Cap and Trade Gives Massachusetts Economy Critical Boost, Defying Naysayers

New report on a ten-state initiative to reduce greenhouse gas emissions shows the program is a success after three years.

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Gov. Deval Patrick
Massachusetts Gov. Deval Patrick/Credit: Massachusetts Office of Energy & Environmental Affairs.

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The state of Massachusetts is quietly reaping the benefits of cap and trade, the much-maligned process for curbing greenhouse gas emissions that federal lawmakers and many state governments resoundingly rejected in recent years. According to a recent study, cap and trade has created 3,800 jobs and nearly $500 million in economic activity for Massachusetts since 2008.

Massachusetts belongs to the Regional Greenhouse Gas Initiative (RGGI), the first and only mandatory carbon emissions trading scheme in America. A report analyzing data from the first three years of the effort found that of the 10 participating Northeast and Mid-Atlantic states, Massachusetts benefited most economically, because it used the bulk of its money to help fund its aggressive energy efficiency agenda.

“Energy efficiency investments have a much bigger multiplier effect than any other category of spending,” said Paul Hibbard, vice president of the Analysis Group, the Boston-based consulting firm that prepared the report. When homeowners and businesses used RGGI dollars to retrofit and weatherize buildings, they not only ended up saving on energy costs and spending money elsewhere in the economy—they also put contractors and installers to work.

RGGI “is a very successful program … and we look forward to continue achieving those results,” Mark Sylvia, commissioner of Massachusetts’ Department of Energy Resources, told InsideClimate News.

All the RGGI states saw a net economic benefit from the program, the report found, despite increased compliance costs for power plant operators and subsequent electricity rate hikes, largely thanks to energy conservation measures that reduced electric bills. Regionally, $912 million in total auction proceeds spurred $1.6 billion in economic value and created 16,000 jobs, the report found.

The states used their RGGI proceeds in a variety of ways, including patching state budget gaps, paying utility bills for low-income residents, and funding renewable energy projects. The other RGGI members include Connecticut, Delaware, Maine, Maryland, New Hampshire, New Jersey, New York, Rhode Island and Vermont.

Despite the success story described in the Analysis Group report, cap and trade’s future in America seems uncertain.

A similar program, made up of seven western states and four Canadian provinces, suffered setbacks this year when Arizona defected and Montana, New Mexico, Oregon, Utah and Washington were dropped for failing to pass laws that would allow them to participate. California, the only remaining U.S. member of the Western Climate Initiative, will start capping its emissions in 2013.

The last major effort to create a national cap-and-trade policy was in June 2009, when the House of Representatives passed a bill crafted by Reps. Henry A. Waxman (D-Calif.) and Edward J. Markey (D-Mass.). A similar measure died in the Senate after tax-averse Republicans and Democrats from fossil fuel-producing states opposed it.

Americans for Prosperity (AFP), a group that has long opposed the RGGI effort and is largely financed by oil industry interests, has attacked the Analysis Group report as a politically motivated and “fraudulent” product of the far-left. The report was funded by the Merck Family Fund, the Barr Foundation, the Chorus Foundation and the Henry P. Kendall Foundation.

“According to this report, RGGI is the first tax in history to actually create jobs and prosperity with no ill effects on the people and businesses being taxed,” Steve Lonegan, director of AFP’s New Jersey chapter, said in a statement. “This is a totally one-sided report propped up by environmental extremists, career bureaucrats and Obama cronies.”

This year AFP ramped up its efforts to dismantle RGGI state by state, usually with the support of Republican lawmakers who call it “cap and tax.”

In May, New Jersey Gov. Chris Christie announced that his state will pull out of RGGI at the end of the year. Lonegan told InsideClimate News in the spring that AFP had given Christie information about RGGI and urged him to withdraw. Christie argued that “RGGI does nothing more than tax electricity, tax our citizens, tax our businesses.”

The Analysis Group found that cap and trade generated more than $150 million in economic activity and created nearly 1,800 jobs for New Jersey.

Legislators in Delaware and Maine tried unsuccessfully this year to pass legislation that would have withdrawn their states from RGGI. The New Hampshire legislature voted to withdraw—but the bill was vetoed by Democratic Gov. John Lynch.

How RGGI Works

Under RGGI, fossil fuel power plants must curb the amount of CO2 they emit each year to a pre-determined level, initially set at 188 million tons of CO2 across the ten-state region.

Operators of fossil fuel plants with at least 25 megawatts in capacity hold “carbon allowances” for every ton of CO2 emissions their plants give off. Plants that exceed their allowances must either reduce their emissions, or buy spare allowances from within the market, with the price determined by how many allowances are up for sale and how many are needed. Private financial firms can also buy and sell carbon allowances in the quarterly auctions run by RGGI Inc., a nonprofit organization that then transfers the proceeds to the states.

In Massachusetts, at least 80 percent of RGGI proceeds must be used for green building and energy-saving programs. In practice, however, the state sent 94 percent of its proceeds from the last 13 auctions—or $134 million—to efficiency efforts, according to Analysis Group.

Hibbard said the study proves that cap-and-trade programs can work and can deliver economic benefits, especially when funding is steered toward energy efficiency.

“It would be impossible to not have that be a key takeaway,” particularly after seeing the economic impact in Massachusetts, he said.

The Massachusetts Experiment

Massachusetts wasn’t always the RGGI proponent it is today. Former Gov. Mitt Romney, now a GOP presidential candidate, championed RGGI in 2005, when it was in its early stages. But he pulled Massachusetts out of RGGI after he failed to get a limit placed on the amount of money power plants would be charged for exceeding their emissions limits.

When Democratic Gov. Deval Patrick took office in 2007, he set out to make energy efficiency the “first fuel” for Massachusetts’ power plants. Rejoining RGGI was among Patrick’s earliest steps as governor, because he saw it as a strong vehicle to help realize that goal, said Sylvia, the state’s energy resources commissioner.

In 2008, Patrick passed a set of ambitious policies to curb energy consumption, driving down electricity costs and slashing greenhouse gas emissions. First among them was the Green Communities Act, which requires gas and electric companies to exhaust all cost-effective energy efficiency measures before building new plants or procuring more power.

By 2020, Massachusetts aims to meet about 30 percent of its energy needs through these energy efficiency measures. Already it has leapfrogged California as the most energy-efficient state, according to an October ranking by the American Council for an Energy-Efficient Economy, a Washington, D.C.-based nonprofit.

Although Massachusetts’ $143 million in total RGGI auction proceeds account for only a fraction of the $2 billion the state plans to invest in energy efficiency programs from 2010 to 2012, Sylvia said RGGI money is still a critical source of funding.

RGGI dollars provided electric utilities with about $30 million in 2010, or 11 percent of total utility program budgets, according to a first-year report from the state’s Energy Efficiency Advisory Council. They also provided $18 million in grants to nearly 75 municipal efficiency programs.

Aside from funding specific programs, RGGI has helped fuel an economic engine that is creating jobs across the state.

In 2010, some 33,800 people in Massachusetts—20 percent more than in 2003—worked in the broad field of energy efficiency, including providing home energy assessments, creating energy-saving lighting and appliances, and renovating and upgrading green buildings, according to a green jobs count by the Brookings Institution.

RGGI’s Future

While the Analysis Group report makes it clear that RGGI has been a big success, other analysts point out that RGGI proceeds will likely plateau unless power plants are forced to make deeper cuts in their CO2 emissions.

The problem is that emissions began dropping below RGGI’s 188 million ton cap before the first auction was even held.

Part of the reduction occurred because most of the New England states began swapping coal and oil for cleaner-burning and cheaper natural gas. Emissions fell again when the global economy nosedived, because plants reduced their operations and thus their energy use. Aggressive energy efficiency policies have also curbed power plant emissions. RGGI Inc. reported in September that CO2 emissions from power plants in its member states fell by nearly 20 percent from 2008 to 2009.

When fewer plant operators need to buy allowances, the value of the allowances falls and they become harder for states to sell, said Ashley Lawson, a carbon market analyst at Point Carbon, a Thomson Reuters research firm. Auction proceeds declined from nearly $500 million in 2008 and 2009 to less than $300 million in 2010 and $175 million this year, including the most recent auction on Dec. 7.

“We think that emissions will stay below the cap throughout at least 2018 if states leave the cap at the level it is today,” she said. “Those prices are going to stay very low and so revenues would stay correspondingly low.”

RGGI members will meet sometime in mid-2012 to review the program, including the emissions cap. The original RGGI agreement calls for the 188 million ton cap remains in place through 2015. Then it will decline 2.5 percent a year through 2018. To boost the price power plants pay for allowances, Lawson said the cap would have to be lowered even more.

RGGI opponents have used the declining prices as proof that cap and trade isn’t needed, because other factors already at play are already lowering emissions.

But even if RGGI keeps the emissions cap at its original level, its members will continue to benefit, Lawson noted. The fourteenth auction, held last week, still brought in nearly $52 million, raising the total proceeds from all the RGGI auctions to $952 million.

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