Tom Shepstone at Natural Gas Now has graciously re-posted several of my posts including this post Regional Greenhouse Gas Initiative on the Fast Track to Nowhere based on this post. Unfortunately, the arcane world of pollution control programs is difficult to understand without a lot of background and my posts presume more than a little background. As a result there are some things that need to be clarified with respect to Tom’s conclusions from my post.
Tom made the following four conclusions. My indented and italicized comments follow.
First a bit of background. The Regional Greenhouse Gas Initiative (RGGI) is a cap and trade program. In order to understand the point I was trying to make you need to understand the fundamentals of cap and trade. What you need to know about this pollution control approach is that there are two components: the cap and tradable allowances for the pollutant covered. The cap sets a limit on the total regional emissions that must be met over a trading season. The cap is set at a level such that the pollutant of interest will be reduced to levels that are supposed to improve air quality to the appropriate standard. Setting the cap level correctly is critically important: too high and the environmental objectives won’t get met and too low and the market mechanism won’t work.
There is a wrinkle for RGGI. Instead of a traditional cap and trade program it is a cap and auction program. Normally allowances are allocated to the affected sources based on some past historical performance metric. In RGGI allowances are sold off in quarterly auctions. The affected sources universally consider this a tax inasmuch as they have to pay for the allowances they need to operate. Seriously, no one is claiming that RGGI is going to have any impact on global warming but proponents can claim that they use the auction proceeds to fund all sorts of feel-good initiatives that in some cases actually do reduce CO2 emissions. I described my thoughts whether RGGI was a success here, here, here and here.
Natural gas has reduced emissions faster than anyone thought possible, making it necessary to actually increase emission allowances in 2017 for the obvious purpose of giving renewables at least a chance to catch up.
When the RGGI program was being implemented the forecasts of future generation and emissions assumed much higher gas prices which resulted in high coal unit usage and high CO2 emissions. As a result the cap was set high but the natural gas revolution made those estimates inappropriate. As a result when RGGI started the auction price of allowances was so low that proponents of the program were not getting as much money as they wanted.
There is a scheduled program review component in RGGI and during that process the existing caps were lowered significantly and future reductions were incorporated that are more ambitious than I believe is warranted. The RGGI states and environmental organizations believe that RGGI was the reason for most of the reductions and argued that because reductions had been so significant to date that lower caps were appropriate. However, they missed the point that the reductions were mostly due to reduced operations in the RGGI states and fuel switching from coal and residual oil to natural gas. RGGI had very little to do with it.
Renewables are not catching up much, if at all, because investments in them are dependent on Federal subsidies and, therefore, their potential is limited.
RGGI auction proceeds are supposed to be used to reduce emissions or provide ratepayer relief. The fact of the matter is that the record of RGGI investments actually reducing emissions is poor. As Tom notes the potential is limited for further reductions based on RGGI’s own data.
Because of these facts, the opportunities to achieve meaningful reductions in greenhouse gases by rewarding investment in “compliance” entities are dissipating like a sunset and faster than the wind dies down in severe cold.
I did not adequately describe the terms “compliance entities” and “non-compliance” entities. Compliance entities are those fossil-fired generating units that have the compliance obligation to surrender a RGGI allowance for every ton of CO2 emitted. Non-compliance entities are those organizations that have purchased RGGI allowances as investments.
This means the Regional Greenhouse Gas Initiative is headed nowhere in terms of the strategy the public has been sold by the politicians; it is approaching a situation (if not already there) where it will have to reward investment in non-compliance entities such as natural gas fired power plants or fine these entities, which will then pass the costs onto consumers who will never know what hit them.
I agree that RGGI is headed nowhere but the problem is different than Tom described. The problem is that the non-compliance entities (think Morgan Stanley and other investment companies) now hold the majority of the RGGI allowances. The RGGI states reduced future allowances allocated to the auctions and their cap presumes that further reductions are possible when the fact is that most of the fuel switching has already occurred. As a result, there are not enough allowances for compliance entities to purchase at upcoming auctions in order to operate. Therefore they will have to go to the non-compliance entities and purchase their allowances if they want to run. This shortage will increase the price and the non-compliance entities will profit. However, the public will not get any benefit from the increased price of the non-compliance entity allowance sales because they only get benefits from auction proceeds. In other words, the non compliance entities have already purchased the allowances so the higher price of the allowances due to profiteering will simply be passed on to consumers. Worse if the compliance entities are not able to get the allowances they need to run their only compliance option is to not run which could lead to reliability issues.
My final point is that this is uncharted territory for RGGI. No one knows how the market will react or what the prices on the market relative to auctions will be when this allowance shortage hits. Consumers in the RGGI states will be the guinea pigs for this experiment.