Does the nation’s first CO2 cap and trade system work?

By Miranda Willson | 04/06/2022 07:20 AM EDT

The Regional Greenhouse Gas Initiative, which covers 11 states, is facing new scrutiny of its costs and effect on emissions.

Wind turbines and power lines photo collage.

Claudine Hellmuth/E&E News (illustration); Internet Archive Book Images/Flickr (drafting sketch); MaxPixel (turbines and transmission lines)

This story was updated at 5:58 p.m. EDT.

Seventeen years after its founding, the nation’s first cap-and-trade system for greenhouse gases has become a flashpoint across the eastern United States, with lawmakers in two states vowing to exit the program and environmental advocates calling to reform it.

The debates are raising key questions about the Regional Greenhouse Gas Initiative: Is it functioning well, and can it do more to slash carbon emissions without driving up energy prices?


The issue is in the spotlight as Pennsylvania officials battle over the state’s potential entrance into RGGI this fall and Virginia’s newly elected governor considers avenues for exiting the program.

Often referred to as a “cap and invest” initiative, RGGI is a cooperative venture of Northeastern and Mid-Atlantic states that targets carbon dioxide emissions from large power plants. Its current members include Connecticut, Massachusetts, Rhode Island, New Hampshire, Maine, Delaware, Vermont, Maryland, New York, New Jersey and Virginia.

Polluters in participating states are required to purchase allowances during quarterly auctions for each ton of carbon dioxide they emit. The number of allowances available during the auctions declines gradually over time to drive down carbon emissions.

Since the first auction in 2008, power plant emissions in the RGGI region have fallen by about 50 percent, but observers are divided as to how much those reductions can be attributed to the program itself, rather than market forces — and how best to ensure the trend continues.

“The RGGI program has not been very ambitious … I think because of the fear of high energy costs and the fear of imposing heavy costs on the private sector,” said Timothy Hamilton, an associate professor of economics at the University of Richmond. “We’ve seen big changes in the last 10 or 20 years, but most evidence points to that being primarily driven by natural gas coming online.”

As many coal plants in the RGGI region have been replaced with natural gas over the last two decades, some are concerned about whether emissions reductions will continue. An analysis of electric power emissions data from the EPA shows that six RGGI states — Connecticut, Massachusetts, Maine, Rhode Island, New York and Vermont — saw an uptick in greenhouse gases from power plants last year relative to both 2020 and 2019.

“The only place where much coal exists at this point is in Maryland,” said Brian Megali, director of clean energy policy at Constellation Energy Corp. “So the opportunity to cut emissions dramatically is diminishing.”

Whether RGGI states should commit to faster emissions reductions is a key focus of an ongoing review of the program, the third since the initiative’s founding.

As part of the review, some environmental advocates have called for incorporating environmental justice principals into the program design, facilitating greater engagement with members of the public and lowering the size threshold for generators that are required to purchase allowances, among other changes. Clean energy advocates also note that several RGGI states have enacted policies to shift toward 100 percent carbon-free power within the next two to three decades and argue that the program’s framework should reflect those plans.

Still, the review comes as Republican lawmakers in Virginia and Pennsylvania are criticizing what they see as unnecessary costs of RGGI for consumers. Broadly, they say that RGGI acts similarly to a tax, raising costs for consumers, and have questioned its emissions benefits.

Under RGGI, the proceeds from each allowance auction are reinvested into state programs. States have elected to use the money to promote energy efficiency, help with flood control and develop renewable energy projects, among other initiatives.

Raising the price of CO2 allowances would increase the pool of money reinvested into states, while putting fossil fuels at an economic disadvantage relative to renewable energy. But an overly ambitious RGGI framework could also raise electric rates, given that compliance costs may be passed on to consumers, at a time when prices are already elevated, economists say.

“A group of states doesn’t exist in a vacuum. They always have to be cognizant of what the balance is: How far can we go without harming our economies?” said William Shobe, a professor of public policy at the University Virginia who helped design RGGI’s auctions format.

‘Relentless’ fight in Pa.

As states debate what RGGI should look like through the rest of the decade, some lawmakers in Pennsylvania are preparing legal challenges to stay out of it altogether.

Last night, the Pennsylvania Commonwealth Court issued an order staying publication of Democratic Gov. Tom Wolf’s RGGI regulation until the court issues a further order on the issue. It comes after the Republican-controlled Pennsylvania Senate earlier this week failed to override Wolf’s plan for the state to begin participating in RGGI later this year.

The veto override attempt was the latest effort over the last two years to prevent Pennsylvania — which produces a significant amount of natural gas and some coal — from joining the cap-and-trade program.

“The first word that comes to mind is relentless — and exasperating,” Mark Szybist, a senior attorney in the climate and clean energy program at the Natural Resources Defense Council, said of the ongoing controversy in Pennsylvania.

RGGI opponents failed to gain enough votes to override Wolf’s veto of a bill that could have effectively prevented Pennsylvania from regulating carbon emissions through RGGI. But the effort is unlikely to end there.

“The next step is to address this issue in the courts,” Erica Clayton Wright, communications director for Pennsylvania Senate Majority Leader Kim Ward (R), said in an email.

If potential legal challenges are unsuccessful, the earliest Pennsylvania could participate in RGGI is the third quarter of this year, Szybist said.

In Virginia, which joined RGGI in 2021, Gov. Glenn Youngkin (R) and his allies are seeking avenues of their own to pull the state of the initiative, citing concerns about the costs of the program and questioning its emissions benefits.

Last month, the Youngkin administration released an analysis of RGGI, asserting that the initiative amounts to a “carbon tax” and raises costs for Virginians. Although efforts in the Virginia General Assembly to repeal the 2020 law that brought the state into RGGI were unsuccessful earlier this year, other challenges may come up during the special session that began this week, according to the Virginia Conservation Network.

“The governor is still committed to withdrawing from RGGI and has directed staff to begin the regulatory process,” a spokesperson for the Youngkin administration said in an email.

In Pennsylvania, RGGI critics say that participating in the program could spur the handful of remaining coal plants in the state to shut down earlier than expected, destroying the livelihood of workers who are employed in the industry. Pennsylvania would be the first major energy-producing state to take part in the initiative.

Opponents have also questioned whether RGGI is effective at cutting carbon emissions. If Pennsylvania were to join RGGI, power plants in the state might retire or run less often, but similar plants in neighboring states would ultimately make up the difference, Pennsylvania state Sen. Joe Pittman (R) said last week.

“This makes no sense. There is no benefit to the climate. All it does is increase the cost of electricity and greatly diminish our ability to have family sustaining jobs in the Commonwealth,” Pittman, one of the most vocal RGGI critics in the Pennsylvania Senate, said during a March 28 hearing on the initiative.

Nonetheless, coal’s future in Pennsylvania is already in question, with two large coal plants in the state projected to close before the end of the decade (Greenwire, Dec. 2, 2021).

Overall, skeptics of RGGI tend to focus on the costs of compliance while discounting the benefits, environmental advocates say.

For one thing, the auction proceeds can be used to invest in a variety of energy and climate programs of each state’s choosing. The Wolf administration also expects that participating in RGGI would increase gross state product by nearly $2 billion and bring in more than 30,000 jobs between 2022 and 2030, in part through the money the program would raise.

In addition, analyses have shown improved health outcomes due to reduced soot, particulate matter and other pollutants in RGGI states. A 2020 study from Columbia University researchers estimated that the program had resulted in $191 million to $350 million in avoided health costs between 2009 and 2014, as pollution from power plants that contributes to asthma and other problems decreased.

“We’re not just throwing money away,” Shobe said. “We’re generating benefits — health benefits, productivity benefits — and we’re investing in new technologies for generation that are lower cost.”

Emissions from power plants in RGGI states have also fallen faster than in the United States as a whole since the auctions began in 2008, according to EPA data.

“To the extent that people have looked at it, RGGI has definitely been a significant factor in driving emissions reductions,” said Bruce Ho, a senior advocate in the climate and clean energy program at the Natural Resources Defense Council.

Pollution ‘hot spots’ and ‘leakage’?

Regardless of the wrangling in Pennsylvania and Virginia, states that are currently in RGGI aim to complete their review of the program by the end of the year. The updated rules could change how quickly states are required to reduce emissions and add new considerations for equity and environmental justice, according to provisions that are on the table.

During the last program review that concluded in 2017, states agreed to lower the amount of allowances sold during each auction by 3 percent annually, said Ho of NRDC. Previously, the allowance “cap” had been decreasing by 2.5 percent annually since 2013, Ho added.

Over the years, states have complied with the cap, suggesting that emissions have trended downward despite some fluctuations in individual states, Ho said. Still, lowering the cap so that there are fewer available allowances would make sense given the need to quickly reduce carbon emissions, he said.

Environmental justice advocates, meanwhile, have pushed for changes through the program review that would benefit historically disadvantaged communities living near power plants. Because RGGI is designed to slash emissions across the entire system, it’s not clear whether pollution has dropped in a way that is equitable or fair, advocates note.

Staci Rubin, vice president of environmental justice at the Boston-based Conservation Law Foundation, said recently that RGGI should address the threat of “pollution hotspots.”

“Historically, RGGI has reduced emissions, but it hasn’t been that great if you’re a resident living near one of these fossil fuel plants,” Rubin said during a roundtable discussion last month hosted by Raab Associates Ltd.

Others have argued for raising the price of allowances. Allowance prices have more than doubled since 2020, possibly driven by the rise in natural gas prices last year after a period of relatively low gas prices. Even so, the cost of allowances, which came out to $13 per each ton of CO2 emitted during the most recent auction last month, remains much lower than the estimated social cost of carbon.

Intended to measure the economic costs or harms of emitting one ton of carbon dioxide, the social cost of carbon was determined to be $51 by the Biden administration last year, although Republican-led states are trying to block the administration from using the climate metric (Greenwire, March 31).

“The auction prices of allowances under RGGI are simply far too low, a fraction of what has been estimated at the ‘social costs of carbon’ and way too low to drive investments in major transformation that we know now is needed over the next 10-20 years,” J. Timmons Roberts, a professor of environmental studies at Brown University, said in a comment last year to RGGI as part of the program review.

On the other hand, the recent spike in allowance prices has been cited by RGGI critics in Pennsylvania and Virginia as a reason for keeping their respective states out of the program. The Youngkin administration’s RGGI analysis from last month, for example, asserted that allowance prices are “expected to continue increasing,” bolstering the case that the program is a “carbon tax.”

Some of the criticisms facing RGGI in Pennsylvania and Virginia have merit, particularly when it comes to “leakage” of emissions to other states, said Sherman Knight, president and chief commercial officer of Competitive Power Ventures, which owns natural gas and renewable energy projects in the Northeast and Kansas. Specifically, power plants in nearby non-RGGI states may begin to run more frequently if a new state joins, given the cost of compliance with the program, Knight said.

Still, he said the main limitation of RGGI is its regional nature. A better solution would be a national carbon-trading program, but in the absence of that, RGGI is a good solution, Knight said.

“Just like any program, there are small tweaks around the edges,” he said. “The reality is the program that states are participating in works. I just would rather see more states participate than less.”

Reporter Benjamin Storrow contributed.

This story also appears in Climatewire.