Federal legislators should look to the states for some key lessons on cap-and-trade.
This piece is third in a series from Visiting Senior Fellow Jill Duggan:
Given the intensity of the debate on whether market mechanisms for reducing greenhouse gases should be adopted in the US, many people are surprised to hear that 10 states in Northeastern United States have already implemented a cap-and-trade system for the power sector.
I was hearing surprisingly little about the experience of the Regional Greenhouse Gas Initiative (RGGI, or “Reggie” to those in the know) when I came to the US last year. I had been deeply involved in designing and implementing cap-and-trade in Europe and was curious to see how RGGI fared in its first year of operation. As the climate talks in Copenhagen kicked off in December, I took myself off to RGGI-land to talk to some of those who have been involved in the initiative along the way and to learn more.
An Early Success
RGGI provides a powerful example of how simple action on climate change can make a real difference – generating emissions reductions, training and new jobs, and most importantly political confidence in action. RGGI’s approach has quietly provided a pilot for the rest of the US, by learning lessons from Europe and improving on the policies adopted there.
RGGI generated close to half a billion dollars in its first year, for investment in energy efficiency, clean energy programmes, and new jobs.
These northeastern states1 have tried to keep it simple and transparent by starting with the power sector. The cap on emissions has not been very ambitious – and in my interviews I heard criticism of this caution. But the states have been bold in adopting significant auctioning of carbon allowances from the start – close to 100%. This approach has paid real dividends, with proceeds from the auctions transforming state investments in energy efficiency and helping RGGI states improve their competitiveness. The success of RGGI’s cap-and-trade has also given states the political confidence to tackle other sectors outside of electricity generation.
I spoke to state administrations, NGOs and utilities, to find out more about their approach and the feedback from the first year. There were some common themes. State officials were clearly proud of their achievement, particularly the successful auctions and the effective use of auction revenues to create jobs, reduce demand for energy, save households money and invest in clean energy.
RGGI was initially conceived in 2003, around the same time Europe was finalizing legislation for its own cap-and-trade program. RGGI sought a slower timetable, hoping to learn lessons from both the federal Acid Rain program that introduced trading of SO2 (sulphur dioxide) in the US and the development of the European Emissions Trading System. This strategy worked well; RGGI’s adoption of full auctioning is one example of their improvement on the European trading system.
In the absence of federal legislation, RGGI required voluntary cooperation from states. Brokering agreements between 10 states and getting them moving at roughly the same pace has proved tricky. One interviewee described the process to me as “synchronized swimming”.
RGGI’s program design is very different from recent proposals for federal cap-and-trade. While on the federal level there is much debate about how many carbon credits to allocate for free and how many to auction away at a price, the RGGI states each decided to auction close to 100% of allowances.
Whilst recent Congressional legislation has looked at economy-wide cap-and-trade, RGGI limited itself to the power sector only – where emissions can be most easily be monitored, and where there are limited competitiveness issues.
Reaping the Benefits of Auctioning
This RGGI system is simple and, because of the auctioning, avoids much of the lobbying that can happen when government gives allowances away. Free allocation is not a perfect science. Businesses lobby to get as many free allowances as they can (and as many as their competitors might get), which means there is always pressure to soften the carbon limit or “cap”.
In addition, if companies can pass on costs to customers, then free allocation can result in windfall profits to the company. This was an early lesson from Europe. Auctioning, on the other hand, provides a clear incentive to reduce emissions, ensures that those who have taken early action will be better placed than their competitors and can provide resources for governments to reinvest in energy efficiency and clean energy.
While the cooperation between states was voluntary, it was difficult to set a tough cap on CO2. The challenge for RGGI was to turn a system with a relatively weak cap into a meaningful initiative that could pave the way for others. By adopting high levels of auctioning the system has generated enough revenue to make a difference to clean energy and energy efficiency programs, even though the initial carbon price has been low.
Even at the very low prices (see below), the auctions have generated close to half a billion dollars in RGGI’s first year, for investment in energy efficiency, clean energy programmes, and new jobs.
|Auction Number||Allocation Year||Quantity Offered||Quantity Sold||Clearing Price||Total Proceeds|
|Auction 1, 9/25/20082||2009||12,565,387||12,565,387||$3.07||$38,575,738.09|
|Auction 2, 12/17/2008||2009||31,505,898||31,505,898||$3.38||$106,489,935.24|
|Auction 3, 3/18/2009||2009||31,513,765||31,513,765||$3.51||$117,248,629.80|
|Auction 4, 6/17/2009||2009||30,887,620||30,887,620||$3.23||$104,242,445.00|
|Auction 5, 9/09/2009||2009||28,408,945||28,408,945||$2.19||$66,278,239.35|
|Auction 6, 12/12/2009||2009||28,591,698||28,591,698||$2.05||$61,587,120.90|
In New Hampshire, for example, auction revenue has more than doubled the amount available for these programs. The Construction Institute of New Hampshire is receiving close to $200,000 over two years to train building professionals to design, build and remodel homes to meet the Green Building standard – and reduce energy demand and greenhouse gas emissions. Another programme will offer classes to train energy auditors. The state is also investing more money on weatherization and solar hot water systems. Massachusetts also has a number of programs to train people for new jobs in energy efficiency, and has more money for their Green Communities Program. These kinds of programs are replicated in the other RGGI states.
RGGI sees this investment in energy efficiency as a key tool to keep the carbon price down – as the states’ emissions go down, the demand for carbon credits will be lower.
After the first year of operation, the RGGI states have produced a simple and transparent cap-and-trade program that works, and that has provided benefits for the local communities.
It is too early to know whether RGGI’s cap and carbon price have generated emissions reductions. It is clear though that the auction revenues and the spending on efficiency programs will reduce emissions – and should save businesses and consumers money too.
Another indicator of success: the process has been successful enough for the states to broaden their ambitions. The RGGI states (alongside Pennsylvania) have signed a memorandum of understanding to develop a low carbon fuel standard, showing that taking the first steps to reduce emissions makes future ambitious action more likely. Now that is an important lesson for Congress.