RGGI: A cap-tax-spend model to NOT follow

"Bottom line, the program has raised electricity prices, created a slush fund for each of the member states, and has had virtually no impact on emissions or on global climate change."

Against a backdrop of oil spewing into the Gulf of Mexico, the Obama administration stepped up its campaign to pass national climate change legislation. Senate Majority Leader Harry Reid, D-NV announced last week that he plans to bring a comprehensive energy and climate bill to the Senate floor by the end of the July. The bill, still to be written, is expected to include a cap on carbon emissions produced by the nation's electricity providers.

But before the U.S. embraces such a program, Congress - and the public - would be wise to examine the early performance of the Regional Greenhouse Gas Initiative (RGGI), the nation's first mandatory greenhouse gas cap and trade system.

Bottom line, the program has raised electricity prices, created a slush fund for each of the member states, and has had virtually no impact on emissions or on global climate change.

Background

The federal government has been debating national climate legislation since 1992. Over one-hundred heads of state attended the United Nations Conference on Environment and Development, where it was assumed that man-made global warming was a problem and deserved public-policy action.

The Kyoto Conference followed in 1997. The conference resulted in the proposed Kyoto Protocol, a treaty to reduce greenhouse gas emissions ("GHG") through either a cap-and-trade or a carbon tax program in developed nations, and through carbon emission subsidies for underdeveloped nations.

The Protocol established the concepts of Joint Implementation ("JI") and Clean Development Mechanism ("CDM") as means to fund GHG reductions in the developing world. With Kyoto, "carbon finance" was born.

Major compromises in Kyoto included setting 1990 as the baseline to get Eastern European buy-in and exempting the underdeveloped world. The 1997 Byrd-Hagel Resolution, which passed the U.S. Senate by 95-0 ensured the U.S. would not sign onto Kyoto. It was the sense of the Senate, as cited in the resolution, that the protocol would "result in serious harm to the economy of the United States."

RGGI in Action

Ten years later, in 2008, the Regional Greenhouse Gas Initiative ("RGGI") was launched. RGGI was the first mandatory system in the country aimed at capping and reducing CO2 emissions over time. The region consists of ten Northeastern states: New York, New Jersey, Delaware, Maryland, and the six New England states.

Member states agreed to an initial emissions cap of approximately 188 million tons of CO2, representing the total amount of CO2 that power plants in the ten states were expected to emit in 2009, the first year RGGI went into effect. This cap is to remain in place until 2015 and then drop by 2.5% per year from 2015 to 2019 - a total drop of 10% by 2019. At the time the RGGI caps were set, stakeholders assumed that business-as-usual emissions from electric generation would grow roughly 1% each year.

Over two-hundred generators are subject to RGGI within the ten states, including all fossil fuel-fired power plants (coal, oil, and gas) with a capacity of at least 25 megawatts.

Each state is allocated a quantity of CO2 allowances according to previous emission history. New York State, for example, received 64 million allowances while Maryland received 38 million etc. up to the 188 million tons.

One allowance is equivalent to one ton of CO2. Generators within the respective states are required to purchase, through auction or directly from the state entity managing the program, a single allowance (permit to emit CO2) for every ton of CO2[1] they emit. RGGI requires that at least 25% of the allowances be auctioned by the states with the proceeds to be spent for consumer benefit and strategic energy projects.

A minimum price for RGGI allowances, known as the "reserve price," was set at $1.86 per ton. This floor price prohibits allowance prices from dropping to zero when emission limits are met, thus ensuring minimum revenues for state supported energy programs.

Quarterly, online auctions are conducted by World Energy Solutions which returns the proceeds to the member states. The initial RGGI auction, held September 2008, raised $39 million for the member states. Total proceeds raised to date, including the most recent RGGI auction (June 9, 2010), stand at $662.8 million.

Auction participation is not limited to power generators. Allowance trading can also occur within a secondary market that is expected to lower transaction costs and provide power plants an opportunity to acquire allowances at any time rather than through the quarterly auctions. Unsold allowances are made available for sale in future.

RGGI's Questionable Benefits

In its annual report on RGGI (October 2009) member State New Hampshire described the program in only positive light:

"... to date RGGI has been an unqualified success, particularly given the obstacles proposed by undertaking cooperative efforts among the ten states to establish and operate a viable carbon emissions trading market with a common currency (budget allowances) recognized by all parties. RGGI has helped establish a new and vibrant market for carbon in the United States with robust trading and strong demand for CO2 allowances. RGGI auctions have been conducted for a full year, smoothly and professionally. The state has received over $15,000,000 to date in allowance auction revenues.... Total revenues collected for consumer benefit in the ten RGGI states have exceeded $400 million."

But a closer look at the program should give the public and federal legislators pause.

Superficially, the good news is that RGGI's initial year saw emissions from participant power plants fall 34% to just above 120 million tons of CO2. This figure is well below the 188 million ton cap and even below the program's 2019 goal of 10% reductions from 2005 levels[2]. However, most objective observers do not credit RGGI for the precipitous drop in overall emissions. Mild weather, the current economic downturn and lower natural gas prices caused a significant drop in electricity consumption.

In fact, RGGI allowances added about 0.9% to retail electricity prices in New England with little tangible benefit for ratepayers beyond another government program.

The distribution of RGGI revenues did little to raise public confidence. In New Hampshire, columnist Fergus Cullen wrote that too many of the twenty-one projects funded so far with RGGI proceeds were tainted by what he called "cronyism and corporate welfare."

Political/Enviro Cronyism?

A quick look at the grants funded in New Hampshire affirms this point.

Clean Air Cool Planet , the global warming alarmist group whose aggressive political lobbying is credited with the state joining RGGI, received over $1.2 million through two grants, including $813,402 to be shared with the University of New Hampshire to create the Carbon Challenge website. The state's descriptions of the two grants ("to provide residents and communities with the information, tools and support necessary for households to make substantial reductions in their energy consumption and thus greenhouse gas emissions") are vague and the money unlikely to translate into measurable results.

A $470,000 grant was funneled to Fraser paper mill in Gorham, NH, to help reduce the mill's oil consumption. The company declared bankruptcy in 2009, and this month it is expected to divest of all its assets, raising doubt that the money spent will have any long-term public benefit.

New Hampshire is not alone. Maine allocated ten-million dollars in RGGI revenues to form Efficiency Maine Trust, a public entity whose purpose is to help residents save on electricity and use less heating oil. Each of the 10 member states describe their allocations of the money in similarly vague terms.

An Energy Tax for Political Kitties

Actions this year by four member states demonstrate that RGGI is little more than an energy tax to be spent as politicians see fit. In Maryland, legislators voted to take 50% of the RGGI revenues and distribute the money to lower income residents to help pay their power bills. New York's Governor David Patterson will use $90 million of revenue to address state budget deficits. New Jersey followed suit and grabbed $65 million to cover a shortfall in last year's budget. New Hampshire closed its budget gap by diverting $3.1 million from RGGI funds.

Conclusion

Under RGGI, the cap was purposely set low and compliance has already been met through 2019 and beyond due to fortuitous circumstances. While the cost per allowance is also low (now selling at the floor price of $1.86 per unit) participant states have managed to amass over half a billion dollars in proceeds since September 2008.

Yet it is very doubtful whether projects receiving RGGI grants have achieved anything except for superficial "feel-good" results. With the decline in the economy, Maryland, New York, New Jersey, and New Hampshire redirected the money to cover budget shortfalls - thus cementing the view of skeptics that cap-and-trade is nothing more than another government program aimed at taxing energy.

Senate negotiators are currently considering an initial carbon price of around $20 dollars a ton, rising as high as $50 per ton by 2050. The Wall Street Journal recently reported that a national cap and trade system could generate between $1.3 trillion and $1.9 trillion during fiscal years 2012 and 2019.

Regional disparities in fuel uses, if not addressed in the law, will unfairly burden residents in coal-powered states like Kentucky, while favoring others in New England (natural gas, nuclear) and the Pacific Northwest (hydro). Although there is some indication from the White House that money would go toward a tax cut for the "middle class," RGGI proves there will likely be substantial wiggle-room to use the money to promote more government growth.

RGGI is Exhibit A against a national cap-tax-and-spend program. Americans should understand this program and run in the other direction.

[Special thanks to MasterResource.org for featuring our editorial on July 19.]

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[1] In the New England region, 1 CO2 allowance equates to 2 megawatt hours of generation from a combined-cycle natural gas plant and 1 megawatt hour of coal-fired generation.

[2] Barring changes in the cap, CO2 allowances are valued at the $1.86 floor price and will likely remain in surplus through to 2019.