Regional CO2 cap-and-trade program (RGGI) is launched: how will auction revenues be spent?


The Regional Greenhouse Gas Initiative (RGGI)—the first mandatory market-based system in the US for reducing CO2 emissions—got off to an official start last week.  Ten northeastern and mid-Atlantic states have opted into this regional cap-and-trade program designed to curb carbon dioxide emissions from power plants by 10% over the next decade.  Under RGGI the right to emit CO2 must be purchased; the first auction of “allowances” on Sept. 25 generated nearly $40 million in total revenue for the six states that participated.  Nearly every dollar will go toward programs supporting energy demand reduction and renewable energy; only three of the states in RGGI so far have plans to spend a minor portion on adaptation measures.  We ask, is this the wisest choice?

Post by Anne Polansky

Several regional cap-and-trade programs are being developed throughout the US in response to the lack of leadership by the federal government.  RGGI is one; the Western Climate Initiative is another, still another in the midwest got off to a start last November when nine midwestern governors and the premier of Manitoba signed a “greenhouse gas accord.” (.pdf)

The three regional programs are similar to several cap-and-trade bills that were considered in the 110th Congress, including the Lieberman-Warner bill, S. 3036, that managed to pass through the Environment and Public Works Committee but died in the Senate.  The regional programs are widely considered to be test-beds for an ultimate national program that would supersede the regional efforts. While there are significant differences among the various federal and regional programs and proposals, they all have one important element in common:  they generate revenues by selling the right to emit carbon dioxide in open market settings, allowing the price of each allowance (ton of CO2) to rise or fall as supply is controlled but demand varies depending on the available least-cost options for reducing emissions at the source (by, for example, increasing efficiency, fuel switching, or retiring an old coal-fired power plant and installing a wind farm instead). 

RGGI starts with an overall cap of 188 million tons of CO2 that can be emitted annually starting in 2009 until 2014; then beginning in 2015 the cap will be reduced by 2.5% a year for four years, resulting in a 10% decrease in emissions by 2019.  The underlying economic logic is that as the cap shrinks, demand will rise as will the price of allowances, creating higher incentives to reduce emissions.  Any unused allowances can be sold in future auctions.  At the moment, in part due to inaccurate projections, the cap of 188 M tons is 9% higher than the sum of RGGI power plant carbon emissions, but over time, this is expected to reverse itself as the cap gets tighter. 

A total of 233 electricity generating plants fall under the umbrella of RGGI (note that CO2 emissions from the transportation sector are not covered):  each source is required to purchase, through quarterly auctions, one “allowance” for every short ton of CO2 they plan to emit after January 1, 2009, or face fines.  Six of the ten RGGI states participated in the auction: Connecticut, Maine, Maryland, Massachusetts,  Rhode Island, and Vermont; four states had to sit this auction out as they hadn’t yet passed the requisite legislation:  New Jersey, New Hampshire, New York, and Delaware.

More than 12.5 million allowances at $3.07 each were sold,“e-bay style,” on September 25, generating a revenue pool of $38.6 million.  This money then gets funneled back into the states, each of which is solely responsible for determining how the new resource will be spent.

The stakes are much higher for a national cap-and-trade program:  the director of the Congressional Budget Office (CBO) testified before Congress, talking about the potential value of allowances in a national program: 

Under a cap-and-trade program, a key decision for policymakers is whether to sell emission allowances or to give them away. The value of those allowances would probably be substantial: Under the range of cap-and-trade policies now being considered by the Congress, the annual value of emission allowances would be roughly $50 billion to $300 billion by 2020 (measured in 2006 dollars). More-stringent caps would result in higher total allowance values.

The Lieberman-Warner bill establishes an Adaptation Fund “to carry out activities (including research and education activities) that assist fish and wildlife, fish and wildlife habitat, plants, and associated ecological processes in becoming more resilient, adapting to, and surviving the impacts of climate change and ocean acidification,” and requires the President to develop a National Adaptation Strategy (S. 3036, Sec. 4702).  However, environmental groups have admitted that getting these provisions in the bill was extremely difficult, and they are subject to being dropped at any point in the legislative process during the next Congress. 

In all ten RGGI states, nearly every dollar raised will be used to encourage greater reliance on energy efficiency and renewable energy to drive down energy demand, the logic being that the 10% reduction in the cap doesn’t go nearly far enough in achieving the emissions cuts that scientists say are needed to avoid dire climatic consequences.  Cycling resources back into CO2-cutting measures will cause reductions in emissions beyond what the cap itself would do, goes the thinking. Environment and clean energy advocacy organizations lobbied aggressively in all of the RGGI states to help ensure that state bills would be passed into law that achieve significant mitigation goals and objectives. 

This is all well and good, but what it also means, unfortunately, is that adaptation measures as part of cap-and-trade programs have largely been overlooked, and in many cases, rejected on political grounds:  adaptation is still seen as a competing interest with mitigation in many political circles across state legislatures and here in Washington as well.  Only three out of the 10 states participating in RGGI have provided for modest expenditures of allowance revenues (10 percent or less) on adaptation studies and/or measures:  Connecticut, Delaware, and New Jersey.  More must be done, in more states, if the nation as a whole is to be better prepared for global climatic disruption.

The Nature Conservancy is prominent among the NGOs championing the notion of using some portion of allowance revenues to support adaptation measures.  A press release issued just as the auction opened day contained a couple dozen quotes but only one mentioned the need to address impacts: Mark Tercek, CEO and President of The Nature Conservancy of New York, said: “State leadership is continuing to step up in the absence of national progress on the issue of climate change. We applaud the Northeast and Mid-Atlantic states on this historic day for taking bold steps to curb their own emissions, provide funding for energy efficiency and renewable energy projects, and support strategies to help humans and nature adapt to global warming.” 

However, adaptation will become increasingly imperative over time, when we begin to realize that climate impacts simply must be dealt with in ways that protects lives, ecosystems, critical infrastructure, and property.  Climate change impacts are already being felt in northeastern and mid-Atlantic states. For example, areas in south-central and southeastern New Hampshire experienced severe flooding in May, 2006 and April, 2007; both events resulted in a presidentially declared disaster, displaced citizens, destroyed or damaged housing and infrastructures, disrupted transportation and emergency services, and caused severe economic impacts to the region.  At the request of NH Gov. John Lynch and other state and local officials, FEMA conducted a study of the causes and possible remedies to mitigate future flooding impacts.  FEMA warned that the federal maps used to determine vulnerability to 100-year floods are up to decades out of date, and off by as much as five feet in elevation.  A five-year study, Climate’s Long-term Impacts on Metro Boston (CLIMB)  emphasized the interrelatedness of threats imposed by climate change:  sea level rise, river flooding, extreme weather, compromised water quality, tall building damage as a result of high winds, climate-related threats to public health, and so on.  The large bays up and down the east coast such as the Chesapeake and Narragansett bays are suffering from environmental degradation exacerbated by climate change.  These are only a few examples.  A comprehensive assessment was completed recently: 

In July 2007 the Union of Concerned Scientists issued a major assessment of climate impacts in RGGI states:  Confronting Climate Change in the U.S. Northeast: Science, Impacts, and Solutions.  (See CSW post here.)  The report lists some of the devastating consequences we could see by late this century if the higher-emissions scenarios prevail (and so far, we have seen that they are):

• The extreme coastal flooding that now occurs only once a century could strike New York City on average once every decade.
• Increasing water temperatures may make the storied fishing grounds of Georges Bank unfavorable for cod.
• Pittsburgh and Concord, NH, could each swelter through roughly 25 days over 100°F every summer—compared with roughly one day per summer historically—and even typically cool cities such as Buffalo could average 14 days over 100°F each year, amplifying the risk of heat-related illnesses and death among vulnerable populations.
• In Philadelphia, which already ranks tenth in the nation for ozone pollution, the number of days failing to meet federal air-quality standards is projected to quadruple (if local vehicle and industrial emissions of ozone-forming pollutants are not reduced).
• Only western Maine is projected to retain a reliable ski season.
• The hemlock stands that shade and cool many of the Northeast’s streams could be lost—much like the American elm—to a pest that thrives in warmer weather, further threatening native brook trout in the Adirondacks and elsewhere.
• Climate conditions suitable for maple/beech/birch forests are projected to shift dramatically northward, while conditions suitable for spruce/fir forests—a primary source of sawlogs and pulpwood as well as a favored recreation destination—would all but disappear from the region.
• As their forest habitat changes, many migratory songbirds such as the Baltimore oriole, American goldfinch, and song sparrow are expected to become less abundant.
• Parts of Massachusetts, New Jersey, Pennsylvania, and other areas in the Northeast are likely to become unsuitable for growing certain popular varieties of apples, blueberries, and cranberries.
• Unless farmers can afford cooling technologies, milk production across much of the region is projected to decline 5 to 20 in certain months.

We hope that in the drive to reduce GHG emissions and champion mitigation strategies—crucial if the US is to show leadership and tackle this problem head-on —we also remember to put in place strong preparedness elements that will allow us to better cope and adapt to the serious impacts we face going forward. 

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