of
RGGI (2009-2013) to the existing program is an apples-to-oranges exercise. The RGGI states
significantly altered their emissions cap in 2014, and this new cap may have vastly different
effects than the original emissions cap. Note, for example, the most recent emission allowance
auction clearing prices cited above. It is uncertain how this new development may impact
electricity use and prices in the RGGI region and, in turn, the perception and support for the
program.
As a group, the nine RGGI states account for approximately 7% of U.S. CO2 emissions from
energy consumption and 16% of the U.S. Gross Domestic Product (GDP).46 Table 2 indicates that
RGGI’s aggregate emissions rank in the top 20 among nations. But from a practical standpoint,
(...continued)
system has a similar mechanism. More information is available at http://www.arb.ca.gov/cc/capandtrade/
capandtrade.htm.
43 79 Federal Register 34830, “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility
Generating Units,” June 18, 2014.
44 42 U.S.C. §7411(d).
45 For more background on the statutory authority, history, and legal and administrative processes involving this
rulemaking, see CRS Report R43572, EPA’s Proposed Greenhouse Gas Regulations for Existing Power Plants:
Frequently Asked Questions, by James E. McCarthy et al.
46 Calculated by CRS using 2013 data from the Bureau of Economic Analysis, at http://www.bea.gov/newsreleases/
regional/gdp_state/gsp_newsrelease.htm.
Congressional Research Service
16
The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Policy Makers
the RGGI program’s contribution to directly reducing the global accumulation of GHG emissions
in the atmosphere is arguably negligible.
However, when business and industry have confronted a growing patchwork of state
requirements, these sectors have historically preferred a national policy. RGGI and other state
programs, particularly developments in California, may have some influence on federal policy
makers. Note that the combination of RGGI and California CO2 emissions (729 million metric
tons) would account for a substantial portion of U.S. CO2 emissions (14%) and rank above South
Korea (Table 2).
In addition, RGGI’s activities may create examples and/or models that will prove instructive for
federal policy makers crafting more widespread applications. Moreover, the program has
provided a training ground for personnel from multiple states and various professions to develop
a specific expertise in emissions trading issues. This knowledge base would be useful if a federal
system were developed.
Table 2. Top-Ranked Nations, U.S. States, and Selected Groups for CO2 Emissions
from Energy Consumption (2011 Data)
CO2 Emissions
CO2 Emissions
Country, State, or Group
(million metric tons)
Country, State, or Group
(million metric tons)
China 8,127
Canada
552
United States
5,483
Saudi Arabia
551
Europe 4,348
United
Kingdom
488
India 1,753
Brazil
477
Russian Federation
1,710
South Africa
472
Japan 1,200
Indonesia 450
Germany 784
Mexico
446
Texas 656
Australia 426
South Korea
650
Italy
412
Iran
594
9 RGGI states
383
Source: Prepared by CRS with data from EIA, International Energy Statistics, Total CO2 Emissions from the
Consumption of Energy, and State CO2 Emissions, at http://www.eia.gov.
Author Contact Information
Jonathan L. Ramseur
Specialist in Environmental Policy
jramseur@crs.loc.gov, 7-7919
Congressional Research Service
17