The Acadia Center recently released “The Regional Greenhouse Gas Initiative: Ten Years in Review”. According to the report “The country’s first program designed to reduce climate change-causing pollution from power plants has provided a wealth of lessons to be incorporated into the next generation of climate policies, from successes to build on to opportunities for improvement”. This post compares the claims of success for the Regional Greenhouse Gas Initiative (RGGI) against reality.
I have been involved in the RGGI program process since its inception. I blog about the details of the RGGI program because very few seem to want to provide any criticisms of the program. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
RGGI is a market-based program to reduce greenhouse gas emissions. It is a cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont to cap and reduce CO2 emissions from the power sector. This program is a prototype for “cap and dividend” pollution control programs. RGGI holds quarterly auctions for CO2 allowances. Affected sources purchase the allowances they think they will need to operate and surrender them to RGGI every three years at the end of the compliance period. The proceeds are used to fund investments throughout the region.
The Acadia report analyzes data since the launch of the program. Their analysis claims that “CO2 emissions from power plants in the RGGI states have fallen 90% faster than in the rest of country, while economic growth in the RGGI states has outpaced the rest of the country by 31%. The program has also driven substantial reductions in harmful co-pollutants, making the region’s air cleaner and its people healthier.”
As I will show below this report is fundamentally flawed because it attributes all the reductions in CO2 emissions and air quality improvements to the RGGI program. In reality fuel switching is the primary cause of the reductions. When the savings that RGGI claims as benefits due to investments from the auction proceeds are evaluated, they are a small fraction of the observed reductions.
RGGI Ten Years in Review Emissions Reduction Claim
The Acadia report states:
States participating in RGGI have seen a steep decline in CO2 emissions from power plants over the last 10 years. Since 2008, the year before the program launched, RGGI emissions have fallen from 133 million short tons of CO2 to 70 million tons in 2018, shown in Figure 1. The impressive electric sector emission reductions achieved in RGGI states over that time period have outpaced reductions in the rest of the country by a staggering 90%. While the RGGI program has not been the sole factor behind the region’s rapid electric sector decarbonization, earlier analysis shows that it has been a key driver—and accelerator—of emission reductions from power plants.
I do not dispute the observed reduction values but the claim that the RGGI program has been a key driver or accelerator, whatever that means, is bogus. The referenced paper by Murray and Maniloff does not indicate that the majority of the reductions are due to RGGI and I think their estimate of 24% is an unlikely upper bound. There are two ways to determine how much RGGI itself has contributed to the observed reductions and both show even lower estimates of the RGGI effect on emissions.
The Murray and Maniloff analysis referenced shows the region’s emissions would have been “24 percent higher without the program, accounting for about half of the region’s emissions reductions during that time”. The econometric modeling used in their analysis assumes that compliance with the program is made more efficient by an allowance acquisition program that resembles commodities markets. In reality, based on my experience in the utility allowance trading business and discussions with my peers, the vast majority of companies and possibly all companies treat allowance acquisition as simply a tax. Allowances are purchased in the auctions or on the secondary market based on short-term compliance needs. The over-riding concern is compliance. I am not familiar enough with econometric modeling to say how this affects the results but I believe they do.
In my opinion the Murray and Maniloff analysis assumed that companies would do things to reduce their CO2 emissions rather than just buying allowances as a tax. However, the only thing that they could do is to improve combustion efficiency to use less fuel. Fuel costs are the over-riding driver for operating costs so plants have already looked into this and probably made the efficiency changes that they could afford so there were few opportunities left to become more efficient. In addition, EPA’s New Source Review program can penalize old facilities that make efficiency improvements because they are concerned that they those improvements could extend the life of a higher emitting facility. Based on my experience and discussions with colleagues in the industry affected generating units did not do anything to control emissions for RGGI. More importantly when this analysis observed facilities shutting down, they claimed that was due to RGGI. In fact, all the facilities that I am familiar would have shut down even if RGGI were not in effect. For all these reasons I do not accept this reference as credible evidence for RGGI success.
The first way to determine why emissions dropped over this period is to evaluate the emissions data. I queried the database at EPA Clean Air Markets Division data and maps and downloaded emissions, load and heat rate data for the nine RGGI states for the years 2000-2018. In order to determine what fuel was used I had to use these data instead of the data in the RGGI system because the EPA data includes fuel type information. This means that there are differences in the annual totals because the EPA data set has more units in it. Prior to the start of RGGI I had to ask for data from “all programs” and for consistency kept that constraint even after the start of RGGI.
The RGGI Nine-State EPA Clean Air Markets Division Annual Emissions Data by Primary Fuel Type table lists load and CO2 mass data from 2006 to 2018. In order to establish a baseline, I used the average of the three years prior to the start of the program. The CO2 mass and load from coal-fired units went down over 80% from the baseline to 2018. The RGGI states have a relatively high concentration of residual oil-fired units and load and CO2 mass went down nearly as much. Diesel and other oil-fired units went down over 50%. On the other hand, natural gas firing loads went up 35% and CO2 mass went up 43%. Because natural gas firing has much lower CO2 per MWhr emission rates the total CO2 mass went down 41% from my baseline to 2018. Because fuel prices are the primary driver of unit operations and because the RGGI allowance price was relatively small in comparison to the fuel price differential of natural gas relative to coal and oil I conclude that the primary driver of RGGI region CO2 emission reductions was fuel switching not RGGI.
The second way to determine the effect of RGGI is to use RGGI’s own information. The Investment of RGGI Proceeds in 2017 report tracks the investment of the RGGI proceeds and the benefits of these investments throughout the region. I recently calculated that the total annual reductions since the start of the program were: 4,014,410 MWh of electricity use avoided, 9,824,199 MMBtu of fossil fuel use avoided, and 2,818,775 short tons of CO2 emissions avoided. The total reduction in load from the baseline until 2018 is 51,098,013 MWh so the direct investments of RGGI auction proceeds were responsible for 7.9% of the observed reduction in load. The total reduction in CO2 from the baseline until 2018 is 52,202,198 tons so the direct investments of RGGI auction proceeds were responsible for only 5.4% of the observed emissions reduction.
Clearly the Acadia report claim that the RGGI program has been a key driver of emission reductions from power plants is wishful thinking and not supported by the data.
RGGI Ten Years in Review – Aligning the RGGI Cap with Current Emissions
Because historical emissions have been less than the cap on emissions, the Acadia report calls for program reforms including a more stringent cap, more constraints on the allowance supply, and adjustments to eliminate the allowance surplus. The report notes that “To be most effective, the RGGI cap needs to more closely reflect the new, lower-carbon reality of the region’s electric sector and the science-based GHG reduction targets adopted by the RGGI states.”
There is one facet of the cap and trade pollution control theory that is neglected with these recommendations. In order to be effective, the affected sources must have options to reduce their emissions. In general, with any GHG market-based program the sources affected by the rule don’t have options. As noted above there are no real options for a power plant to reduce its emissions. Theoretically a power plant could develop its own non-CO2 emitting generating units but the reality, especially in a non-regulated state, is that fossil-fired power plants have little incentive to pursue those options. Most importantly, non-regulated generators have no obligation to serve. In my opinion they will simply operate as long as they can make a profit or have the allowances available to operate then shut down.
The most important limitation to market-based cap programs is the cap limit. If there are no other operations then affected facilities will just operate less or shut down entirely. In their naïveté the Acadia report authors support a strict cap that actually constrains CO2 emissions. The problem is that CO2 emissions represent generated power. If the facilities cannot emit CO2 then they cannot produce power. At some point the apparent preference of environmentalists for wind and solar resources will require grid services support to support the transmission grid because those resources are diffuse and energy storage because those resources are intermittent. No cost studies that claim wind and solar are approaching the cost of natural gas generation include those integration costs. If the trajectory of emission reductions does not account for that reality then I predict there will be big problems.
RGGI Ten Years in Review – Economic Trends and Electricity Prices
The Acadia report claims that RGGI has “generated significant economic benefits” by investing auction proceeds in “energy efficiency, renewable energy, and other consumer programs that increase economic activity in participating states.” They also claim that “The RGGI states have managed to rapidly reduce CO2 emissions without impeding economic growth” and that the “average retail electricity prices have dropped since RGGI took effect”.
The Investment of RGGI Proceeds in 2017 report released in October 2019 tracks the investment of the RGGI proceeds and the benefits of these investments throughout the region. According to the report, the lifetime benefits of RGGI energy efficiency investments made in 2017 includes energy bill savings of over $1.4 billion on an investment of $315.6 million which qualifies as significant economic benefits. However, RGGI is supposed to be a CO2 reduction program and what are the lessons to be incorporated into the next generation of climate policies from RGGI. Sadly, from the standpoint of an efficient CO2 reduction program I don’t think you can call RGGI a success. From the start of the program in 2009 through 2017 RGGI has invested $2,527,635,414 and reduced CO2 2,818775 tons annually which results in $897 per ton of CO2 reduced.
I will not debate the claims that RGGI rapidly reduced CO2 emissions without affecting economic growth and that retail electricity prices dropped. However, as shown earlier the RGGI reductions had little to do with RGGI itself and much more to fuel switching to cheaper natural gas. It seems to me that these claims then should be more to do with fuel switching than RGGI itself.
The Acadia report concludes:
RGGI has successfully demonstrated the viability of a market-based program to reduce CO2 emissions from the power sector while generating benefits for participating states. RGGI’s experience has disproven the concerns most frequently associated with capping emissions from the power sector. Emissions have declined rapidly, far more dramatically than projected, without stifling economic growth. RGGI’s reinvestment model has benefited the regional economy and increased employment while accelerating deployment of renewable energy and funding energy efficiency programs. The region’s residents now pay lower electricity prices than before the program began and breathe cleaner air.
I don’t think that RGGI has disproven any capping emissions concerns. In fact, I think it is more likely that as RGGI increases the stringency on its cap at the same time that fuel switching options are used up that we will see what happens when a market-based control program has a restrictive cap. Given that affected sources only have the option to not run when allowances are not available, I do not think this will end well.
By RGGI’s own numbers despite the apparent value of the energy efficiency investments the fact is that as a CO2 control program the results are expensive, far exceeding any regulatory social cost of carbon value. If society is to depend upon RGGI investments as the control program to drive emissions reductions on the order of the Green New Deal then enormous costs are inevitable.
 Brian Murray and Peter Maniloff, Why Have Greenhouse Emissions in RGGI States Declined? An Econometric Attribution to Economic, Energy Market, and Policy Factors, Duke Nicholas Institute, August 2015. Available at: https://nicholasinstitute.duke.edu/environment/publications/why-have-greenhouse-emissions-rggi-states-declined-econometric-attribution-economic