Report

Expanding the Toolkit: The Potential Role for an Emissions Containment Reserve in RGGI

Aug 22, 2017 | Dallas Burtraw, Charles Holt, Karen L. Palmer, Anthony Paul, William Shobe

Summary

This research and analysis demonstrates that an emissions containment reserve (ECR) would provide several important benefits to help improve the functioning of the market for emissions allowances under the Regional Greenhouse Gas Initiative (RGGI).

Key Findings

  • An emissions containment reserve (ECR) is a mechanism intended to support the program by reducing the number of emissions allowances that are sold at low prices.
  • An 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 by enabling additional emissions reductions when prices are low.
  • An ECR is transparent and can be expected to reduce price volatility, providing a more predictable market environment.
  • Implementation of an ECR under RGGI would not eclipse the importance of regular program reviews, but it may make those reviews significantly easier to accomplish.

Abstract

Since the Regional Greenhouse Gas Initiative (RGGI) launched in 2009, low allowance prices have been frequent and precipitated important design adjustments at the first program review. As a part of the ongoing 2016 program review, RGGI is considering a new provision, known as an emissions containment reserve (ECR), that would incorporate a minimum price for specified quantities of allowances under the cap and thereby introduce steps into the allowance supply function. This report uses simulation modeling and economic experiments to explore the implications of introducing an ECR and varying its design parameters. Whenever the ECR is in effect it allows advantageous changes in the demand for emissions allowances to be shared between the economy and the environment. From a behavioral perspective we find the ECR does not hinder price discovery in allowance markets.

Figures

Figure 2. Supply Schedule without the ECR

Figure 3. An Illustration of an ECR with One Step and Changes that Result from a Low Demand for Emissions Allowances

Figure 4. An Illustration of an ECR with Multiple Steps and Changes that Result from a Low Demand for Emissions Allowances