Earlier this month, Pennsylvania Gov was announced His state was moving to join the Northeast Regional Greenhouse Gas Initiative carbon market. In 2018, we explained how states already part of the RGGI receive significant dividends from the program while reducing emissions. Read it here:
When climate hawks imagine climate policy, they tend to imagine a sweeping economy-wide carbon tax, high and rising. But as a political strategy, this didn't work very well. Political constraints mean that no such tax has appeared in the real world.
But there is another political strategy, much more popular among real politicians. It goes something like this: The wise course is to start with a relatively low carbon price, targeted at sectors amenable to carbon reduction, and spend the proceeds on things that clearly benefit the public. Set up that system, show that it can work, then raise its ambitions until it's right for the job.
This more gradual strategy is less sexy, but unlike the constant longing for revolution, it has gotten the ball rolling. According to Carbon Price Leadership Coalitionsome 42 countries and 25 subnational jurisdictions now price carbon.
None of these carbon pricing systems reduce enough carbon fast enough. We still don't know if it is politically possible to have a price high enough to lead to radical carbon reductions.
What we do know, what has been amply demonstrated, is that it is possible to create a transparent, orderly carbon pricing system that economically benefits the jurisdictions where it is implemented and is politically sustainable.
Exhibit A is right here in the United States: the Regional Greenhouse Gas Initiative (RGGI), a cap-and-trade system that covers the energy sector in 10 northeastern states, including Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. (New Jersey recently reunited after Democrat Phil Murphy was elected governor. Virginia may also participate in the wake of the election of Democrat Ralph Northam.)
I wrote a longer post about RGGI here if you want to dig into the details. For now, let's just look at the benefits that accrue to the states involved. Perhaps if more jurisdictions are convinced that carbon pricing is a net benefit, some of the political resistance to higher carbon pricing may erode.
The RGGI cap does not drive most of the emissions reductions in the electricity sector
Since the RGGI began in 2009, the Analysis Group has periodically assessed its economic impact in participating states. Of last reportreleased last week, is of particular interest as it covers the three-year compliance period from 2015 to 2017, a period that saw several changes.
The economics of renewables have changed, pollution control regulations have changed, and some of the rules governing regional energy markets have changed, but most importantly, in December 2017, the RGGI states completed second mandatory program reviewwhich resulted in a number of revisions in the program. More specifically, the regional carbon cap between 2020 and 2030 was reduced by 30%.
That last part is important because RGGI's dirty secret is that, so far, the electricity sector's carbon cap (the dotted line) has been well above the sector's actual emissions (the solid line):
The excessively high cap was the result of two things: one, the overzealousness of policymakers who pioneered one of the first carbon trading schemes, and two, the fact that electricity sector emissions fell much faster than expected; everywhere. USA.
Only with the 2014 revisions to the RGGI did the cap even come close to actual emissions, and only with the 2017 revisions does the cap threaten to actually start pushing them down faster than their “natural” rate over the long term.
For now, emissions are still falling faster than the cap is falling. The cap does not drive this, for the most part. At least not yet. But the program still works, thanks to three clever features built in from the start.
RGGI pays financial dividends to participating states
First, pollution permits distributed below the cap are not given for free. are auctioned. This guarantees that each state receives a revenue stream.
Second, no matter how little pressure the cap puts on emissions, the price of permits never falls below a set reserve price (just over $2 in 2017), so there is always at least some revenue.
And third, much of the revenue goes to “consumer benefit programs,” including energy efficiency programs and direct bill assistance. By agreement, 25 percent of the revenue is earmarked for such programs, but in practice, the total was much higher.
“As in previous years,” writes the Analysis Group, “during the period 2015-2017 [RGGI] states received and spent approximately $1.0 billion in auction proceeds primarily on energy efficiency measures, community-based renewable energy projects, customer bill assistance, other greenhouse gas emission reduction measures, and research, education, and job training.
The best way to think of the RGGI, then, is as a relatively low carbon tax that transfers money from fossil fuel power plant owners to consumer benefit programs.
According to the Analysis Group, it's a very good deal for the states involved – the benefits of the investments outweigh the costs to consumers in higher electricity prices. In 2015-2017, “the RGGI program resulted in $1.4 billion (net present value) of net positive economic activity in the nine-state region.” Each participating state's economy and electricity consumers benefited.
Here's how the financial impact breaks down by energy market:
Spending money on efficiency and renewable energy programs is also good for jobs. During 2015-2017, factoring in gains and losses, the Analysis Group estimates that RGGI led to “more than 14,500 new job years, cumulatively over the study period, with each of the nine states showing net additions per year of work”.
Most RGGI states are not major fossil fuel producers, but most of the region's power comes from fossil fuels, so fossil fuel imports are a huge cost. During the study period, the Analysis Group estimates that RGGI reduced spending on imported fossil fuels by $1.37 billion.
For the RGGI states, the coal policy was not a sacrifice.
What can we learn from RGGI?
As the Analysis Group points out, the RGGI was not intended or designed to be an economic development policy. Ultimately, it should be judged on its success in phasing out emissions from the electricity sector.
Emissions in the electricity sector are falling and the program is running smoothly. That RGGI achieved both while imposing no financial sacrifice (quite the opposite, in fact) has to do with the fact that emissions were already driven — and that energy efficiency investments are smart because the savings are made over time next year. Diverting money from fossil fuels to energy efficiency would produce a net economic benefit for any state, using almost any policy mechanism.
But right now, the RGGI corresponds to a small carbon price on a small fraction of the region's emissions. It remains an open question how a program like the RGGI would fare if it were extended to sectors less amenable to carbon reduction, such as transport or industry (sectors that are increasingly urgent to address).
In theory, a rising carbon price could eventually make gasoline-powered vehicles so expensive that consumers are forced en masse into electrics. But they may not be so sanguine about it as it is for small bumps in electricity bills. When it comes to more stubborn areas, progress is unlikely to unfold in the benign, orderly way that RGGI has so far.
Basically, we don't know how the price of carbon seems to be high enough to emerge as the main driver of rapid emissions reductions. What we do know, thanks to RGGI and other schemes, is that carbon pricing schemes can be established, drive emissions reductions and build some political capital.
However, for the incremental political strategy to pay off, RGGI needs to spend some of that capital and keep climbing. Its true test will only come when its range expands and its prices increase.