WASHINGTON—The Regional Greenhouse Gas Initiative (RGGI) is a market-based program that sets a cap on carbon dioxide (CO2) emissions from the electricity sector in nine northeastern states. Trading of emissions allowances is a proven way of achieving compliance with pollution goals at the least possible cost. Yet there has been one particularly persistent challenge for the program, which has otherwise been regarded as an overall success. Since RGGI’s outset in 2009, the price of emissions allowances has proven to be lower than most observers expected. Low prices suggest low costs for industry and consumers—which is a good thing—but when they are persistently lower than anticipated, they fall short of providing the intended incentive for new investments in renewable energy and energy efficiency.
RGGI is now in the midst of its 2016 Program Review, but even after that is complete, compliance costs and allowance prices may again settle in at low levels. That has been a shared experience across most market-based programs. An idea to address the consistently low prices has been in development and discussed in various stakeholder forums and webinars over the course of this review; the new design mechanism under consideration is known as an emissions containment reserve (ECR).
In a new independent report posted today by Resources for the Future (RFF)—Expanding the Toolkit: The Potential Role for an Emissions Containment Reserve in RGGI—RFF’s Dallas Burtraw, Karen Palmer, and Anthony Paul, with the University of Virginia’s Charles Holt and William Shobe, use simulation modeling and laboratory experiments to assess this potential new design idea for RGGI.
Here is how an ECR would work, according to the report: If the demand for allowances is low, the auction clearing price will fall. If the auction price falls to the ECR price level, then some or all of a set amount of allowances associated with the ECR would not be sold, and the allowance price would respond to the reduced supply accordingly. This outcome would resemble the dynamics in nearly all other commodity markets: when the price of a good falls, less of that good comes into the market, which helps reduce price volatility. The ECR could have multiple price “steps,” each associated with a different set of allowances.
The researchers find that an ECR would help to capture cost savings and greater emissions reductions when the demand for emissions allowances is low and the price falls. The authors conclude that the ECR “shares the risks and benefits of changes in the demand for emissions allowances between economic and environmental interests. It helps preserve the incentive for state and local government action and individual efforts to address climate change goals. The ECR is transparent and can be expected to reduce price volatility, providing a more predictable market environment.”
Read the executive summary and full report—Expanding the Toolkit: The Potential Role for an Emissions Containment Reserve in RGGI.
Author contacts for media:
Dallas Burtraw, Resources for the Future: 202.328.5087; email@example.com
Karen Palmer, Resources for the Future: 202.328.5106; firstname.lastname@example.org
Anthony Paul, Resources for the Future: 202.328.5148; email@example.com
Bill Shobe, University of Virginia: 434.982.5376; firstname.lastname@example.org