Curbing GHGs with Cap–and–Trade —How It Works
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The Regional Greenhouse Gas Initiative (RGGI or “Reggie”) was first discussed in 2003 by the governors of nine states as a possible way to lower CO2 emissions from electric power plants on a regional scale. In late 2005, seven states – Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont – signed a Memorandum of Understanding (MOU) to implement the program. Over the following several years, the RGGI developed a Model Rule with a regulatory framework, three more states (Massachusetts, Rhode Island and Maryland) joined, and all 10 states completed their individual rulemaking processes. The first compliance period for each state’s linked CO2 Budget Trading Program began January 1, 2009, however, New Jersey withdrew from the MOU, effective January 1, 2012.
The RGGI covers fossil fuel-fired electric power generators with a capacity of 25 megawatts (MW) or greater in participating states. Allowances are issued by the states in an amount defined in each state’s regulations, with one CO2 allowance representing a limited authorization to emit one short ton of CO2 from a regulated source.
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Although not the first U.S. cap-and-trade program, the RGGI claims to be the nation’s first mandatory cap-and-trade program for greenhouse gas (GHG) emissions. The program uses the market-based approach through the following regulatory mechanisms, which were reviewed and updated for the period 2014 through 2020:
- A CO2 emissions budget or “cap,” which, for the period 2014 -2020, was adjusted to further reduce regional emissions while accounting for allowances “banked” by participants. The cap for 2014 dropped 45% from 165 million to 91 million short tons and will continue to decline 2.5% per year from 2015 to 2020.
- Requiring sources to acquire and hold allowances equal to at least 50% of their emissions in each of the first two years of the three-year compliance period, in addition to demonstrating full compliance at the end of each three-year compliance period.
- Allocating CO2 allowances equaling the RGGI cap through quarterly, regional CO2 allowance auctions. The RGGI will not reoffer unsold 2012 and 2013 allowances.
- Investing proceeds from the auctions in programs to improve energy efficiency and accelerate use of renewable energy technologies benefiting consumers, which the RGGI says have so far exceeded $700 million.
- Allowing offsets – GHG reduction or carbon sequestration projects outside the capped electricity sector – to help power plants meet their compliance obligations. The RGGI limits the award of CO2 offsets to the following five categories, which also must meet state regulatory requirements:
- Landfill methane capture and destruction,
- Reduced sulfur hexafluoride (SF6) emissions from equipment in the electricity transmission and distribution sector,
- Forest projects meeting protocol requirements,
- End-use energy efficiency projects in certain new and existing buildings, and
- Manure management programs to avoid methane emissions.
- A system to record and track each state’s RGGI market and program data called the RGGI CO2 Allowance Tracking System (RGGI COATS). The system is also used for compliance processes and functions related to market participation, such as registration of offset projects. The system is publicly available and can provide customized reports for downloading. Going forward, the RGGI is also committed to identifying and evaluating potential tracking tools for addressing emissions from electricity imported into the RGGI region.
- The cost containment reserve (CCR), which created a fixed additional supply of allowances that are only available for sale if CO2 allowance prices exceed the following price levels:
- $4 in 2014,
- $6 in 2015,
- $8 in 2016, and
- $10 in 2017, rising by 2.5%, to account for inflation, each year thereafter.
The first-ever CCR sale was triggered during the RGGI’s March 5, 2014 auction.
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