Carbon Control: Is Emissions Trading Working in the Northeast?

As congressional Republicans have become increasingly wary of any and all schemes to limit greenhouse gasses, the possibility of a national program that would incentivize power plants to curb their carbon dioxide emissions has seemed ever more remote in recent years. But with the Environmental Protection Agency slated to issue rules for President Barack Obama’s ambitious new climate change plan as soon as this summer, the nation could be on the verge of a dramatic rise in carbon-trading schemes at the state level.

The president’s so-called Clean Power Plan would bypass Congress by using the Clean Air Act to require each state to meet emissions reduction targets—and while the EPA is giving states a lot of leeway when it comes to ways to comply, the agency has highlighted some pre-existing programs, including the Regional Greenhouse Gas Initiative, a cap and trade agreement between nine Northeastern states that since 2008 has required power producers in those states to purchase allowances in order to pollute.

In its 2014 clean power proposal, the EPA cited the RGGI program (pronounced “Reggie”) as an effective way for states to generate revenue for clean power initiatives—the program has pulled in $760 million for New York to date, and over $2 billion overall—and, with some tweaks, as a possible way for states to lower emissions to meet the federal agency’s proposed standards.

One of just two cap and trade agreements for carbon emissions in the United States, RGGI requires power plants in participating states—New York, Maryland, Delaware and all of New England—to purchase a permit for every ton of carbon they emit during a set period, on the premise that the emissions have a cost to society. These allowances are sold at quarterly auctions hosted by RGGI, but they can be traded privately among power producers. Anyone with more than enough allowances to cover their emissions can sell their surplus to another power producer, or stockpile them for the future. The program aims to reduce overall carbon emissions by setting a limit on the number of allowances allowed in the market, and that “cap” is reduced over time.

Yet the program is still unproven as a method for dramatically reducing greenhouse gas emissions.

“RGGI has had very, very small, virtually zero effect on emissions because it hasn’t been binding,” said Robert Stavins, an economist at Harvard’s Kennedy School of Government who directs both the university’s environmental economics program and the Harvard Project on Climate Agreements. “‘Business as usual’ emissions have actually been below the cap, so it has had no effect.”

While it is true that total carbon emissions from power plants in all nine participating states are now 40 percent lower than they were in 2005, it is impossible to say whether the reduction can be attributed to the program: Over the past decade a trend toward burning cheaper, cleaner natural gas in the Northeast has coincided with the retirement of dirtier-burning coal plants. The recession and milder winters also reduced demand for power, which led to power plant emissions in 2012 that were actually lower than the cap for 2013. As the EPA itself noted in its clean power plan, “RGGI was not the primary driver for these reductions.” 

“It’s a fairly well-designed program if you make the cap sufficiently stringent,” Stavins said. He says the program’s cap on emissions was made relatively lenient at the outset in part to keep power producers from importing cheaper electricity from non-RGGI states.

“If the program were really stringent, then the cost of generating electricity in New York State would go up and the cost of generating electricity in Pennsylvania would not, because Pennsylvania is not a participant,” Stavins said. “There would be a very strong incentive for electricity companies in New York to import electricity from Pennsylvania. Also, you’d be reducing emissions in New York State, but at the same time you’d be providing an incentive to actually increase emissions in Pennsylvania.”

Some environmental advocates disagree with that analysis, however, noting that the first RGGI cap was set in 2005—three years before the first allowance auction was held.

“Modeling showed higher prices for natural gas and did not anticipate the recession of 2008,” said Peter Iwanowicz, executive director of the Environmental Advocates of New York. “Less consumption of oil and less consumption of electricity (means) a fairly slack cap.”

RGGI ratcheted down its overall emissions cap by 45 percent in 2014 (from 165 million tons to 91 million tons)—and set a 2.5 percent rate of reduction every year thereafter until 2020.

But coal-fired power plants—which currently provide around 39 percent of the U.S. power market, compared with close to half in 2008—will continue to go offline or switch to cleaner fuel sources, spurred in large part by new federal regulations aimed at reducing mercury pollution, as well as the nation’s natural gas boom. While the decision to stop burning coal used to be a question of ethics, it is increasingly the economically sound thing to do. 

By 2023, half of the 42 coal-burning units in RGGI states are slated to be retired, according to Synapse Energy Economics, a Massachusetts-based consulting firm. (A typical power plant often has more than one “unit,” and each unit can be designed for different fuels.) This represents 30 percent of all the coal power generation in RGGI states, according to Synapse.

But with so many factors at play in the market, it is hard to say with certainty whether RGGI’s newly lowered cap will roughly match the natural pace of reduction, or if it will squeeze power plant emissions in the future.

And while one might assume that the apparently negligible pressure RGGI has exerted would lower allowances’ value to power plants, their price at auction has actually risen over time: RGGI permits began trading at $3.07 in September 2008, while at the most recent RGGI auction in March, all available allowances were sold at a clearing price of  $5.41 per ton—a record high.

“Even with the tightening of the RGGI cap, it remains difficult to attribute specific quantities of emissions reductions to any single political, market or economic factor,” said Jordan Stutt, a policy analyst at Boston’s Acadia Center, a nonprofit that tracks the RGGI program. “However, the tightening of the cap has led to higher RGGI allowance prices, creating a more significant incentive to generate electricity from cleaner sources and to invest more heavily in energy efficiency.”

RGGI’S REVENUES

RGGI proponents, however, insist that the program indeed contributes to lowered greenhouse gas emissions. They point to the significant revenues RGGI has generated for participating states, which in part fund clean energy and efficiency initiatives.

According to the New York Energy Research and Development Authority, an arm of the state executive chamber that oversees how the bulk of RGGI funds are spent, of the $760 million New York has collected from RGGI, $556 million had been allocated for NYSERDA-driven initiatives by the end of 2014, most of which are for clean energy programs. This includes $52.9 million for the NY Green Bank, the state’s clean energy financing initiative, and $113.8 million for Green Jobs-Green New York, which helps New Yorkers retrofit their homes to be more energy efficient. New York’s solar energy program, NY-Sun, also benefits from RGGI funds, along with other clean energy and efficiency programs.

A NYSERDA spokesperson said the initiatives funded by RGGI auction proceeds “are expected to reduce carbon pollution by nearly 5.7 million tons over the lifetime of installed measures.” (The cap for all RGGI power plants in 2014 was 91 million tons of carbon.)

But the state’s handling of RGGI funds has been attacked by pro-energy industry groups, who say the proceeds do not directly benefit consumers or power producers.

The New York Affordable Reliable Electricity Alliance (AREA), a business, labor and energy industry coalition, views RGGI as just one of many taxes—both explicit and opaque—passed on to consumers in their electric bills. AREA estimates that New Yorkers pay the third-highest retail electricity prices in the nation—58 percent above the national average.

“The benefits of the innovations are not reaching the ratepayers because the state continues to drive a bigger and bigger wedge between producers and consumers of energy in the form of explicit taxes,” said Richard Thomas, AREA’s executive director.

Thomas says AREA was pleased with a new provision adopted in this year’s state budget requiring NYSERDA to “provide the legislature with a semi-annual report,” which he hopes will boost the transparency of the authority’s spending. The measure also instructs NYSERDA to increase access to energy efficiency loans for low- and moderate-income households.

Another attack on the state’s handling of RGGI funds comes from representatives of New York’s power producers, who say they are disappointed in how the state has allocated its RGGI money. They contend that NYSERDA sits on the money for too long and does not channel enough back to the power plants themselves to help them reduce their emissions.

“The state is not doing a good job issuing timely (requests for proposals) that actually target the emission points,” said Gavin Donohue, president and CEO of the Independent Power Producers of New York. “One of the reasons we were so supportive of the RGGI program in 2007 was because there were commitments made that the money would go back to the businesses that are impacting carbon emissions the most. And we haven’t seen that at all.”

To date, $14.5 million of the $760 million collected by New York from sale of RGGI allowances has been earmarked for reducing emissions at power plants, and NYSERDA is still in the process of awarding a contract for that project.

According to NYSERDA, “This program is the only one of its kind being offered across all RGGI states, and awards are expected to be announced later in the second quarter of 2015.”

THE BENEFITS

Yet in its clean power plan, the EPA said RGGI-funded programs ultimately do drive down power prices for consumers, noting that through 2012, “participating RGGI states estimate that those investments are providing benefits to energy consumers in the region of more than $1.8 billion in lifetime energy savings.” In an updated report released this month, the nine RGGI states claim initiatives funded by the program generated an estimated “return of more than $2.9 billion in lifetime energy bill savings to more than 3.7 million participating households and 17,800 businesses.”

Jackson Morris, Eastern energy director at the Natural Resources Defense Council, a national environmental action group, says these investments reduce energy consumption and bills over time. “Every time you install a solar panel or retrofit a home, you reduce demand that changes the wholesale price of electricity in the entire state,” he said.

John Cahill, who served as commissioner of the state Department of Environmental Conservation and chief of staff to Republican Gov. George Pataki when New York was first negotiating the RGGI program with other states, says he sees no problem with NYSERDA’s use of the funds.

“They have to do it right, and whether it takes a little more time than what people would hope for—people always feel like they don’t get their fair share,” Cahill said. “But I think the idea of where they’re putting their funds with respect to renewable resources, developing and technology—that’s where the RGGI funds were really intended to be put to use. So I have no criticisms of how NYSERDA has been handling those funds.”

DIVERSION OF FUNDS

Not all of the program’s funds have been channeled into NYSERDA programming, however. The recently passed state budget diverted $41 million of the RGGI money into the state Environmental Protection Fund and the state’s general fund, a move that has riled environmentalists, who say it undermines the program’s legitimacy. It’s not the first time this has happened: In 2009, then-Gov. David Paterson took $90 million from RGGI to help fill the state’s nearly $50 billion deficit.

The Cuomo administration claims the money will help pay for solar energy tax credits that have already been in the state’s financial plan for years.

“The $23 million to support solar and other clean energy technologies (i.e. green buildings credit, alternative fuels and electric vehicle recharging property credit, clean heating fuel credit) are spurring New York’s clean energy economy and creating local jobs,” said NYSERDA spokesperson Kate Muller. “The additional $18 million going to the State’s Environmental Protection Fund will be used to bolster programs that reduce greenhouse gases (i.e. land acquisition, carbon mitigation for farmers) and invest in climate protection.”

But critics say those solar tax credits should have already been budgeted for.

"It’s really odd, to be honest," Iwanowicz of Environmental Advocates said. "Especially at a time where we don’t have massive deficits. We’re in surplus mode. We have billions of dollars from financial settlements with banking institutions."

Cahill worries that moving money around like this will ruin any chances of expanding the program beyond power plants.

“The original focus of RGGI was on the electrical generation side—to see whether the state could effectively price carbon in that specific industry, he said. “But the whole point was that it would eventually be wider than just the electrical generations sector. Raids on the program make it harder to make the case that this is really an issue of fighting climate change as opposed to just raising general fund revenue, and that undermines the credibility or any efforts to expand the program beyond its original purpose.”

(The only other cap and trade program in the U.S., an agreement between California and the Canadian province of Quebec, applies to the broader economy beyond power plants. Trading in that program began in 2012.)

Iwanowicz, who worked on RGGI as the commissioner of the state Department of Environmental Conservation under Gov. Eliot Spitzer, has even raised the possibility of a legal challenge to the program.

“Unlike the other states, New York did not create RGGI with legislation—it was done by regulation, not by law. And when you have a mechanism that actually raises revenue with that sort of program, you need to be really careful about how you spend it,” Iwanowicz said. “This to me smells like an unauthorized tax that only the legislature can approve.”

Conservative groups have sued over RGGI in the past: In 2011, a lawsuit was filed against New York’s cap and trade program by Americans for Prosperity, a group backed by the Koch brothers, billionaire businessmen known for funding right-wing causes. The suit challenged the program’s constitutionality, arguing that it amounted to a hidden tax on electricity that was never authorized through the state Legislature.

“RGGI is a tax and spend scheme that should be voted on by the New York state legislature,” said Mark W. Smith, the lawyer who represented Americans for Prosperity in the case. “This recent tapping of RGGI monies for general governmental purposes only serves to prove that point.”

An Appellate Division court ultimately dismissed the complaint on the grounds that it was filed too long after RGGI’s implementation.

While that attempt failed, New Jersey Gov. Chris Christie took it upon himself to withdraw his state from the program that very same year, saying “it does nothing more than tax electricity, tax our citizens, tax our businesses, with no discernible or measurable impact upon our environment.” (Some environmental advocates say the Koch brothers pressured Christie to pull out. “They were the ones that convinced Gov. Christie to remove New Jersey from the program,” Iwanowicz said.) This left RGGI the nine-state program it is today.

But unlike in New York, New Jersey did institute RGGI through the state Legislature, a fact that has dogged Christie’s attempts to fully exit the program. In response to a lawsuit, a New Jersey court ruled that since RGGI was instituted via legal statute, the governor must move to repeal the carbon trading regulations through formal measures that include a public comment period. Christie has since initiated a rulemaking process that is ongoing. In October, both the state Senate and the Assembly Regulatory Oversight Committee adopted identical resolutions seeking to prevent New Jersey’s Department of Environmental Protection from adopting rules that would finalize the state’s exit.

THE GOP’S EVOLUTION

Christie’s hostile stance is indicative of Republicans’ shifting view on cap and trade, which was once championed in conservative circles as a flexible alternative to the rigid restrictions that environmentalists sought to place on the energy industry.

In RGGI, this flexibility can be seen in the fact that power plants are only reviewed for compliance every three years—a period spanning 12 allowance auctions. (If, during one of these audits, a power plant is found to hold fewer allowances than can cover their emissions during that time period, they are hit with a hefty fine for every excess ton of carbon.)

“If you’re a power plant the good thing about that three-year compliance period is that it lets you play the market,” the NRDC’s Morris said. “Maybe you see a lower price one year and you stock up a little bit—you can bank those allowances. And maybe it’s really high priced one quarter and you say, I’m good, I’m going to wait till the next quarter and play things out.”

The Reagan administration first used a cap and trade system to phase out leaded gasoline in the 1980s, and President George H. W. Bush’s 1990 amendment to the Clean Air Act aimed at curbing the sulfur dioxide and nitrogen oxide that cause acid rain is largely credited with bringing that problem under control. But political stances on the policy have since been widely reversed.

“Environmentalists actually didn’t like cap and trade when it was created because they didn’t think it would achieve results,” Iwanowicz said. “Then somewhere along the way conservatives found this to be a liberal plot, and now cap and trade is a dirty word in the conservative movement.”

For the GOP, the reversal gained serious momentum in 2010, when congressional Republicans condemned a Democratic climate change bill that included the system. That year, Republicans, who won control of the House, campaigned against “cap and tax” as a boondoggle that only amounted to government overreach.

“It wasn’t antipathy toward the instrument itself, it was rather opposition to climate policy, so I think you could characterize the ‘cap and tax’ phenomenon as collateral damage,” said Stavins, the Harvard economist.

Although former Republican presidential candidates including John McCain, Mitt Romney and Mike Huckabee all supported various carbon-trading programs before 2009, they have since shied away from or even attacked cap and trade.

“It’s part of the political polarization of the Democratic Party moving toward the left and the Republican Party toward the right,” Stavins said. “The ridiculous verb they use for McCain is that he was ‘Tea Partied’ in the primaries, and he was, and he almost lost the primary when he was up for re-election in his Senate seat. And as a result he moved to the right to fend off that primary and he has remained there ever since.”

In March, Senate Majority Leader Mitch McConnell sent a letter to all 50 governors urging them to ignore the EPA’s plan to reduce carbon emissions from power plants. That same month, Sen. Ted Cruz of Texas introduced a bill that seeks to prevent federal agencies from regulating carbon emissions.

While EPA officials have said the states by and large seem to be ignoring McConnell’s plea—and are working with the agency to prepare to comply—the legal challenges to the agency’s clean power proposal are far from over: More than a dozen states and Ohio-based coal company Murray Energy Corp have sued over the plan, arguing that the agency cannot issue rules for power plants under the section of the Clean Air Act in question, because it already issued separate regulations under a different section aimed at reducing power plants’ mercury emissions in 2012.

This month three Republican-appointed appellate judges said they cannot review the case until the EPA issues its rules, which could happen this summer.

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Morris says the National Resources Defense Council is “confident that the proposal is on a sound legal footing.”

“The Regional Greenhouse Gas Initiative has allowed the states that are in RGGI to get ahead of the game," he said.

And while it is impossible to accurately gauge RGGI’s contribution to decreased emissions from the power sector, Morris says the program has provided power producers with the framework they need to rethink their operations going forward.

“What you can say with confidence is that by providing a price on carbon, even one that was very modest at the beginning of the program, you have provided power plants with the certainty they need to think through their investments and their assets,” Morris said. “It was an unprecedented victory for providing the private sector with the security they needed to plan for a world where emitting carbon is no longer free. And that’s a fundamental shift.”