How the Regional Greenhouse Gas Initiative (RGGI), a program to reduce greenhouse gas emissions, has become a model that inspires other similar programs in the United States and around the world.
Just over a decade ago, the first mandatory carbon emissions abatement program in the United States launched, with the Regional Greenhouse Gas Initiative (RGGI). This market-based system currently spans nine northeastern states and aims to reduce greenhouse gas emissions. Through RGGI, emissions from the power sector are capped at a maximum amount (in tons of carbon dioxide), and electricity generators within the participating states trade “allowances” that allow them to emit carbon up to this total limit. The emissions cap declines over time, most recently set to require a 30 percent reduction from 2020 levels by the year 2030, with some flexibility for generators to make even greater reductions in the near term and “bank” unused allowances for future compliance. Periodic reviews are carried out to refine the program as necessary, including adjustments of the cap and other design features.
From the outset, RGGI has implemented innovative features for cap-and-trade mechanisms. For example, it introduced an allowance auction, which raises valuable revenue for states (that they’ve mostly invested in energy efficiency thus far) and reveals a more accurate market price for emissions abatement. An auction also prevents the possibility of generators in competitive electricity markets from earning windfall profits when allowances are freely distributed: without an auction, generators could include in their electricity prices the opportunity cost of selling allowances, thereby imposing higher costs on consumers, despite paying no initial cost for the allowances.
In a rapidly evolving electricity industry that has been experiencing declining costs of renewable technologies, slowed growth in electricity demand, and the closing of coal-fired power plants—trends that accelerate emissions reductions but threaten to render RGGI’s emissions cap irrelevant—RGGI has demonstrated the ability to evolve and continues to deliver climate progress. Along the way, research from Resources for the Future (RFF) has informed the evolution of RGGI’s design and scope.
For example, RGGI has adopted features of both cap and price mechanisms, a “hybrid” approach in which the emissions cap can respond to the allowance price. RGGI was the first trading program to include a minimum price in its auction (a so-called price floor): if costs fall below that level, fewer allowances are sold, and emissions fall automatically. Subsequently, the program introduced a price for an emissions containment reserve, which is set above the price floor and below which ten percent of the allowances do not sell. Conversely, the program also has a cost containment reserve, which expands the cap if prices rise above a certain level. With these features, the program can contain costs and leverage low allowance prices to deliver further reductions beyond the initial targets. Similar features have since been adopted in cap-and-trade programs in California and Europe. Through this kind of innovation, RGGI has maintained relevance and established a blueprint for durable climate policy that programs near and far have begun to adopt and that has enabled the program’s outsized, and growing, leadership.
With shifting attitudes toward addressing climate challenges, along with RGGI’s demonstrated success, the program is attracting the interest of new states. New Jersey, an initial member that exited the program in 2012 due to cost considerations, will now re-enter in 2020 with the support of Governor Phil Murphy. The mandate for New Jersey to re-join RGGI reflects a commitment to climate action and the appeal of program benefits, including opportunities to raise revenue that could be used for investment in clean energy and energy efficiency or to reduce electricity rates for consumers.
In addition, Virginia has finalized a regulation to implement a carbon pricing program with the intent to link it with RGGI. Pennsylvania, another significant carbon emitter and net exporter of power, formalized a similar intent to develop a plan to join RGGI through an executive order in October 2019. Lastly, North Carolina’s recent Clean Energy Plan signals that the state is considering the use of carbon pricing to reduce its emissions, including a potential cap-and-trade program that could potentially link with RGGI. By modeling these scenarios, RFF and other researchers have shown how these states can reduce emissions while supporting renewables and nuclear generation, with relatively small impacts on electricity prices.
RGGI’s influence extends beyond the expansion of state membership. In a current parallel effort in the northeast, the Transportation and Climate Initiative (TCI) aims to enforce emissions reductions from the transportation sector through a cap-and-trade program. TCI’s draft Memorandum of Understanding (released in December 2019) indicates that the new program intends to borrow key features from the RGGI architecture, including a price floor, an emissions containment reserve, and a cost containment reserve. As TCI covers similar geographic territories, the programs will likely interact, and the similar program structure raises the question and possibility of the programs linking in the future.
Other overlapping climate efforts also have implications on the impact and ultimate success of RGGI. New York, a current RGGI member, committed in June 2019 to the Climate Leadership and Community Protection Act, which contains the most ambitious climate and clean energy goals adopted by any state in the nation. Efforts by the state to achieve net-zero emissions by mid-century, with interim requirements along the way, such as 70 percent renewable electricity by 2030 and 100 percent clean electricity by 2040, could reduce the burden on other RGGI states to comply with the regional cap, which in turn could reduce the program’s allowance price and effective stringency in those states. However, an RFF simulation study has found that an additional carbon price in New York—which has been proposed as an option to help meet its ambitious climate targets—could trigger RGGI’s emissions containment reserve, driving even greater emissions reductions in the region. These kinds of overlapping policies may pose new challenges, but RGGI’s robust features and ability to adapt suggest that the program will continue to be successful and model best practices for resilient and effective climate policy.
Through more than a decade of existence, RGGI has evolved by embracing innovative features that help it maintain relevance in a rapidly transitioning electricity sector. The program has established a blueprint for durable climate policy that has rippled beyond its initial geographic borders. From its growing membership to its increasing interactions with other ambitious climate efforts, RGGI is poised for continued outsized leadership in the transition to a cleaner and healthier future