Roger Caiazza
On April 29, 2026, the Regional Greenhouse Gas Initiative (RGGI) states released a statement that Virginia was rejoining the program. On May 8, the RGGI states issued a notice that they were monitoring the allowance market in response to a sharp increase in the secondary futures market price. I offer my thoughts on this market volatility in this post.
Background
RGGI is a market-based program to reduce greenhouse gas emissions from the power sector. It has been a cooperative effort among Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont since 2008, with New Jersey rejoining in 2020 and Virginia scheduled to rejoin beginning July 1, 2026; Pennsylvania recently decided not to join.
According to the RGGI program description, the states issue CO₂ allowances that are distributed almost entirely through regional auctions, and the proceeds are then reinvested in strategic energy and consumer programs. Those investments include energy efficiency, clean and renewable energy, beneficial electrification, greenhouse gas abatement and climate adaptation, and direct bill assistance, with energy efficiency receiving the largest share.
Cost Impact of Virginia Rejoining RGGI
The RGGI statement said that, with Governor Spanberger’s approval of Virginia’s regulation reinstating the state’s CO₂ budget trading program, Virginia’s participation and compliance obligations will resume on July 1, 2026. The statement noted the Virginia allowance allocation for the second half of 2026, Virginia’s participation in the September 9 and December 2, 2026 auctions, and an addition to the Cost Containment Reserve allowances for the remainder of 2026.
RGGI allowance costs are driven by basic economic considerations. When there is scarcity, prices increase; when there is uncertainty about scarcity, costs also go up. The difference is that price increases associated with uncertainty can drop when more information is available, whereas if the RGGI plans for reducing the emission cap are unrealistic that bakes in scarcity so prices will increase structurally.
RGGI allowance auction clearing prices from 2009 to 2018 were generally below 5 dollars per ton, but since then both prices and volatility have increased materially (Figure 1). It is not yet clear whether the recent spike in RGGI allowance futures will be fully reflected in future auction prices, but the average price in 2025 was 22.09 dollars and the clearing price in the March 11, 2026 auction was 24.99 dollars per ton.
Figure 1: RGGI Allowance Auction Clearing Prices 2012 to Present
RGGI allowance costs are driven by basic economic considerations. When there is scarcity, prices increase, and when there is uncertainty about scarcity, costs also go up; the difference is that price increases associated with uncertainty can drop when more information is available, whereas it is possible that the RGGI plans for the emission cap are so aspirational that scarcity is essentially baked in.
The price of RGGI allowance futures recently rose sharply after the announcement that Virginia would rejoin RGGI created uncertainty. There is no publicly available resource describing the price of allowances on the secondary market; instead, subscription-based trade news services determine the secondary allowance prices. A recent OPIS Insights article stated: “During the week of April 27–May 4, V26 RGGI allowances for December 2026 delivery traded on ICE repeatedly above 40 dollars per short ton, with transactions reaching 58.50 dollars per short ton by midday Monday, May 4.” If this forecast for future allowance prices verifies, this will represent a doubling of historical prices shown in Figure 1; following the release of the RGGI notice about the market described below, prices fell.
May 8 RGGI Notice
In response to this unprecedented volatility, on May 8 the RGGI states issued a notice that explained that the reason for the notice is the observed volatility.
The RGGI participating states are constantly monitoring the performance of RGGI to ensure a reliable, affordable, and clean electricity supply. The states have become aware of recent short-term volatility in the independent RGGI futures market.
The notice goes on to argue that there are mechanisms in place that will address this issue:
Recent futures prices are above thresholds established to automatically mitigate price growth by releasing additional allowances at auctions for cost containment. RGGI has a long history of stability. Regular program reviews have made adjustments to align the program with policy objectives of a reliable, affordable, and clean electricity supply. A sustained period of elevated auction prices would not meet these objectives and may require renewed consideration of improvements.
However, the states reassure everyone that RGGI has a “long history of stability” and point to cost‑containment mechanisms that release extra allowances if prices get too high. What they do not admit is that those mechanisms operate on a slower time scale than the financial markets, so consumers can still get hit with higher power prices long before any extra allowances show up
The notice continues:
The RGGI participating states currently estimate that around 60 million surplus allowances are in circulation beyond what is needed to cover current emissions obligations. This is in addition to allowances that will be made available at auction in 2026, including Virginia’s 11.48 million allowances and 1.148 million cost containment reserve allowances for the second half of 2026. Virginia is requiring its compliance entities to cover emissions obligations only for the second half of the year.
One factor affecting costs is uncertainty. The RGGI states claim that there are around 60 million surplus allowances, but their documentation does not clearly explain how they define “surplus.” For example, according to the latest auction market monitoring report, 77% of the allowances held are for compliance. Whether the surplus quoted is in addition to or includes those allowances held for compliance is not explained but is important for traders trying to figure out whether the market has enough allowances to cover expected emissions.
Proponents of cap‑and‑dividend programs frequently cite RGGI as a success story that could be emulated elsewhere. They believe that a cap‑and‑invest program will kill two birds with one stone because it simultaneously puts a limit on the tons of pollution companies can emit — the “cap” — while making them pay for each ton, funding projects to help move the state away from polluting energy sources — the “invest.”
I described the RGGI 2023 investment proceeds report that documents one departure from this theory. The RGGI states do not prioritize funding projects to reduce polluting energy sources; instead, allocation of allowance proceeds funds other programs, including energy efficiency, clean and renewable energy, beneficial electrification, greenhouse gas abatement, and direct bill assistance that do not necessarily reduce emissions or only produce small indirect emission reductions.
RGGI’s defenders like to point to emission drops since the mid‑2000s as proof that the program works. But if you plot CO₂ emissions (Figure 2) across all eleven states from 2006 to 2025, what you actually see is fuel switching: coal and oil out, natural gas in.
Figure 2: Eleven State RGGI CO₂ Emissions (short tons) for all Programs 2006–2025
Plotting heat input (thermal energy needed to produce power) across all eleven states from 2006 to 2025 (Figure 3) describes the heat input over this period for the same units. It has been essentially flat since 2017, even as auction proceeds have piled up to more than 8 billion dollars. When I dug into the 2023 RGGI investment proceeds report, I estimated that only about 7.6% of observed emission reductions could be attributed to RGGI‑funded projects. The rest came from the same market forces that have cut coal use everywhere else. The long‑term price driver is whether the RGGI states can displace enough of the energy used today with zero‑emissions sources to achieve the RGGI allowance reduction trajectory. I think it is only a matter of time before there will be insufficient allowances available. My best guess is that the crisis will not occur before 2030; but I have not analyzed whether the addition of Virginia will change the date of reckoning.
Figure 3: Eleven State RGGI Heat Input (mmBtu) for all Programs 2006–2025
Unacknowledged RGGI Cost Factor
There is a major largely unacknowledged RGGI allowance cost factor. I recently published an analysis that shows that RGGI allowance prices are passed through as a hidden cost adder in the New York Independent System Operator (NYISO) electric market and, by extension, throughout RGGI. In wholesale markets like New York’s NYISO, the marginal unit sets the price; when that marginal unit is subject to RGGI, the cost of allowances is baked into the market‑clearing price.
That means all generators—gas, nuclear, hydro, wind, solar—get paid a price that includes the carbon charge, even if they never bought an allowance. Based on 2025 data, I estimated that direct allowance purchases run about 0.7 billion dollars per year in New York, but the pass‑through effect lifts ratepayer costs to roughly 1.4–2.3 billion dollars per year. The difference is effectively a hidden carbon tax, up to about 12 million dollars a day, flowing as windfall profits to lower‑ and zero‑emitting generators.
Cap‑and‑invest advocates claim that spending allowance revenues will more than offset these costs. With current price levels and investment performance, that claim simply does not hold water.
Because the RGGI region sits inside larger grids like PJM, some states are in the program while neighbors are not. Higher RGGI prices make in‑region generation more expensive relative to non‑RGGI plants just across the border. Emissions do not magically disappear—they move, or “leak,” to the cheaper units, which are often less efficient and higher emitting.
Looking ahead, the cap trajectory is on a collision course with reality. As loads grow and decarbonization targets tighten, there will come a point when there simply are not enough allowances for all the fossil units that the system still needs for reliability. At that point, the only way to comply is to shut units down and create an artificial shortage.
Conclusion
RGGI is, functionally, a tax by another name, with added volatility and administrative overhead. If policymakers insist on putting a price on CO₂ from the power sector, a straightforward carbon tax would at least give a clear, predictable price and avoid the gamesmanship of allowance auctions, “surplus” definitions, and opaque pass‑through effects.
Given that allowance prices are now about an order of magnitude higher than in RGGI’s early years—and could go higher still—it is past time for the states to ask whether this experiment is worth the cost. If politicians really want to lower electricity costs, the easiest step is to drop out of RGGI.
Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York. Dealing with the RGGI regulatory and political landscapes is challenging enough that affected entities seldom see value in speaking out about fundamental issues associated with the program. He has been involved in the RGGI program process since its inception and has no such restrictions when writing about the details of the RGGI program. This represents his opinion and not the opinion of any of his previous employers or any other company with which he has been associated.
