Carbon Cap Drops 45% Under RGGI: Northeast Cap-and-Trade

Northeastern and Mid-Atlantic states reached an agreement to significantly cut carbon emissions from power plants under their cap-and-trade program, the Regional Greenhouse Gas Initiative (RGGI).

They are cutting the "cap" by 45%, which means power plants can emit 90 million tons a year, down from the current 165 million tons a year.

That will bring in $2.2 billion in revenue to the region by 2020, most of which goes to increasing energy efficiency and renewable energy.

In Massachusetts, for example, the program will generate $350 million through 2020, which will mostly be used to help businesses and residences become more energy efficient. The state leads the US on energy efficiency programs.

"This agreement means lower greenhouse gas emissions for the region and increased growth and opportunity in our clean energy economy, a major driver of job creation here in Massachusetts," says Governor Patrick. "It is also a strong statement that this region, which comprises nearly 20 percent of the national economy, is serious about being stewards of our environment and addressing climate change."

Massachusetts, Connecticut, Delaware, Maine, Maryland, New Hampshire, New York, Rhode Island and Vermont participate in RGGI, a collaborative effort to limit power plant carbon emissions. Funds are generated when power plant operators buy "allowances" to emit carbon and are used to ramp efficiency and clean energy.

After successfully cutting emissions during the first three years, the states agreed to cut the cap significantly because the 165 million allowances greatly exceeded the demand of 91 million. 

This is due to the decline in natural gas prices, which has supplanted coal use in power plants; lower electric demand because of energy efficiency measures, a slowdown in the economy, and atypical weather patterns.

As a result, allowance prices have dropped to the "floor" price of $1.93 per ton and, without a change, the current cap will not help further to reduce emissions.

RGGI Agency Heads therefore cut the cap to 91 million tons in 2014, and it will go down 2.5% a year until 2020.

While the price for allowances is expected to rise, the agreement also calls for establishing a "cost containment reserve" that would stabilize allowance prices in the event of unforeseen circumstances, such as a natural gas shortage. Additional allowances will be injected in the market if they reach price triggers ($4 per ton in 2014, $6 in 2015, $8 in 2016, and $10 in 2017, rising by 2.5% to account for inflation, each year thereafter).

Extensive modeling on the impacts of these changes on consumers show they are extremely modest, less than 1% on utility bills.

In Massachusetts, for example, a residential monthly electricity bill of $72 will rise 39 cents and an average commercial monthly bill of $455 will rise $3.89. 

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