Regional Greenhouse Gas Initiative – Successful Model?

Guest post by Roger Caiazza

The Regional Greenhouse Gas Initiative (RGGI) is ten years old and has been touted as a successful example of a “cap and invest” pollution control program and now it is being proposed as the model for a similar control program in the Transportation Control Initiative. This post looks at the numbers to see if this praise is warranted.

I have been involved in the RGGI program process since its inception. I blog about the details of the RGGI program because very few seem to want to provide any criticisms of the program. I will attempt to be less wonky in this post than on my blog but note that there is a wonky, more detailed version of this post here. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Background

RGGI is a market-based program to reduce greenhouse gas emissions. It is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector. According to a RGGI website: “The RGGI states issue CO2 allowances which are distributed almost entirely through regional auctions, resulting in proceeds for reinvestment in strategic energy and consumer programs. Programs funded with RGGI investments have spanned a wide range of consumers, providing benefits and improvements to private homes, local businesses, multi-family housing, industrial facilities, community buildings, retail customers, and more.”

In order to determine if RGGI is successful and a program to emulate let’s define some metrics. The primary goal of the program is to reduce greenhouse gas emissions (GHG) from the electric generation sector so quantifying the emissions change from before the program to the present is a key metric. Another appropriate metric is cost efficiency per ton of CO2 reduced compared to the Social Cost of Carbon (SCC). This parameter is an estimate of the economic damages from emitting a ton of CO2 and is widely used to justify GHG programs. I will use this as a comparison metric so I will ignore issues with this parameter even though I agree with the following by Paul Driessen and Roger Bezdek: “The SCC assumes fossil-fuel-driven carbon dioxide emissions are causing dangerous manmade climate change, and blames U.S. emissions for every conceivable climate-related cost worldwide. But it fails even to mention, much less analyze, the tremendous and obvious benefits of using oil, gas and coal to power modern civilization.”

RGGI is a Success

There are many who believe that RGGI is a successful example of a market-based control program. Not surprisingly, when RGGI recently released its report The Investment of RGGI Proceeds in 2017, agency staff who administer it sang its praises. The report’s press release quotes Ben Grumbles, Secretary of the Maryland Department of the Environment and Chair of the RGGI, Inc. Board of Directors: “The 2017 report shows why RGGI is a climate leader globally and nationally, not only cutting emissions in half but generating revenues to strengthen local economies and communities.” Katie Dykes, Commissioner of the Connecticut Department of Energy and Environmental Protection and Vice Chair of the RGGI, Inc. Board of Directors said “RGGI states’ investments accelerate clean energy, reduce climate risk, and improve lives”.

Others also agree. The Acadia Center recently released “The Regional Greenhouse Gas Initiative: Ten Years in Review”. According to the report “The country’s first program designed to reduce climate change-causing pollution from power plants has provided a wealth of lessons to be incorporated into the next generation of climate policies, from successes to build on, to opportunities for improvement”. Bruce Ho at the National Resources Defense Council blogged that the report “confirms that RGGI is a tremendous success story whose benefits continue to grow, and it shows how, in the absence of national leadership, states are forging ahead to protect our health, environment, and economy from the worst impacts of climate change.”

RGGI by the Numbers

In order to evaluate the RGGI emissions reduction claims I used data from the Environmental Protection Agency Clean Air Markets Division air markets program website. Emissions data from the electric generating unit (EGU) sector are available from before RGGI started to the present, so I downloaded all the EGU data for the nine states currently in RGGI from 2006 until 2018. In order to establish a baseline, I calculated the average of three years before the program started. As shown in Table 1 the total emissions have decreased from a baseline of over 127 million tons prior to the program to just under 75 million tons in 2018. This represents a 40% decrease.

However, it is important to evaluate why the emissions decreased. When you evaluate emissions by the primary fuel type burned it is obvious that emissions reductions from coal and oil generating are the primary reason why the emissions decreased. Note that both coal and oil emissions have dropped over 80% since the baseline. Natural gas increased but not nearly as much. The fuel switch from coal and oil to natural gas occurred because it was economic to do so. I believe that RGGI had very little to do with these fuel switches because fuel costs are the biggest driver for operational costs and the cost adder of the RGGI carbon price was too small to drive the use of natural gas over coal and oil. The fuel cost and RGGI adder cost differences also mean that affected sources did not do efficiency projects to reduce fuel use to comply because means those projects are constantly considered by generating plants and implemented when cost-effective and allowed by regulations.

Because RGGI is a cap and invest program that is touted to be a model for similar programs it is important to see how effective the auction proceed investments from RGGI were in reducing emissions. Information necessary to evaluate that performance is provided in the RGGI annual Investments of Proceeds update. In order to determine reduction efficiency, I summed have to sum the values in the previous reports. Table 2 lists the annual avoided CO2 emissions generated by the RGGI investments from three previous reports as well as the lifetime values. The total of the annual reductions is 2,818,775 tons while the difference between total annual 2009 and 2017 emissions is 52,202,198 tons. The RGGI investments are only directly responsible for 5% of the total observed reductions!

In order to argue that RGGI emission reduction programs are a good investment relative to the expected societal cost of CO2 emissions the Social Cost of Carbon (SCC) parameter can be used. SCC values range widely depending on assumptions, but if you use a discount rate of 3% and consider global benefits like the Obama-era Environmental Protection Agency (EPA) did then the 2020 SCC value is $50. Table 2 lists the data needed to calculate the RGGI CO2 reduction cost per ton. From the start of the program in 2009 through 2017 RGGI has invested $2,527,635,414 and reduced CO2 2,818,775 tons annually. The $897 per ton reduced result is 18 times more than this SCC value.

RGGI as a Model for Other Programs

Other initiatives such as the framework for the Transportation Climate Initiative (TCI) suggest that the RGGI cap and invest approach should be a model for their cap and trade programs. I believe that there is an over-looked aspect of the existing market-based programs related to the proposed TCI cap and invest program. In RGGI, affected sources did not have viable options to install control equipment but could switch to a lower emitting fuel in many cases. However, as we have seen the reductions linked directly to investments from the auction dividends only provided 5% of the total reductions. The EPA Acid Rain Program (ARP) was a cap and trade program without the dividend component but was by all accounts very successful. Because the affected sources could switch fuels, install controls, or do both ARP reductions have been greater than in RGGI.

On the surface RGGI and ARP may seem to be viable models but there is a critical difference. The TCI proposed cap and invest approach proposes to regulate state fuel suppliers. The over-riding issue is that the suppliers have no skin in the game. They will sell as much fuel as they are allowed to purchase and if it isn’t enough to meet demand it is not their problem. Even if they wanted to do something to comply these affected sources do not have the option to put on controls or to switch fuels so they cannot use the control approaches that reduced emissions elsewhere! As a result, the TCI price signal has to be high enough to force fuel users to reduce fuel use and TCI dividend investments have to give citizens viable options that use less fuel. Given the poor performance of RGGI investments at actually reducing emissions I am very pessimistic that meaningful reductions will be achieved.

Roger Pielke Jr.’s Iron Law of Climate Policy states that “while people are often willing to pay some price for achieving environmental objectives, that willingness has its limits” and the French “Yellow Vest” movement suggests that raising gas prices will invoke a negative response. But it is worse because the RGGI dividend investment results did not reduce emissions enough to meet the cap. If the TCI investments don’t reduce emissions sufficiently to meet the cap, then the inevitable outcome is that there will be more demand than the cap allows and the amount of fuel available will be limited. It is inconceivable to me that government-caused fuel outages would be acceptable to the citizens of the any jurisdiction.

Conclusion

Based on these numbers there are some lessons to be learned. Fuel switching was the most effective driver of emissions reductions since the inception of RGGI. Emission reductions from direct RGGI investments were only responsible for 5% of the observed reductions. RGGI investments in emission reductions were not efficient at $897 per ton of CO2 removed. As a model for future programs, RGGI successfully proved that a regional entity could implement a cap and auction program. However, the actual cause of observed reductions and ability of affected sources to make the reductions proposed must be considered before other programs adopt the RGGI model. Readers can decide for themselves whether this program should be emulated elsewhere.

Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York. This represents his opinion and not the opinion of any of his previous employers or any other company he has been associated with.