Regional Greenhouse Gas Initiative (RGGI)

The Regional Greenhouse Gas Initiative (RGGI) is the first mandatory cap-and-trade program in the United States to limit carbon dioxide from the power sector. Ten states currently participate in RGGI: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey (withdrew in 2012, rejoined in 2020), New York, Rhode Island, and Vermont. Virginia is scheduled to join RGGI starting in 2021. In 2019, Pennsylvania Gov. Tom Wolf directed the state’s Department of Environmental Protection to develop regulations for the state to join RGGI. The proposed regulation is expected by July 31, 2020.

RGGI was established in 2005 and administered its first auction of carbon dioxide emissions allowances in 2008. The annual average CO2 emissions from RGGI electric generation sources decreased by 45 percent between the base period of 2006-2008 and the period of 2015-2017 (these statistics do not include New Jersey, which rejoined RGGI in 2020). The states have set a goal of further reducing emissions 30 percent below 2020 levels by 2030.

RGGI requires fossil fuel power plants with capacity greater than 25 megawatts to obtain an allowance for each ton of carbon dioxide they emit annually. Power plants within the region may comply by purchasing allowances from quarterly auctions, other generators within the region, or offset projects. Between 2009–2017, RGGI states have seen a net economic benefit of $4.7 billion from the cap-and-trade program.

RGGI History

Program Development and Model Rule

In 2005, the governors of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont signed a Memorandum of Understanding (MOU) to reduce carbon dioxide emissions within the northeastern and mid-Atlantic region. In 2007, RGGI was expanded to include Maryland, Massachusetts, and Rhode Island. The ten signatory states agreed to be jointly responsible for carrying out the provisions featured in the MOU.

RGGI States

First, the states agreed to adopt individual shares of the overall RGGI carbon dioxide cap and to implement state-level carbon dioxide emissions budgets. The shares are based on analysis of historical carbon dioxide emissions and negotiations amongst all the participating states. Second, the states developed a Model Rule to serve as a common framework for individual state-level regulations. The Model Rule was adopted in 2008 and updated in 2013 to account for changes in the program design following a 2012 program review. In 2016, the program was reviewed again and the 2017 Model Rule was released in 2018.

Between 2008 and 2013, RGGI operated using the original Model Rule, which served as a regulatory blueprint for each member state, and the main details remain unchanged. Under the Model Rule framework, each state enacted individual regulations that covered entities were required to comply with in order to participate in the regional trading program. An initial regional carbon dioxide cap of 188 million tons applied from 2008 to 2011; the cap was lowered to 165 million tons for 2012 and 2013 after New Jersey left the program. The Model Rule identified methods and standards for quarterly carbon dioxide allowance auctions and parameters for tracking acquisition and transfers of carbon dioxide allowances through the RGGI carbon dioxide Allowance Tracking System (RGGI COATS). The original Model Rule also established conditions for verifying the eligibility of offset credits.

RGGI states have seen $4.7 billion in net economic benefits from the cap-and-trade program.

RGGI Carbon Dioxide Emissions by Sector, 2017

First Control Period (2009–2011)

In the first control period, between 2009 and 2011, RGGI auctioned 395 million carbon dioxide allowances, or 70 percent of the total 564 million available. Carbon dioxide emissions in the region fell below the cap, leaving a surplus of unsold carbon dioxide allowances. Over the program’s first fourteen quarterly auctions, the clearing price for carbon dioxide allowances ranged between $1.86 and $3.35, yielding $922 million in revenue. A report by the New York State Energy Research and Development Agency attributes the region’s decrease in carbon dioxide emissions to fuel-switching from petroleum and coal to less carbon-intensive natural gas, lower electricity demand, and increased nuclear and renewable capacity.

At the end of the first control period, New Jersey Gov. Chris Christie withdrew the state from RGGI.

Second Control Period (2012–2014)

The nine remaining RGGI states continued the program, lowering the cap to account for New Jersey’s departure. Demand for allowances throughout 2012 remained low, with prices never exceeding $1.93. Demand increased dramatically, however, upon release of the updated Model Rule, which lowered the 2014 carbon dioxide budget to 91 million tons. At the next auction, clearing prices rose as high as $3.21 and 100 percent of allowances were sold. Between 2012 and 2013, nearly 80 percent of allowances offered at auction were sold.

Changes after 2012 Program Review

Starting Jan. 1, 2014, member states began implementing the updated Model Rule adopted in late 2013. The 2014 emissions cap of 91 million tons of carbon dioxide was set 45 percent lower than 2013, to be closer to projected emissions in 2014, and was set to decline 2.5 percent annually until 2020.

In addition to reducing the cap, the 2012 Program Review introduced several policy provisions. One of these is a cost containment reserve (CCR), which is intended to keep the price of allowances from rising above a program-wide trigger price ($4 in 2014, $6 in 2015, $8 in 2016, $10 in 2017, and increasing 2.5 percent annually thereafter). The CCR consists of a limited supply of additional carbon dioxide emission allowances separate from the annual RGGI Program carbon dioxide budget which are to be made available for purchase when demand for allowances causes the clearing price to exceed the trigger price.

RGGI emissions and allowance cap

Third Control Period (2015–2017)

Allowance prices steadily increased through 2015 to a high of $7.50 per ton as nuclear plant closures were announced and the Obama administration released its Clean Power Plan. The 2015 cost containment reserve fully sold out, demonstrating its effectiveness at slowing price increases. However, prices fell steadily through 2016 and early 2017 to a low of $2.53 per ton as it became clear that the Clean Power Plan would not be implemented. After the 2016 Program Review was completed and RGGI states announced a cap reduction goal of 30 percent by 2020, prices increased again. All allowances offered in the first auction of the third compliance period were sold.

Changes implemented after the 2016 Program Review

On Aug. 23, 2017, RGGI states announced proposed changes to the program as part of the 2016 Program Review. They announced an overall cap reduction of 30 percent between 2020 and 2030. The CCR mechanism remains in place, but with higher trigger prices ($13 in 2021, increasing 7 percent annually). A new mechanism called the Emissions Containment Reserve (ECR) will be implemented beginning in 2021. Under the ECR, states can choose to withhold up to 10 percent of their annual budget if prices fall below certain triggers ($6 in 2021, increasing 7 percent annually). In this way, states can choose to force more reductions if prices are lower than currently projected. Seven states (Connecticut, Delaware, Maryland, Massachusetts, New York, Rhode Island, and Vermont) intend to implement the ECR.

These changes will be finalized after each state undergoes its own regulatory process to approve them.

Fourth Control Period (2018–2020)

Thus far, there have been ten auctions. The average auction allowance price during the fourth control period is $5.08. This will be the final control period before the overall cap is reduced between 2020 and 2030.

New RGGI States

In the absence of federal action, states are taking steps to reduce greenhouse gas emissions. A number of states are looking at RGGI as a cost-effective way to reduce emissions in the power sector.

New Jersey rejoined RGGI in 2020 after withdrawing from the compact in 2012. After rejoining, the state set an overall cap reduction of 30 percent from 2020 to 2030. Revenues from allowances will be spent in four areas: 1) Catalyzing Clean, Equitable Transportation; 2) Promoting Blue Carbon in Coastal Habitats; 3) Enhancing Forests and Urban Forests; and Creating a New Jersey Green Bank.

Also in 2020, Virginia enacted the Virginia Clean Economy Act and amended the Clean Energy and Community Flood Preparedness Act, the latter of which directed its State Air Pollution Control Board to adopt regulations to establish a cap-and-trade program for carbon dioxide emissions. The regulations must comply with the RGGI Model Rule, and the state is on track to officially join RGGI starting in 2021. Virginia will use 95 percent of the revenue generated from the cap-and-trade program for communities threatened by recurrent flooding and sea level rise (45 percent) and energy efficiency programs for low-income individuals (50 percent).

In October 2019, Pennsylvania Gov. Tom Wolf directed the Pennsylvania Department of Environmental Protection to produce a proposed rule for the state to join RGGI. The proposed rule is expected before July 31, 2020. The forthcoming regulation faces pushback from the state legislature and opponents are likely to use legal challenges to object to the governor’s authority to adopt and implement the program through his executive authority. The earliest Pennsylvania could join RGGI is 2022.