Cap and Trade in Perspective: Carbon Trading in the Northeast

Part II of a three-part series on cap-and-trade looking at the successes, failures and lessons the U.S. government can learn from three programs already in place.

The Regional Greenhouse Gas Initiative, a program to regulate carbon dioxide emissions in 10 Northeastern and Mid-Atlantic states, is proving a mandatory cap-and-trade program to address greenhouse gas emissions can work in the United States.

The program’s goals are modest — only one greenhouse gas is regulated and only power plants of at least 25 megawatts are covered. Emissions are capped at current levels through 2014, then the cap is reduced by 2.5 percent annually for four years until emissions are cut 10% by 2018.

Still, the fact 10 states overcame their differences to create a single compliance market to reduce carbon dioxide emissions is a “remarkable achievement,” says Judi Greenwald, vice president for innovative solutions at the Pew Center on Global Climate Change.

Also significant is that the system is working; the market has established a price for carbon dioxide emissions and power companies are willing to pay for allowances to emit.

“From a political perspective, it demonstrates that you actually can design and implement a cap-and-trade program in the U.S.,” Greenwald says. “A lot of people want to see a home-grown example. I think it’s very important that it’s working well and it’s working here.”

It took five years for seven states — Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont — to devise a system for regulating carbon emissions.
Massachusetts, Rhode Island and Maryland joined in 2007, after a model rule laying out how the program would work was approved by the initial states.

A unique feature of RGGI is that each state establishes its share of the regional emissions cap and controls the number of allowance issued to power plants. Each allowance gives a plant the right to emit one ton of carbon dioxide. Power plants that reduce emissions below the cap can sell allowances on the secondary market to plants that exceed the emissions cap.

Most RGGI allowances are sold in quarterly auctions, so states earn money for energy efficiency and renewable energy programs, further reducing carbon emissions.

So far, the RGGI states have raised $366.5 million.

“It’s a mini exercise in federalism,” says Christopher Davis, a partner at the law firm Goodwin Procter in Boston. “Each state adopted a flavor and approach that meets its regulatory structure.”

Although the price per allowance has been relatively small — $3.23 at the last auction, compared with about $23 for emission allowances in the European Union — the dollars already are fueling transformation of the regional energy economy, Davis says.

“The auctions have been viewed by most participants as successful and effective,” he says. “It’s generated a lot of money for the 10 states.”

The lawmakers who crafted RGGI decided allowances should be purchased through auctions instead of given away for free so the value of the allowances, or the cost and benefit of complying with a cap on emissions, was visible to consumers.

Unlike RGGI, the national economy-wide cap-and-trade program proposed in the American Clean Energy and Security Act (ACES) legislation that passed the U.S. House of Representatives in late June, would allow for a significant percentage of allowances to be granted for free.

While the idea of free allowances has been controversial, Greenwald at Pew Climate doesn’t view it as problematic.

“We think whether you auction or freely allocate is less important than what you do with the value of allowances,” she says.

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