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.

Mass. Governor Deval Patrick signs an energy law
Mass. Governor Deval Patrick signs an energy law in Aug. 2012 to promote clean energy and energy efficiency. Massachusetts is seen as an economic success story among RGGI enthusiasts for using nearly all of its proceeds to pursue energy efficiency. Credit: Office of the Governor

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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.

An independent study by the Analysis Group found that $912 million in proceeds collected from 2008 to 2011 created $1.6 billion in economic activity across the region and 16,000 jobs. Massachusetts reaped the most economic benefits because it funneled the bulk of its $143 million into its multibillion-dollar energy efficiency agenda.

Dale Bryk, director of energy and transportation at the Natural Resources Defense Council (NRDC), said the states’ ultimate goal is not to raise revenues, but to force utilities to change the future of power generation by leveraging the market.

The idea is that if the price of emitting carbon is high enough, utilities will reduce investments in coal, oil and natural gas and devote more of their budgets to funding clean energy and using less energy. States can help by reinvesting auction proceeds in utilities’ efficiency and renewable energy programs.

Opponents of cap and trade say the rising cost of carbon will harm consumers and business by greatly pushing up energy bills, making the region less competetive.

Steve Lonegan, director of the New Jersey chapter of Americans for Prosperity (AFP), a group that has long opposed the RGGI effort, said higher permit prices are “going to drive down the economy” as businesses flee to non-participating states. AFP, which is financed by the Koch brothers and other oil industry interests, is working to convince several state governments to leave RGGI.

Peter Shattuck, director of market initiatives at Environment Northeast, an advocacy organization, sees the opposite happening. He said the revised RGGI program could attract interest from other states that are seeking ways to comply with future federal carbon requirements while raising money for clean energy. Speculation is swirling that President Obama may soon announce regulations to tackle the emissions of existing fossil fuel plants.

“I think there could be renewed interest in other states joining—or rejoining—RGGI,” Shattuck said.

RGGI affects nearly 170 coal- and natural gas-burning plants in nine states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont. The pact initially included New Jersey, but Gov. Chris Christie ended his state’s participation in December 2011, calling the program an ineffective way to address climate change.

The new rules won’t take effect until each state adopts individual regulations or legislation to approve the changes. All are expected to do so before next year, according to officials.