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Northeast's Tougher Carbon Cap Seen Doubling Critical Revenues by 2020

A major change to RGGI is expected to increase the price of carbon and send billions more into state coffers, much of that to clean energy.

Feb 11, 2013
Mass. Governor Deval Patrick signs an energy law

When the nine states in the Regional Greenhouse Gas Initiative, a cap-and-trade system, agreed last week to dramatically limit power plant emissions, they ushered in a stricter phase of carbon regulation for the Northeast. But they also paved the way for a boom in clean energy investment for the region.

According to a recent analysis, the amount of money generated from the tougher scheme is projected to more than double by 2020, sending an additional $2.2 billion of RGGI money to state coffers—much of that to clean energy industries.

Since RGGI began over four years ago, the program has generated more than a billion dollars for the cash-strapped states that have participated. States are required to use at least 25 percent of their proceeds in efficiency and other programs that benefit consumers. But actually, 80 percent was spent on energy savings, renewable electricity and ratepayer assistance.

Now states are planning to cut the total amount of carbon dioxide that power plants can emit by 45 percenta move expected to increase the price of emitting carbon by five-fold, boosting revenues.

Massachusetts, one of the RGGI states, is predicted to rake in an extra $350 million from the change during the next several years.

Ken Kimmell, commissioner of the Massachusetts Department of Environmental Protection, said the money will be used to fuel already "explosive growth" in the state's clean economy, which grew by more than 11 percent last year, more than twice the rate of the national economy.

Massachusetts is seen as an economic success story among RGGI enthusiasts for using nearly all of its proceeds to pursue energy efficiency, one of the most cost-effective ways to create jobs and reduce dependence on fossil fuels. In 2012, some 40,000 people in Massachusetts worked in the field of energy efficiency, 30 percent more than in 2003.

"We expect that this additional revenue would continue to boost jobs and that sector of the economy," Kimmell said.

Maryland, another RGGI state, is expected to bring in more than $200 million in the next few years, which it will invest in energy savings and utility-bill relief, renewable energy programs and climate change initiatives, according to Kathy Kinsey, deputy secretary of the Maryland Department of the Environment.

Kinsey said the RGGI money enables the state to "really advance and enhance [carbon emissions] reductions."

In New York, the additional millions may be used for infrastructure investments to adapt to extreme storms like Hurricane Sandy amid climate change, according to the New York State Department of Environmental Conservation.

RGGI is the nation's first mandatory cap-and-trade program. Under the initiative, Northeast and Mid-Atlantic states set a ceiling on CO2 emissions from power plants that burn fossil fuels and require operators to buy permits for every ton of carbon they emit.

The program was designed to provide a market incentive for generators to clean up their emissions and be a model for other states and the federal government.

But while RGGI has stimulated clean energy and job growth, it hasn't directly contributed to or kept pace with the region's dramatic fall in emissions—a drop largely due to America's switch from coal to natural gas, lower energy use from efficiency measures and weak electricity demand from the recession.

By last year, power plants in the region were spewing 91 million tons of CO2—45 percent below the RGGI cap of 165 million tons—giving plant operators little or no incentive to cut emissions further or buy a lot of permits.

After two years of review, the nine state governments announced changes on Feb. 7 that they say will strengthen all areas of the program.

Starting in 2014, the region's power plants will be able to emit a total of 91 million tons a year, essentially what they're emitting now. However, between 2015 and 2020, the cap will be lowered by 2.5 percent a year, driving down pollution to about 78 million tons, a 14 percent cut from today.  

Analysts predict the lower cap will stoke demand for carbon permits, causing prices to double to around $4 a ton next year and rise to $10 a ton by 2020.

At their peak, RGGI permits went for as much as $6 a ton of CO2 equivalent. But at the last auction in December only about half of the permits were sold; those that were, went for the floor price of $1.93 a ton. (In California, by comparison, permits are selling for around $14 a ton and have a floor price of $10.71. In Europe's emissions trading scheme, allowances are currently about $6 a ton.)

Before the changes, RGGI states were on track to collect $1.5 billion from auctions between 2012 and 2020. Now they're set to see an additional $2.2 billion, for a total of $3.7 billion, according to an analysis prepared by economists for RGGI officials.

Of all the ways to invest RGGI money, spending on energy efficiency programs—lighting, heating, cooling and other fixes—has spurred the biggest economic gains for states, because consumers spend energy-bill savings in the local economy, and because contractors and installers are put to work on those projects.

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