A REVIEW OF THE REGIONAL GREENHOUSE GAS INITIATIVE.

• Author: Stevenson, David T.
• Position: Report

The nearly decade-old Regional Greenhouse Gas Initiative (RGGI) was always meant to be a model for a national program to reduce power plant carbon dioxide (C[O.sub.2]) emissions. The Environmental Protection Agency (EPA) explicitly cited it in this fashion in its now-stayed Clean Power Plan. Although the RGGI is often called a "cap and trade" program, its effect is the same as a direct tax or fee on emissions because RGGI allowance costs are passed on from electric generators to distribution companies to consumers. More recently, an influential group of former cabinet officials, known as the "Climate Leadership Council," has recommended a direct tax on C[O.sub.2] emissions (Shultz and Summers 2017).

Positive RGGI program reviews have been from RGGI, Inc. (the program administrator) and the Acadia Center, which advocates for reduced emissions (see Stutt, Shattuck, and Kumar 2015). In this article, I investigate whether reported reductions in CO2 emissions from electric power plants, along with associated gains in health benefits and other claims, were actually achieved by the RGGI program. Based on my findings, any form of carbon tax is not the policy to accomplish emission reductions. The key results are:

* There were no added emissions reductions or associated health benefits from the RGGI program.

* Spending of RGGI revenue on energy efficiency, wind, solar power, and low-income fuel assistance had minimal impact.

* RGGI allowance costs added to already high regional electric bills. The combined pricing impact resulted in a 12 percent drop in goods production and a 34 percent drop in the production of energy-intensive goods. Comparison states increased goods production by 20 percent and lost only 5 percent of energy-intensive manufacturing. Power imports from other states increased from 8 percent to 17 percent.

The regional program shifted jobs to other states. A national carbon tax would shift jobs to other countries. A better policy to reduce C[O.sub.2] emissions is to encourage innovation rather than rely on taxes and regulation. The United States has already reduced emissions 12 percent from 2005 to 2015, more than any other developed country with a large economy, mainly through innovations in natural gas drilling techniques. There are many other opportunities to invest in innovation, for example, improved solar photovoltaic cells, more efficient batteries, small modular nuclear reactors, and nascent technologies that use fossil fuels without emitting C[O.sub.2].

Background

Ten northeast states joined together to form the RGGI to require power plants with a capacity of more than 25 megawatts to buy emission allowances for each ton of C[O.sub.2] emissions. The states included Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. The allowances were sold in quarterly auctions beginning in 2008. The initial plan was to gradually reduce the number of allowances available to achieve a 10 percent emission reduction by 2018. New Jersey dropped out of the plan in 2011. In 2013, RGGI, Inc. announced plans for a 45 percent reduction in the number of allowances available in auctions beginning in 2014, with an additional 2.5 percent reduction each year until 2020 (Brown 2013: 1). Consequently, allowance prices began to rise, and RGGI states are now negotiating an extension to 2030, with an additional 30 percent reduction in allowable emissions.

The program is touted by RGGI, Inc. as a market-based system. However, the program applies a minimum reserve price and a Cost Cap Reserve that kicks in additional allowances if an annual price cap is exceeded (Figure 1). The proposed agreement for 2030 also includes an Emissions Containment Reserve whereby states can withhold allowances if auction prices fall below a set target price. A true market-based cap and trade program would allow the market to set the price. Allowance prices averaged about $3/ton from 2008 to 2013 ranging from about $2 to $4. In 2014, there was a dramatic cut in the number of available allowances that forced prices to a high of $7.50/ton in 2015, tracking the Cost Cap Reserve target. Prices began to fall after the Clean Power Plan implementation was stayed by the Supreme Court, and hit $2.53/ton in June, 2017, compared to a reserve price of $2.15. The extension targets a $13/ton price in 2021, and $24/ton in 2030. Speculators have made up roughly one-quarter of allowance purchases, trading with compliance entities in a secondary market.

According to Hibbard et al. (2011:15), in a report for the Analysis Group, "Within the electric system, the impacts of these initial (RGGI) auctions show up during the 2009-11 period, as power plant owners priced the value of C[O.sub.2] allowances into prices they bid in regional wholesale prices." A flow diagram in that report (p. 22) shows how the auction costs flow from the electric generators to the electric distributors, and on to consumers, the same as a direct tax or fee would do.

In order to claim success for RGGI, the first cap and trade program in the United States, we need to consider some related issues:

1. Can the measured emission reductions be accounted for by non-RGGI causes?

2. Can the impacts on the economy be clearly broken down into statistically confirmable independent (RGGI inputs) and dependent variables (real GDP, or electric price changes)?

3. Can the RGGI revenue expenditures be shown to have been necessary and to have had significant impacts?

4. Were energy efficiency project claimed savings rigorously tested by weather-adjusted "before and after" meter readings?

RGGI fails to answer these questions. Unfortunately, the data needed for a robust statistical analysis (question 2) are not readily available and obtaining them is beyond the scope of this article. The other three are noted in the text that follows.

Electricity Demand

The change in electricity demand, by necessity, must consider the interplay of real economic growth, the details of that growth, changes in population, the impact of pricing, and changes in energy efficiency. The RGGI program has an impact on these parameters.

It is difficult to compare electric prices from state to state because of significant regional differences in power cost. Also, at roughly the same time RGGI started, many states began requiring increased use of energy sources like wind and solar in their Renewable Portfolio Standard (RPS) laws and set energy efficiency requirements.

A further complication is that a number of states deregulated the supply portion of electric bills allowing market competition just prior to the start of the RGGI program. All the RGGI states deregulated. Fortunately, there is a comparison sample of five non-RGGI states (Illinois, Ohio, Oregon, Pennsylvania, and Texas) that deregulated electric supply in a manner similar to the RGGI states, and also had significant RPS requirements. Both RGGI and non-RGGI states have wide variation in their RPS programs, which adds uncertainty. Increasing wind and solar power raises electric rates because they are premium-priced power sources. For example, the increase in Delaware's electric prices by 9 percent is directly related to the RPS, which shows up on consumers' Delmarva Power electric bills. Likewise, Maryland electric bills have increased 14 percent for the same reason, according to a report from the Maryland Energy Administration (Tung 2017: 17). (1)

Non-RGGI comparison states actually added more wind and solar generation than RGGI states: adding 5.5 percentage points to generation compared to 2.3 percentage points in the RGGI states. Even removing the large wind farm construction effort in Texas from the calculation, the non-RGGI comparison states still outperformed the RGGI states: adding 3.4...