The RGGI

The Regional Greenhouse Gas Initiative (RGGI) cap-and-trade system covers nine eastern states in the USA: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode Island, New York, Maryland and Delaware.  Launched in 2009, it was the first carbon-trading  scheme developed and implemented in the US, and the second (after British Columbia, Canada) in North America. 

It is a major carbon pricing initiative. The current group of RGGI states account for more than one-eighth of the population of the US and more than one-seventh of America’s gross national product.  However, it should be noted that the RGGI only covers fossil-fuelled electric power plants with a capacity of 25MW or greater. [1] In 2009, when the RGGI program started, these sources accounted for less than a  third of the CO2 emissions generated by the nine participating states.[2]

A comprehensive review of the program’s performance over the period 2015 -2017 showed that the RGGI was working successfully: not only cutting greenhouse gas emissions but also boosting the regional economy and creating jobs. The analysis also found that the RGGI cap-and-trade system had not undermined the reliability of the power grid and, most importantly, had not led to a net increase in household electricity bills.[3]

Emissions of greenhouse gases from the RGGI states

In 2009, the first credits issued to participating industries and power plants totalled 188 million tons of carbon dioxide.  The cap was progressively lowered and stood at 84.3 million tons in 2017. Since 2000, emissions of CO2 have fallen by almost two-thirds—which is an impressive achievement. [4]

It is interesting to note, however, that emissions of carbon dioxide were falling even before the RGGI went into effect in 2009. This decline perhaps was due to the 2008 financial crisis, and in many US states emissions ticked back up after this period. This did not happen in the RGGI states and the continuing decline in CO2 emissions after 2010 is almost certainly the result of the cap-and-trade scheme.  

Over the period 2015-2017, auctions for emission allowances under the RGGI program generated approximately $901 million. The RGGI states disburse this money in different ways—but among essentially eight types of economic activities.

  1. Energy efficiency. Investments in this category are judged to have the most rapid economic impact by reducing the demand for electricity and natural gas for heating and reducing household payments for electricity and fuels. Investments stimulate businesses offering energy-efficiency audits, upgrades to inefficient equipment, residential retrofits, and the installation of energy efficient appliances. The growth of the energy-efficiency sector creates jobs and has a state-wide positive economic impact.
  • Clean technology R&D. This category covers grants and investments to support research focused on developing new technologies aimed at reducing GHG emissions—for example: clean technologies, alternative transportation, and carbon capture and storage.
  • Direct bill assistance. Carbon pricing increases the cost of electricity for households and businesses.  This can be a serious financial burden for low-income families.  Many states have introduced rebates, payment credits, and other means to reduce bills paid by consumers, especially for low-income families.  This is sometimes called recycling carbon revenues.     
  • Greenhouse gas programs. The GHG reduction programs include a variety of expenditures aimed at reducing GHG emissions—for example grants for CO2 emissions reduction technologies, direct investment in ‘green’ startup companies; efforts to reduce vehicle-miles travelled; climate change adaptation measures; investments in existing fossil-fuel fired power plants to make them cleaner or more efficient.
  • Program administration. This category includes the costs associated with the administration of a state’s CO2 budget trading program and/or related consumer benefit programs.
  • Renewable energy.  Grants and investments in utility-scale wind power and solar photovoltaic systems displace power generated from fossil fuels. Distributed energy systems—like solar photovoltaic installations on residences and businesses, reduce the demand for electricity, lower utility bills, and create significant state-wide jobs and employment.
  • Education, outreach, and job training. This includes funds for programs to educate business and residential consumers about ways to increase energy efficiency and reduce consumption.  It includes financial support for training workers in new skills: energy audits, installing energy efficient equipment, distributed energy systems, and providing energy efficiency measures.
  • General funds. Some states allocate a small part of carbon revenues to budgets unrelated to energy or climate change.

The table below shows the ways in which the nine RGGI states allocated funds during the third compliance period from 2015 to 2017.

It is noteworthy that the nine states opted for very different investment strategies.  Vermont disbursed nearly all revenues on energy efficiency measures and nothing on direct billing assistance.  Conversely, New Hampshire directed almost 80% of its revenues towards providing assistance for consumers facing higher utility charges, and less than 20% on energy efficiency measures.  It is also worth noting that only three of the RGGI states diverted a small fraction of their carbon revenues into general funds.  Overall, the amount of revenue than was diverted into general funds was less than 1 percent. So 99% of revenues were directed towards programs aimed at further reducing emissions of greenhouse gases.

The exception is the support for direct billing assistance—which does not directly induce or encourage a reduction in GHG emissions. It may in fact have the opposite effect—as it tends to weaken the price signal intended to change consumer behaviours. However, this may be a policy intended to ensure that a carbon pricing initiative is not vulnerable to cancelation by political parties ideologically opposed to what they will often condemn as an unwarranted ‘tax’.

Overall, just over half the RGGI carbon revenues were spent on energy efficiency measures.  The figure shows the disbursement breakdown for the RGGI program as a whole.  The category ‘other disbursements’ includes GHG programs; clean technology R&D; education, outreach and job training; and general funds.[5]

Disbursement of RGGI carbon revenues

We should recall that the RGGI cap-and-trade program only covers fossil-fuel power plants over 25 MW capacity. The RGGI was specifically aimed at reducing emissions from larger power plants, and within that narrow mandate the program has been extremely successful—reducing emissions from these power plants by almost half from 2009 to 2017 and having a substantial positive economic impact.

But what about the other sources of greenhouse gases in these nine states?

The US Energy Information Administration has published data on energy-related carbon dioxide emissions for all the US states.  Energy-related CO2 emissions includes the combustion of coal, petroleum, and natural gas within a state to produce electricity, to transport people or goods, to operate industrial processes, and to directly fuel equipment in residential and commercial buildings.  The table below shows energy-related emissions from the nine RGGI states for the period 2009 to 2015 in million tonnes CO2.[6]

Energy related emissions of CO2, MtCO2

Overall, there was a decrease of 5.6 % in energy-related emissions over the seven-year period. The states of Delaware and Connecticut actually registered increased emissions of carbon dioxide over the period.

The review of the RGGI program by the economists of the Analysis Group offered the following observations and conclusions.

  • The RGGI program continued  to generate substantial economic benefits for the states while reducing CO2 emissions. The program led to approximately $1.4 billion in economic value added as a result of program implementation in the 2015-2017 period–providing empirical evidence that carbon-control programs for the power sector can provide positive economic outcomes.
  • RGGI’s third compliance period led to overall job increases amounting to over 14,500 new job-years over the study period, with each of the nine states experiencing net job-year additions. Examples include workers who perform efficiency audits and who install energy efficiency measures in residences and commercial buildings, and staff performing training on energy issues. 
  • The experience of the RGGI states demonstrates that states can collaborate successfully in developing programs to control CO2 emissions,  and that market-based CO2 allowance programs—when combined with state-driven centralized auction of CO2 allowances and with local reinvestment of auction proceeds—can help states meet emission-reduction targets while generating positive economic benefits.
  • How allowance proceeds are used affects their economic impacts. Use of auction proceeds to invest in energy efficiency produces the biggest economic bang per buck in terms of net positive benefits to consumers and to the economy.[7]

The last point deserves more emphasis.  It highlights the fact that carbon pricing schemes—whether carbon taxes or cap-and-trade systems, are much more effective in reducing emissions of greenhouse gases, when the revenues from the  scheme are invested in programs that directly target the reduction of emissions.  When structured and managed in this manner, carbon pricing works in two complementary ways: 1) by introducing price signals that induce less carbon-intensive activity, cleaner technology, and lower emissions from power plants and industry, and 2) by providing funds for programs focused on energy efficiency and renewable energy that directly reduce emissions.  Furthermore, these investments funded by carbon revenues can have a substantial positive economic impact on the local and regional economy in terms of employment, new business opportunities, outreach and training.

The RGGI program is well on the way to achieving its objectives—insofar as those objectives are limited to only reducing emissions from fossil-fuel fired power plants. But since the program has limited coverage, its impact on the totality of sources of carbon dioxide emissions has so far been modest—at least up until 2015. And it would be interesting to know more about why emissions increased in the state of Delaware and stayed virtually unchanged in Connecticut.


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For more background and sources:

[1] See the RGGI website. At: //www.rggi.org/progra-overview-and-design/elements
[2] Emission data for the nine RGGI states published by the EIA shows that a total of 415.6 MtCO2 was emitted by the states in 2009 from all sources. See the EIA web page:  Energy-related carbon dioxide emissions by state 2000-2015.
[3] See the report from the Analysis Group: The economic impacts of the regional greenhouse gas initiative on nine northeast and mid-Atlantic states. Review of RGGI’s third three-year compliance period (2015-2017). All the data about the RGGI program are taken from this report. It is available at: //www.analysisgroup.com/uploadedfiles/content/insights/publishing/analysis_group_rggi_report_april_2018.pdf
[4] Ibid
[5] The pie chart is from : Carbon markets pay off for these states as new businesses, jobs spring up. At: //insideclimatenews.org/news/16042018/cap-and-trade-economics-energy-efficiency-jobs-rggi-regional-greenhouse-gas-initiative-carbon-market-data
[6] The data are from the US Energy Information Administration: Energy-related carbon dioxide emissions by state 2000-2015. Available here : //www.eia.gov/environment/emissions/state/analysis/pdf/table1.pdf
[7] Ibid