Grading RGGI’s First Year

For all the haters who can’t abide cap and trade, I give you a new report by Environment Northeast, (ENE) grading RGGI—that’s the carbon cap and trade program that’s been operational for over a year now in the northeastern United States. I’m going to steal their thunder and take you right to the conclusion:

States deserve significant congratulations for coordinating to create RGGI, and for following through with excellent implementation, particularly around the success of the auction markets—the first public carbon market auctions in North America. The investment of RGGI auction proceeds in high value energy efficiency programs is contributing to a transformation in the electric sector; shifting focus from supply to demand and saving consumers millions of dollars. RGGI created organizational and market structures ranging from emissions tracking to regional auctions to market oversight, setting important technical precedents that will smooth the way for future cap and trade systems.

In other words, ENE concludes that RGGI is working exceptionally well. They do, however, ding the program in one area: for lacking a clear mechanism that can tighten the cap faster than planned. But what a problem to have!

In a moment, I’ll talk about how RGGI might fix the “problem,” but first let’s take a moment to acknowledge that cap and trade works. It really, actually works. It has a proven track record for air pollution—reducing contaminants faster and more cheaply than expected. Better yet, carbon cap and trade has worked well in Europe (despite what you may have heard) and now we have evidence that it’s worked well in the United States too.

Basically, it went down like this. RGGI policymakers set emissions reductions—the cap—at the outset of the program, but as things got underway, and as allowances got auctioned off, learned that the region’s emissions could easily fit under the cap. Some of the lower-than-expected emissions were due to the recession—a bad thing, obviously—while others were due to polluters taking early action to avoid having to pay a carbon price—a good thing. So now, because the program is achieving its carbon targets so easily and inexpensively, ENE is urging policymakers to lower the carbon cap further.

One way to lower the cap is for the individual RGGI states to “retire” their carbon allowances early, unused, rather than selling them at auction. (By reducing the number of allowances in circulation in the region the states would have effectively lowered the cap.) However, retiring allowances early has its own practical pitfalls— especially when state programs need revenue—and, anyway, it’s not clear that all of the states have the authority to do so.

It’s something of a technical point, but RGGI’s program lacks a mechanism that allows it to lower it carbon cap easily. Doing so might require complicated new negotiations and legal agreements. That’s a bad thing from the perspective of wringing carbon out of the system faster than planned, but a good thing from the perspective of providing certainty for the economy. But all in all, being too effective is not exactly the worst problem one can imagine for a climate policy.

More coverage of ENE’s report here.