RGGI – or “Reggie” – is a cap-and-trade effort that began this year and may help to shape U.S. policy.
by John Richardson, staff writer
A one-year-old regional experiment with carbon cap-and-trade has so far generated $13.5 million for energy conservation efforts in Maine.
But it could ultimately have a far bigger impact, in Maine and nationwide.
A much more ambitious cap-and-trade plan introduced to the U.S. Senate last week is based, at least in part, on the lessons learned here.
“The hope … was that it would influence the national policy,” said Thomas Tietenberg, a retired Colby College economics professor who helped develop Maine’s piece of the program. “And I think it did.”>/p>
Maine was one of 10 states to create the nation’s first market-based system to fight climate change. By putting a price on carbon dioxide emissions, it encourages large power plants to become cleaner and more efficient.
It’s too early to measure any effects on pollution or on electricity prices, especially given a recession that has reduced production – and thus emissions – far more than any government action.
The program has its flaws, including a cap on emissions that turned out to be too generous. But it also is seen as an innovative way to fight climate change, and as a model.
“Clearly (it) has established that a cap-and-trade system can work and work very well in the United States,” said David Littell, commissioner of Maine’s Department of Environmental Protection. “Before that, people were skeptical.”>/p>
The Regional Greenhouse Gas Initiative, or RGGI, was effectively launched in September 2008 with the first carbon allowance auction in the United States.
RGGI, which is pronounced “Reggie,” requires large electricity producers in the Northeast to have one allowance for every ton of carbon dioxide they put into the atmosphere from burning coal, oil or gas. They can either buy the allowances at quarterly government auctions or trade among themselves.
The basic idea is that the power industry has a new incentive to shift to cleaner burning fuels, such as gas, and to reduce carbon dioxide emissions that scientists say contribute to global warming.
The other principle behind cap-and-trade systems is that the number of overall allowances in the marketplace – the cap – will gradually be reduced over time, ensuring across-the-board pollution reductions.
RGGI is similar to a cap-and-trade system in Europe, with an American twist. The Europeans gave allowances away, while RGGI auctions them off to the highest bidders.
Ted Koffman, former House chairman of the Legislature’s Natural Resources Committee, remembers how a visit from members of Britain’s Parliament helped convince state officials in the Northeast to try something new.
“They felt they had failed because they gave away the allowances. It didn’t create a market,” said Koffman, who is now executive director of Maine Audubon. “We felt if we got it right, we could help the nation get it right.”>/p>
Giving away allowances reduces the initial cost to the companies – and to electric ratepayers – but opens the door to unpredictable prices in the private trading market for allowances.
Auctioning off allowances sets a stable, and public, clearing price, while contributing to an increase in electricity costs. However, the Northeastern states decided to use the revenue generated by the auctions to pay for energy efficiency improvements, ranging from small residential projects to large industrial ones. That, according to economists, would eventually reduce the need for new power generating capacity and, as result, reduce electricity rates.
“The notion that you would auction off the allowances was a completely alien philosophy until RGGI,” Tietenberg said.
In Maine, RGGI is expected to increase electricity costs about 1.5 percent over 10 years.
RGGI has so far held five electronic auctions of carbon allowances, with power plants and other investors paying a total of $432.7 million to the states.
Who buys the allowances, and how many they buy, is confidential under the rules set up by the states. Because the recession has led to such big price drops for oil and natural gas, any impact on electricity prices so far is unknown.
“The auctions have worked well,” said Bill Cohen, a spokesman for Verso Paper, which has to buy allowances because it generates and sells power at mills in Bucksport and Jay. Cohen would not discuss how much the company has spent on the allowances, but said the program has not created any hardships.
“We didn’t anticipate a whole lot of problems,” he said. “We had already made significant reductions in our CO2 output.”>/p>
Of the $13.5 million raised through the auctions of Maine’s allowances, only $650,000 has been spent. It was allocated on an emergency basis last fall, when heating oil prices were approaching $5 a gallon, to weatherize the homes of low-income Mainers.
The Maine State Housing Authority used the bulk of that money – $500,000 – to weatherize about 120 homes. The Passamaquoddy Tribe and Community Concepts Inc., a South Paris-based agency, shared the remainder.
Other RGGI funds are dedicated to a combination of energy efficiency programs, from incentives to promote compact fluorescent bulbs and energy-efficient home appliances to large industrial projects valued between $100,000 and $1 million.
“It means now we have put programs in place that are helping our citizens and our consumers use energy more efficiently,” said Michael Stoddard, deputy director of Environment Northeast, a Portland-based advocacy group. “And that’s going to serve us well when a new federal cap-and-trade system is implemented.”>/p>
The RGGI experiment hasn’t been perfect, however.
The cap on the number of allowances was intentionally set high to start out so that it wouldn’t immediately restrict emissions and raise the cost of allowances. Then the recession pushed energy production and emissions down farther.
Regulated emissions in the region are now believed to be about 20 percent below the overall cap. In Maine, the gap appears to be even bigger. Maine has about 6 million allowances to sell each year, but the six power plants that are covered by that cap only produced 3.6 million tons of carbon emissions last year, in part because of mild weather, according to the Maine Department of Environmental Protection.
That surplus of allowances is one reason that auction prices have declined since a year ago, from $3.51 per ton in a March auction to $2.19 in the latest auction last month. Uncertainty about a future national cap-and-trade program, and how RGGI allowances will fit in, also is keeping prices down, experts say.
Another criticism of RGGI has to do with the spending side.
Anthony Buxton, a Portland lawyer who represents paper mills and other large industrial electricity customers, said it is industry that faces the largest costs if auction revenue isn’t used to reduce electricity use and prices. And, he said, the first use of money – winterizing homes – was a poor precedent.
“We were concerned that it would not be a program focused on cutting carbon but instead become a welfare program, and that in fact happened,” Buxton said. “We regard it as unconscionable that no money has gone out into some very valuable carbon-saving projects (in large industrial plants). If you’re going to do something about climate change, you’ve got to take the best projects first.”>/p>
Officials with the Energy and Carbon Savings Trust, which oversees the auction proceeds, say it took time to create the new program, but that the money is coming. Last week, in fact, state officials announced a new $9 million grant program for large-scale energy-efficiency and renewable energy projects that will be paid for with auction proceeds and federal economic stimulus funds.
Given its strengths and weaknesses, it’s not clear exactly how much of the RGGI concepts will end up in the national plan.
The congressional proposal does include auctions and the use of proceeds to promote energy efficiency, hallmarks of the RGGI program. However, most allowances would be given away in the beginning to reduce the immediate costs.
While officials in Maine and the other RGGI states want more use of auctions, they only dealt with one industry and a region that isn’t reliant on the coal or oil industries. The federal plan would be much broader, going beyond power plants to include virtually all sources of emissions nationwide. Even motorists would effectively be covered because fuel importers would need to hold allowances.
The federal cap also would decline more aggressively and cover other heat trapping gases, such as methane, in addition to carbon dioxide.
Still, there is little doubt that Maine and the other RGGI states are shaping the debate.
“It’s the only functioning compliance program in the United States right now,” said Kathy Lee, a Maine-based global carbon markets consultant. “You go to a carbon meeting internationally and everyone knows RGGI. … People continue to look at it as a model. Not that it’s perfect, but it’s working.”>/p>
THE REGIONAL Greenhouse Gas InitiativeI requires large power-generating plants in 10 Northeastern states to buy one allowance for every ton of carbon dioxide they release into the atmosphere, starting in 2009. ALLOWANCES CAN be purchased at auctions directly from the states or from each other in the private market. THE OVERALL NUMBER of allowances will be capped for six years and then gradually reduced by 10 percent by the end of 2018, making it increasingly expensive to pollute and forcing the dirtiest plants to improve or shut down. Maine and other states will use revenue from the sale of allowances to encourage energy efficiency and conservation. THE 10 STATES participating are: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Delaware and Maryland. MAINE HAS SIX fossil-fuel power plants that generate more than 25 megawatts and must buy allowances:
THE REGIONAL Greenhouse Gas InitiativeI requires large power-generating plants in 10 Northeastern states to buy one allowance for every ton of carbon dioxide they release into the atmosphere, starting in 2009.
ALLOWANCES CAN be purchased at auctions directly from the states or from each other in the private market.
THE OVERALL NUMBER of allowances will be capped for six years and then gradually reduced by 10 percent by the end of 2018, making it increasingly expensive to pollute and forcing the dirtiest plants to improve or shut down. Maine and other states will use revenue from the sale of allowances to encourage energy efficiency and conservation.
THE 10 STATES participating are: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New York, New Jersey, Delaware and Maryland.
MAINE HAS SIX fossil-fuel power plants that generate more than 25 megawatts and must buy allowances: