Sunday, April 29, 2018

The Northeast US Has a Carbon-Trading System.  It Is Boosting, Not Hurting, State Economies. - by David Roberts

RGGI is a net economic benefit for every state involved.

Virginia Gov.-elect Ralph Northam has backed a bill that would have his state join RGGI. (Credit: Win McNamee/Getty Images) Click to Enlarge.
According to the Carbon Pricing Leadership Coalition, some 42 countries and 25 subnational jurisdictions now price carbon.

None of these carbon-pricing systems is reducing enough carbon fast enough.  We still don’t know if it’s politically possible to get a price high enough to drive radical carbon reductions.

What we do know, what has been amply demonstrated, is that it’s possible to set up a transparent, well-run carbon-pricing system that economically benefits the jurisdictions where it’s implemented and is politically resilient.
The RGGI cap is not driving most of the electricity-sector emission reductions
Since RGGI started in 2009, the Analysis Group has periodically assessed its economic impact on participating states.  Its latest report, out last week, is of particular interest, as it covers the three-year compliance period from 2015 to 2017, a period that saw quite a bit of change.

The economics of renewable energy changed, pollution control regulations changed, and some of the rules that govern regional energy markets changed, but most significantly, in December 2017, RGGI states completed their second mandatory Program Review, which resulted in a number of revisions to the program.  Most notably, the regional carbon cap between 2020 and 2030 was reduced by 30 percent.

Actual CO2 Emissions in the RGGI States and Evolution of the RGGI CO2 Emissions Cap (Credit: Analysis Group) Click to Enlarge.
That last part is important because the dirty secret of RGGI is that, so far, the carbon cap on the electricity sector (the dotted line) has been far above the sector’s actual emissions (the solid line):
For now, emissions are still falling faster than the cap is declining. The cap is not driving that, for the most part.  At least not yet.  But the program is still working, thanks to three clever features built in from the beginning.

RGGI is paying economic dividends to participating states
First, the pollution permits distributed under the cap are not given out for free; they are auctioned.  That guarantees that each state receives a stream of revenue.

Second, no matter how little pressure the cap puts on emissions, the price of permits never falls below a set reserve price (just over $2 in 2017), so there’s always at least some revenue.

And third, much of the revenue goes to “consumer-benefit programs,” including energy-efficiency programs and direct bill assistance.  By agreement, 25 percent of the revenue is to go to such programs, but in practice, the total has been much larger.

“As in the prior years,” Analysis Group writes, “during the 2015-2017 period [RGGI] states received and spent the roughly $1.0 billion in auction proceeds primarily on energy efficiency measures, community-based renewable energy projects, customer bill assistance, other GHG-emission reduction measures, and on research, education and job training programs.”

The best way to think of RGGI, then, is as a relatively low carbon tax that transfers money from the owners of fossil fuel power plants to consumer-benefit programs.
For RGGI states, carbon policy has not been a sacrifice.

What can be learned from RGGI
As Analysis Group emphasizes, RGGI was not intended or designed to be an economic development policy.  Ultimately, it should be judged by its success in gradually ratcheting down emissions from the power sector.

Power sector emissions are down and the program is operating smoothly.  That RGGI accomplished both while imposing no economic sacrifice (the opposite, actually) has to do with the fact that emissions were already on their way down — and that energy-efficiency investments are smart because the savings compound over time.  Diverting money from fossil fuels to energy efficiency would produce a net economic benefit for any state, using almost any policy mechanism.

But right now, RGGI amounts to a small carbon price on a small portion of the region’s emissions.  It remains an open question how a program like RGGI would fare if it expanded into sectors less amenable to carbon reductions, like transportation or industry (sectors it is becoming increasingly urgent to address).

Theoretically, a rising price on carbon could eventually make gasoline vehicles so expensive that consumers are forced en masse to EVs.  But they might not be so sanguine about that as they are about small bumps in their electricity bills.  When it comes to more stubborn sectors, progress is unlikely to unfold in the benign, orderly way that RGGI has proceeded so far.

Basically, we don’t know what it looks like for a price on carbon to get high enough to emerge as a primary driver of rapid emission reductions.  What we do know, thanks to RGGI and other systems, is that carbon-pricing systems can get established, nudge emission reductions along, and build some political capital.

For the incrementalist political strategy to pay off, though, RGGI has to spend some of that capital and keep ratcheting up.  Its true test will only come when its reach gets broader and its prices get higher.

Read more at The Northeast US Has a Carbon-Trading System. It Is Boosting, Not Hurting, State Economies. 

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