- What is "Reggie"?
- Why is RGGI called a "cap-and-trade" system?
- Which power plants are covered under RGGI?
- How much will emissions be reduced?
- How will power plants get allowances?
- Why not just give allowances directly to sources?
- How will auction revenue be spent?
- Will allowances be expensive?
- Isn't the federal government planning a similar system?
- How can I learn more about RGGI?
The Regional Greenhouse Gas Initiative (RGGI) is usually called "Reggie." RGGI is an agreement between ten northeastern states to jointly limit emissions of carbon dioxide (CO2) from large electric power plants. Regulations that implement RGGI in Massachusetts were promulgated in January 2008 as 310 CMR 7.70. The program begins on January 1, 2009
RGGI will limit the total amount of CO2 emissions from covered power plants in all ten states to an amount called the "cap." While there is no limit on the amount of CO2 that any particular power plant can emit, the combined CO2 emissions from all covered power plants cannot exceed the cap. The actual requirement for regulated power plants is that each one must own one permit (called an "allowance") for each ton of CO2 that they emit. Allowances can be bought and sold ("traded") any time before a compliance deadline, but state control over the total number of allowances available ensures that the cap is not exceeded. The opportunity to trade allowances ensures that they are sold to power plants that can use them most profitably, thereby harnessing market forces to minimize overall program costs. Similar cap-and-trade systems are currently used to control nitrogen oxides (NOx) and sulfur dioxide (SO2) pollution from power plants.
RGGI regulates fossil fuel-fired combustion units that power electric generators with capacities greater than 25 megawatts. RGGI units are located at over 200 separate facilities spread throughout the ten states, about 30 of which are in Massachusetts.
The ten states in RGGI have agreed to cap emissions at 188 million tons of CO2 per year from 2009 to 2014, and then reduce the cap by 2.5 percent each year for the next four years. Massachusetts' initial share of total emissions and allowances is about 25 million tons per year.
In Massachusetts and most or all other states, power plants will need to buy allowances. Allowances will be sold in regional auctions beginning in September 2008. Participation in auctions is not limited to power plants. Therefore, it is expected that buying and selling will occur in a "secondary market" in which allowances will be purchased for the sole purpose of eventual resale to power plants. Broad participation in this market by financial institutions will lower transaction costs and allow power plants to obtain allowances at any time. Similar markets exist for SO2 and NOx allowances, and for grains and other commodities that are routinely sold at auctions. The Massachusetts Division of Energy Resources (DOER) has proposed regulations covering auction mechanics and allowable uses for revenue.
Allowances are given (or "allocated") freely to regulated sources in the SO2 and NOx programs, and such direct allocations were considered for RGGI. However, they were rejected for three reasons. First, economic analysis has shown, perhaps surprisingly, that even when allowances are given to power plants for free, they charge consumers for the cost of allowances that they use and therefore cannot sell. Free allocations therefore allow power plants to profit at the expense of ratepayers. Second, experience with markets for NOx and SO2 allowances has convinced policymakers that direct allocations to power plants are not necessary to ensure that power plants can obtain the allowances that they need to operate. Third, selling allowances at auctions generates revenue that can be used to further complementary greenhouse gas reduction strategies, as described below.
Massachusetts will use much of the revenue from auctions to fund energy efficiency projects. These projects will lower electricity consumption, the demand for allowances, and, therefore, overall program costs. DOER will manage the use of auction revenue.
Initially, allowances are expected to sell for a few dollars each. Recent data suggests that the number of allowances created may be sufficient to cover business-as-usual emissions in early years, and a number of program details will tend to limit prices and price volatility. Examples include:
- Offset allowances: Sponsors of projects that reduce emissions of greenhouse gases from sources other than power plants, such as landfills, can apply to create offset allowances corresponding to these reductions. Power plants may use offset allowances to meet up to 3.3 percent of their compliance obligations. While these allowances allow total emissions from regulated facilities to exceed the cap, the excess emissions from the regulated power plants are "offset" by reductions achieved by the offsets projects. Offset projects are initially limited to five specific categories.
- Three-year compliance periods: Power plants are not required to own any allowances until after December 31, 2011, the end of the first compliance period. This will limit the degree to which allowance prices are driven by short-term fluctuations in demand for electricity.
- Early Reduction Allowances: Power plants that reduce emissions over a specific period prior to the start of the program can receive early reduction allowances that can be applied toward their compliance obligations or sold.
- Trigger Events: If allowance prices remain above $10 per ton for an extended period, the compliance period will be extended and the percentage limit on offsets will be relaxed.
The U.S. Congress is considering legislation that would create a similar nationwide system. MassDEP is working to ensure that such legislation will be effective and supportive of current and future state-specific efforts to control emissions. If and when a federal system is created, Massachusetts and other RGGI states may decide that RGGI is no longer necessary.
Contact Will Space of MassDEP at firstname.lastname@example.org or 617-292-5610.