Learning from the Difficult Lessons of Real-World Regional Cap-and-Trade

It’s known as “Reggie” for short. And though it may be small, it’s said to be paving the way for something huge: a federal cap-and-trade program for greenhouse gas emissions.

The Regional Greenhouse Gas Initiative (RGGI), the country’s first public sector experiment with auctioning carbon permits, is up and running. It is consistently cited as a good “first step” – an example of how green ideals and good old American capitalism can work in harmony.

“Without question, it is already demonstrating that an auction system can be made to work,” Congressman Ed Markey (D-Mass.), who is co-author of the landmark national climate-energy bill now being debated in the House of Representatives, said at a recent forum at MIT. “[T]he Regional Greenhouse Gas Initiative is a very good working template.”

Its relevance in the larger public policy sphere needs no more proof than a look at its origins. President Obama’s Environmental Protection Agency Administrator, Lisa Jackson, was the RGGI’s vice chair this time last year; she facilitated its adoption in her home state of New Jersey, where she was Commissioner of the Department of Environmental Protection.

The point of RGGI was clear, she explained in January 2007. “What we wanted to do as states is to show the federal government that this is a viable way to address greenhouse gases in one sector,” Jackson said.

Hard Numbers: Conclusions Remain Ambiguous

The hard numbers behind the effort so far, however, contain mixed indications for journalists and policymakers looking at this regional “template” to assess prospects for a federal scheme. And the conclusions to draw from it remain at best ambiguous, observers say.

Since its first sale of permits last year, RGGI has auctioned off millions of carbon permits and generated $262 million in funds that are to be directed toward energy efficiency across the 10 participating Northeast states.

“It’s worked very well in terms of the mechanics of the process … It may seem confusing, but it does work in reality,” Sarah Woodhouse Murdock, senior policy advisor for The Nature Conservancy, said in a telephone interview with The Yale Forum. “The biggest success is the amount of money generated. It’s going to energy efficiency.”

Legislatures have mandated that the money go toward green purposes, Murdock said, though in a few states there has been talk of siphoning it off to help cash-strapped ratepayers. Maryland, for example, recently decided to help low-income residents hurt by the recession by reallocating some of the money.

As with all such large-scale government spending, the on-the-ground expenditures will need to be monitored carefully by journalists and observers. In other words, the jury is still out on that score – how successfully the efficiency efforts ultimately prove to be, and whether they justify the costs.

‘No Pain, No Gain’ for a Cap Set too High?

Moreover, RGGI currently allows the 225 power plants whose emissions are capped to emit some 188 million tons of carbon a year. Critics are quick to point out that the cap vastly exceeds current polluting levels, undermining the very notion of their being a “cap” at all. ( “No pain, no gain,” as the Boston Globe editorialized recently on it. The paper cited RGGI as an example of why a federal cap-and-trade scheme needs “real teeth.” )

The high “cap,” Murdock concedes, is troubling. “I think that’s another lesson learned. There needs to be a re-open clause.” Most states can’t adjust their levels without an extensive legislative process. But it’s a general lesson – the ability to recalibrate any cap as conditions change – that’s being incorporated into federal planning for national cap-and-trade, Murdock said.

The emission levels in 2008 for RGGI were only 156 million tons of carbon, a roughly 9 percent decline from 2007, according to Point Carbon, an industry monitoring firm. The reasons for the yawning gap between the cap limit and the real emissions are complex: a political process that set the original cap to accommodate industry concerns; the recession; milder weather; a move toward cleaner natural gas; and increased energy efficiency in the 10 states.

It won’t be until 2015 that the cap begins being reduced, with the goal of reducing emissions 10 percent by 2018

Might New York Governor Back Off Some?

In another troubling sign, New York Democratic Governor David Paterson has said he may reopen his state’s cap because of concerns that some companies will be hurt economically. That state allows for changes by the executive branch.

Indeck Energy Services, which has five power plants in New York, RGGI’s largest state, has filed a lawsuit because it is locked into long-term contracts and must swallow a $1.6 million annual loss under RGGI. Some fear Paterson’s move could prompt rollbacks by other states.

The other questionable result so far for RGGI is the price for a ton of carbon. It remains in the $3 range, nowhere near the kind of price that might spur utilities to seek alternatives. The price in RGGI’s first auction was $3.05; it was $3.51 in the third auction in March 2009.

In an e-mail exchange with The Yale Forum, Robert Stavins, professor at Harvard University’s John F. Kennedy School of Government and director of the Harvard Environmental Economics Program, said the price nevertheless represented a relative victory.

“The RGGI system is successful judged by the key criterion appropriate for judging a cap-and-trade system, namely the cap is being met cost-effectively,” he wrote. “The fact that the cap is non-binding as a result of a variety of factors, including but not limited to the economic downturn, does not change this.”

So why is the price not even lower? (It could be – the floor price during auctions has been set just below $2.)

“I’ve done some back-of-the-envelope calculations which confirm,” Stavins said, “that the price is equal to the market’s judgment of the expected value of RGGI allowances as options to be exchanged in the future for a federal cap-and-trade system in 2012-2015, when RGGI program is inevitably pre-empted.”

Betting on the Future … and a Federal Program

In other words, the permits are being bought as a bet on a future, more valuable system. Without that prospect – let’s say federal cap-and-trade is shelved this year – it’s unclear what price investors would assign to the intrinsic value of the permits.

Of course, RGGI is still in its infant phases. It may be too much to draw strong conclusions yet, as some conservative publications such as the Boston Herald already have.

Frank Ackerman, an economist with the Global Development and Environment Institute at Tufts University, said in a telephone interview with The Yale Forum that RGGI has indeed been getting a “low price,” and it hasn’t generated a lot of momentum. (See The Yale Forum‘s review of Ackerman’s new book.)

“There are lots of people trying things decentralizing over the past eight years, and we’ve gotten nowhere,” Ackerman said. “Any serious national policy has to do more than RGGI has tried to do.”