Regional Ghg Regimes In The United States Regional Greenhouse Gas Initiative

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The Regional Greenhouse Gas Initiative (RGGI, pronounced 'REGGIE') was the first regional cap-and-trade program established in the United States. On 20 December 2005, the eastern states of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont agreed to establish statewide carbon dioxide (CO2) emission caps. Massachusetts, Rhode Island, and Maryland later joined RGGI, adopting similar CO2 emission caps.

RGGI operates within a few different regional transmission organizations (RTOs) and independent system operators (ISO) - entities that administer the electricity transmission grids in the RGGI region. The major RTOs and ISOs include PJM (Pennsylvania-New Jersey-Maryland, which provides for the movement of wholesale electricity to eleven states), ISO New England (covering six New England states), and New York ISO. Trading regularly occurs between these various power pools, as well as with Canada. Not all of the state members of these RTOs and ISOs are members of RGGI, so it is possible for the RGGI states to import electricity from non-RGGI states. Table 9.1 identifies some of the primary importers of electricity within the RGGI region and exporters outside the RGGI region within the PJM RTO, along with their primary fuel source and contribution to GHG pollution from the electricity generated by their combined sources of electricity. Currently, the RGGI states

6 See Rabe et al. (2005, pp. 34-36), (noting that attempts to address leakage may be viewed as disguised economic protectionism).

collectively import approximately 90 million megawatt hours of electricity, or about 21% of their total consumed electricity.7

Although electricity used within the RGGI region may be imported from outside the RGGI region, the RGGI states agreed to adopt mandatory CO2 limits that stabilize emissions from sources located within RGGI. The RGGI states agreed to stabilize CO2 emissions at 2009 levels between 2009 and 2014 (effectively reducing emissions from projected economic growth in the region), and to reduce their CO2 emissions by 2.5% annually thereafter, through 2018. This amounts to a fairly modest emission reduction (10% below 2009 levels) by 2018. Given projected growth, this translates into GHG emissions approximately 35% lower than under a business-as-usual scenario.

In addition to requiring only modest emission reductions, the impact of RGGI is further constrained by other limitations of the program's scope. RGGI only covers CO2 emissions; it does not regulate the other GHGs. It also is limited to electricity-generating units over 25 MW that use more than 50%

Table 9.1 PJM Generation and Sales in 20068

Table 9.1 PJM Generation and Sales in 20068













Fuel Source)



(% of

(1000 tons)




New Jersey





















West Virginia



















7 See United States Energy Information Administration (2007), State Electricity Profiles 2006, DOE/EIA-0348(01)/2, pp. 261-2, tbl. A1 (Selected Electric Industry Summary Statistics by State, 2006), st_profiles/sep2006.pdf.

8 Ibid. The CO2 emissions identified in the table relate to emissions from all electricity sources within each state, not merely the emissions from the primary fuel source.

fossil fuels for combustion. This is expected to cover approximately 750 sources generating CO2 pollution.9 It does not, however, cover electricity consumption by industrial processes.

Like the EU ETS cap-and-trade program discussed throughout this book, each electricity-generating unit (source) has a CO2 allocation, distributed as allowances (also known as credits). RGGI permits sources to obtain additional pollution allowances by paying other sources to reduce their emissions or funding emissions-reducing projects known as 'offsets.'10 To prevent sources from polluting in excess of their allowances and remaining in compliance with RGGI by funding offsets - an outcome that would limit the potential of the program to force the development and deployment of newer clean technology

- RGGI limits the amount of offsets that a source may use to ensure compliance with its net CO2 allocation.

Under a business-as-usual scenario, CO2 reductions are recognized from offset projects located within the RGGI states, non-RGGI jurisdictions of the United States (if those jurisdictions have a cap-and-trade program with specific tonnage limitations for GHGs imposed on significant economic sectors), and non-RGGI jurisdictions within the United States that have entered into a memorandum of agreement with the RGGI state to ensure the credibility of the offsets.11 Offsets are credited at a ratio of one ton of CO2 reduced for a one ton allowance of CO2 that can be emitted by the source.12 Under a business-as-usual scenario, a source can purchase offsets totaling up to 3.3% of its total CO2 emissions allocation.

If the price of CO2 on the RGGI market exceeds certain price thresholds after the 'market settling period' - the first 14 months of the compliance period

- RGGI attempts to minimize the economic burden imposed by the higher price of CO2 on the regulated sources by using what is essentially a safety

9 RGGI adopted a source-based approach to regulating CO2 pollution because it concluded that such an approach is most consistent with RGGI's goal of reducing the carbon intensity of generators. Peress and Booher (2007, p. 8).

10 Currently, regulated entities can only earn emission offsets from certain categories of projects, including: natural gas, heating oil and propane energy efficiency, landfill gas and combustion, methane capture from animal operations, forestation of non-forested lands, and reductions in sulfur hexafluoride (SF6) emissions from transmission and distribution equipment. RGGI MOU; RGGI (8 August 2006), Memorandum of Understanding Amendment, art. 2 (hereinafter, 'RGGI, MOU Amendment').

12 Initially, the RGGI states concluded that the potential uncertainties associated with the lack of regulatory control over offset projects outside the RGGI region warranted discounting the value of offset credits earned in non-RGGI jurisdictions by half. RGGI MOU, n. 10, art. 2(F)(2)(a)(2). After further discussions, however, the RGGI states ultimately determined that such a discounting mechanism was inappropriate, and the MOU was amended accordingly.

valve that expands the use of offsets. If the price of CO2 exceeds the modest price of $7 (2005$) per ton, a source may purchase offsets totaling up to 5% of the source's total CO2 allocation, and offsets throughout North America become eligible. If the price of CO2 reaches $10 (2005$)/ton (as adjusted for inflation), international offsets become eligible, and sources can purchase offsets up to 10% of the source's total CO2 allowances.13

Because RGGI imposes only modest CO2 reductions over a decade and its offset safety valve is triggered at a relatively modest CO2 price, the projected cost of compliance for industry and consumer cost increases are expected to be minimal. Through the stabilization period, RGGI is expected to increase the cost of compliance for industries by less than 5% of the average wholesale electricity price.14 These costs will not be passed on to consumers to any significant degree. Average household electricity bills are expected to experience an annual increase of $3-16, which is approximately a 0.3-0.6% increase.15 After factoring in increased energy efficiency that should result from RGGI, RGGI should actually result in net energy cost savings to consumers.16 RGGI's overall impact on the economy is similarly expected to be positive, as RGGI should promote investment in new technologies, including nuclear energy, which exist throughout the RGGI region.17

Since RGGI only imposes modest requirements on electricity generators in the region, the cost of compliance (cost adder) for those generators is not expected to be substantial. As a result, modeling performed for RGGI suggests that RGGI should not promote a large increase in the amount of lower-cost electricity imported from non-RGGI states. This is in part the result of long-term contracts, which account for approximately 14% of electricity generated in the RGGI region, reducing the near-term leakage potential of the program.18 Indeed, the RGGI modeling concluded that its design should result in acceptable levels of emissions leakage resulting from increased electricity imports from unregulated sources.

13 RGGI, MOU Amendment, n. 10, art. 5(a)(2). Initially, the RGGI states wanted to increase the use of offsets under this 'Safety Valve Trigger' to 20% in the extended year of compliance. See RGGI MOU, n. 10, art. 2(F)(4)(a)(3). After further discussions, however, the RGGI states decided to limit the use of offset credits to 10%, and the MOU was amended accordingly.

14 RGGI (14/03/2007), Initial Report of the RGGI Emissions Leakage MultiState Staff Working Group to the RGGI Agency Heads, p. 6 (hereinafter, 'RGGI, Initial Leakage Report').

15 RGGI (2005), 'RGGI Region Projected Household Bill Impacts,' rggi_house_hold_bill_impacts12_12_05.ppt, December 12.

17 Ibid.

Nevertheless, as described below, there are a variety of factors that contribute to emissions leakage. While the modeling suggests acceptable levels of leakage, the RGGI states have always recognized that the competitive electricity markets within which the program will operate create a potential leakage problem.19 If the RGGI states cannot resolve the potential leakage problem, the states will try to mitigate those leakage-induced emissions. A report released by RGGI in March 2008 suggests that demand-reduction strategies should help reduce such leakage.20

Currently, the RGGI states appear marginally concerned about the impact of potential leakage on the electricity market, the region's competitiveness, or uncontrolled emissions. RGGI staff has concluded that the leakage problem is a near- to medium-term concern because the staff believes the political momentum in the United States is toward a national program, which staff expects will equalize regulatory inequities among the regions.21 This view, however, is somewhat myopic because so long as regional regimes are permitted to exist and differentiate themselves with stricter requirements than the national regime, leakage concerns will remain, even if reduced. Potentially more troubling, however, is that RGGI is designed to be a model for a national program. If RGGI cannot control leakage, it may very well hinder the development of a national program, which must also concern itself with leakage abroad.

Indeed, concerns about leakage are evident in the national program context, as evidenced by discussions over the Lieberman-Warner climate change bill. That bill seeks to address leakage to protect industry from cheaper, unregulated competition abroad.22 National legislation may curtail leakage from abroad while remaining consistent with the rules of international trade, but it is no easy task to design legislation consistent with those rules. Given the difficult road ahead for national legislation, a regional regime that fails to address leakage in the domestic context, despite efforts to minimize such leakage and a more hospitable legal environment within which to do so, could cause national regulators and legislators to look for mechanisms other than a cap-and-trade system to curb GHG pollution.

19 RGGI, MOU, n. 10, art. 6(A) ('The Signatory States recognize the potential that the Program may lead to increased electricity imports and associated emissions leakage.').

20 RGGI (March 2008), Potential Emissions Leakage and the Regional Greenhouse Gas Initiative (RGGI), at 41-42. But see Tanton (2008).

22 See Brevetti (2008).

2.2 California and the Western Climate Initiative

Following the model established by RGGI, California, after a number of intermediary steps, is working to establish a mandatory cap-and-trade regime for GHGs. On 1 June 2005, Governor Arnold Schwarzenegger signed Executive Order S-3-05, calling for statewide GHG emission reductions by 80% below 1990 levels by 2050. California started the process of meeting this goal with the passage of the California Global Warming Solutions Act of 2006, Assembly Bill 32 (AB32), in fall 2006.

AB32 establishes a GHG emission limit of 1990 levels by 2020, and permits the use of market-based mechanisms to achieve those levels.23 It covers all six GHGs regulated by the Kyoto Protocol under Annex A: CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. AB32 imposes GHG reduction requirements for sources 'whose emissions are at a level of significance, as determined by the state board.'24 The program scope is left somewhat undefined by the legislation, which explicitly mentions only 'electrical generation, petroleum refining, and statewide fuel supplies' as having GHG reduction requirements.25 The program is nevertheless expected to cover other major industrial sources as well.26

Notably, AB32 gives official approval to load-based standards. Load-based standards regulate electricity delivered into a region from any source, whether domestic or imported. In contrast to generator-based standards, which apply only to generators located within the region's boundaries, load-based standards target consumption of electricity within the region's boundaries. Accordingly, AB32 defines 'statewide greenhouse gas emissions' as:

the total annual emissions of greenhouse gases in the state, including all emissions of greenhouse gases from the generation of electricity delivered to and consumed in California, accounting for transmission and distribution line losses, whether the electricity is generated in state or imported. Statewide emissions shall be expressed in tons of carbon dioxide equivalents.27

AB32, then, gave official sanction to the California Public Utility Commission's (CPUC) decision to use a load-based standard as the unifying framework for utility procurement incentives.28

23 California Health & Safety Code §§ 38550, 38570.

27 California Health & Safety Code § 38505(m) (emphasis added).

28 California Public Utilities Commission (16/02/2006), Decision 06-02-032; see Fitch (2007).

While AB32 does not require a cap-and-trade scheme,29 on 16 October 2006, just a few weeks after signing AB32, Governor Schwarzenegger issued Executive Order S-17-06, calling for the creation of a 'market-based compliance program with the goal of creating a program that permits trading with the European Union, the Regional Greenhouse Gas Initiative and other jurisdictions.' Like the RGGI states, the California legislature believes passage of AB32 may induce federal and international action to address global climate change.30 In the interim, AB32 calls on California to 'minimize leakage.'

California is concerned about leakage because although its net electricity imports approximate the net import ratio of the RGGI states from non-RGGI states, the imported electricity in California is substantially more carbonintensive, and half as costly, as electricity generated within California. Indeed, while California imports between 22-32% of its electricity, those imports account for 39-57% of electricity-related CO2 emissions.31 This differential is attributed primarily to stricter environmental regulations in California than surrounding jurisdictions and California's substantial reliance on natural gas (and absence of coal-fired power plants) for electricity generation. Accordingly, emissions leakage is a potential problem for California, especially for its energy-intensive industries such as refining.

Given California's concern regarding leakage, it is attempting to incorporate all the states in the Western Interconnection - an alternating current power grid stretching from Western Canada south to Baja California in Mexico - in a regional GHG regime. California's efforts yielded the creation of the Western Regional Climate Action Initiative on 26 February 2007, by a group of Western states (Arizona, California, New Mexico, Oregon, and Washington), with the purpose to 'collaborate in identifying, evaluating, and implementing ways to reduce GHG emissions.'32 Utah, Montana, and the Canadian provinces of British Columbia, Ontario, Quebec, and Manitoba have since joined the Initiative, now known as the Western Climate Initiative (WCI). The WCI was established to develop 'a regional market-based multi-sector

29 Although the California law does not require a cap-and-trade scheme, and there is some opposition to a cap-and-trade scheme from the environmental justice lobby, it nevertheless appears, at the time of this writing, that California will ultimately implement a cap-and-trade program. See Whetzel (2008, p. A-5).

30 California Health & Safety Code § 38501(d) ('[A]ction taken by California to reduce emissions of greenhouse gases will have far-reaching effects by encouraging other states, the federal government, and other countries to act.').

31 California Energy Commission (2006), 'Inventory of California Greenhouse Gas Emissions and Sinks: 1990 to 2004,' CEC-600-2006-013/CEC-600-2006-013-SF.PDF, p. 12.

32 Western Regional Climate Action Initiative, Memorandum of Understanding, p. 1.

mechanism, such as a load-based cap and trade program, to achieve the regional GHG reduction goal.'33

The WCI partners agreed to establish a regional GHG emission reduction goal of 15% below 2005 levels by 2020.34 Currently, the WCI is very early in the design phase. The scope and regulatory structure of, allocation and reporting of allowances within, and use of offsets within the program have not been finalized at the time of publication. The WCI partners have released draft documents establishing a draft scope of the regulatory program, the intention to auction a minimum amount of allowances, concluding that a generator-based approach designed to minimize leakage is the preferable approach, and determining that offsets should be incorporated into the system.35 Of the WCI participating jurisdictions, however, Oregon, Washington, Arizona, and New Mexico have signaled that they will follow California's lead by developing a regional load-based cap-and-trade program.

2.3 Midwest States

On 15 November 2007, a group of Midwestern states (Wisconsin, Minnesota, Illinois, Iowa, Michigan, Kansas, and the Canadian province of Manitoba), through the Midwestern Governors Association, combined to form the Midwestern Regional Greenhouse Gas Reduction Accord (MR 66RA). The group agreed to 'develop a market-based and multi-sector cap-and-trade mechanism to help achieve GHG reduction targets.'36 The program will be designed to 'enable linkage to other jurisdictions' systems to create economies of scale,' and 'address potential interaction or integration with a future federal program.'37 While the Midwestern Greenhouse Gas Accord states may be able to design their cap-and-trade program more quickly than was possible under RGGI and WCI given their ability to learn from the design of those regimes, the program is still under design and is not expected to be operational before 2013.

2.4 Voluntary Programs

In addition to the mandatory regional GHG emission reduction regimes

34 WCI (22/08/2007), Statement of Regional Goal, p. 1.

35 WCI documents, including drafts, are available at: http://www.westernclimate

36 Midwestern Governors Association (2007), Midwestern Greenhouse Gas Accord, p. 3.

discussed above, two other major voluntary regional GHG initiatives exist in the United States.38

On 8 May 2007, 31 states, a Native American tribe, and two Canadian provinces agreed to establish 'The Climate Registry,' a multi-state GHG emissions tracking system.39 The Climate Registry is designed to '[d]evelop and manage a common greenhouse gas emissions reporting system,' and '[p]rovide an accurate, complete, consistent, transparent, and verified set of greenhouse gas emissions data from reporting entities, supported by a robust accounting and verification infrastructure.'40 The Climate Registry is designed to enable the participating states 'to incorporate these minimum data quantification standards into any mandated greenhouse gas reporting and emissions reduction program.'41 On 1 February 2008, The Climate Registry issued its Fourth Draft of the General Verification Protocol for public comment, and in May 2008, the Registry is expected to issue its final General Reporting Protocol.

The other primary voluntary regional regime in the United States is the Chicago Climate Exchange (CCX). The CCX was established in 2003 by Richard Sandor, who has been dubbed the 'father of carbon trading.' Participating entities under the CCX voluntarily agree to undertake legally binding commitments to meet GHG emission reduction targets.42 The CCX, while imposing relatively modest emission reduction targets on participating entities, is important to regional GHG reduction regimes because it helps build capacity for future carbon trading regimes, whether voluntary or mandatory.

38 Some of the mandatory regional regimes may develop a voluntary element similar to the Acid Rain Program, whereby participants may voluntarily join the mandatory regime through an opt-in program that provides incentives for those entities to join. Environmental Protection Agency (2 Feb. 2007), 'Opt-in Program Fact Sheet,' Such a regime would operate similarly to the United Kingdom Emissions Trading Scheme, which provides reductions in payments due to the Climate Change Levy for participating entities. For a discussion of the United Kingdom's trading scheme, see Bluemel (2007a, pp. 2021-2025). Generally, opt-in programs are a good way to increase participation in a regulatory regime, but they are difficult to manage to ensure beneficial environmental outcomes. See Aulisi, et al. (2005, pp. 22—23). Despite the problems associated with opt-in programs, some have nevertheless called for their use in GHG emission reduction regimes. Ellerman (2003, p. 35 and pp. 41-43).

39 Jones and McIntyre (2007, p. 1640).

40 The Climate Registry (2008), 'Principles and Goals,' http://www.the (accessed 22/02/2008).

41 Ibid.

42 For a good discussion of the Chicago Climate Exchange, see Yang (2006, pp. 274-82).

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