RGGI Lessons to Date – November 2019 Edition

I recently had a simple version of this RGGI article published at Whats Up with That .  This article provides more details and considers other issues with the Regional Greenhouse Gas Initiative (RGGI).  The program is ten years old and has been touted as a successful example of a “cap and dividend” pollution control program and now it is being proposed as the model for a similar control program in the Transportation Control Initiative (TCI).  This post looks at the numbers to see if this praise is warranted and whether RGGI is a good model for the proposed TCI.  Ultimately the question is whether any cap and trade program for carbon dioxide (CO2) can be successful.

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. I have extensive experience with air pollution control theory and implementation having worked every cap and trade program affecting electric generating facilities in New York including the Acid Rain Program, Regional Greenhouse Gas Initiative (RGGI) and several Nitrogen Oxide programs.  Note that my experience is exclusively on the industry side and the difference in perspective between affected sources trying to comply with the rules and economists opining about what they should be doing have important ramifications.  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.

Background

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.  According to a RGGI website: “The RGGI states issue CO2 allowances which are distributed almost entirely through regional auctions, resulting in proceeds for reinvestment in strategic energy and consumer programs. Programs funded with RGGI investments have spanned a wide range of consumers, providing benefits and improvements to private homes, local businesses, multi-family housing, industrial facilities, community buildings, retail customers, and more.”

The RGGI states developed a cap during a long stakeholder process that was based on historical operations and emissions.  The cap is the regional budget for CO2 emissions.  The Nine-State RGGI Region Emissions, Original RGGI Cap, and the Adjusted RGGI Cap table lists observed emissions and two caps.  The original cap was developed before the fracking revolution changed the cost of natural gas such that it became significantly cheaper than coal and residual oil.  After natural gas prices dropped so much the original projections for emissions were so out of tune to what was happening the RGGI states developed an adjusted cap to account for that development.

In order to determine if RGGI is successful and a program to emulate let’s define some metrics.  The primary goal of the program is to reduce greenhouse gas emissions (GHG) from the electric generation sector so quantifying the emissions change from before the program to the present is a key metric.  Another appropriate metric is cost efficiency per ton of CO2 reduced compared to the Social Cost of Carbon (SCC).  This parameter is an estimate of the economic damages from emitting a ton of CO2 and is widely used to justify GHG programs.  For a comparison metric I will ignore issues with this parameter even though I agree with the following by Paul Driessen and Roger Bezdek: “The SCC assumes fossil-fuel-driven carbon dioxide emissions are causing dangerous manmade climate change, and blames U.S. emissions for every conceivable climate-related cost worldwide. But it fails even to mention, much less analyze, the tremendous and obvious benefits of using oil, gas and coal to power modern civilization.”

In addition to these metrics we have to look at lessons learned and considerations that are not yet resolved to determine whether RGGI is a good model for future control programs.  I address the following: the theory and reality of historical trading programs, control options for affected sources, allowance management, allowance ownership and allowance costs.  Most of these issues were not discussed in the What’s Up with That post.

Theory and Practice

I agree with the argument that economic incentives or market trading programs reduced emissions more cost-effectively than a command and control program.  However, it is instructive to look at the reasons why emission reductions occurred because the theory does not necessarily drive the observed reductions.  It is necessary to review historical performance of RGGI to determine why CO2 emissions reductions have occurred so we can reasonably expect a similar result in other applications like the TCI..

Let me first point out that there is a fundamental difference between the way affected sources operate in emissions trading markets and the way economic theory predicts they should operate.  I believe that electric generating affected source allowance management is different than theory because the affected sources do not treat allowances as a storable commodity or a financial asset in the usual sense of the term.  Instead allowance management is overwhelmingly driven by regulatory requirements for the current compliance period. i.e., do I have enough allowances to cover expected emissions?  Financially it is simply another cost of operating and not a potential profit center.  The important difference is that the academic economic theory holds that affected sources are looking years into the future, but in reality, there is no such long-term time horizon for affected sources.  Their decision on the quantity of allowances to buy is driven by their expected operations in the period between auctions and, at most, the entire compliance period.  Also note that most companies include a small margin for operational variations and regulatory compliance considerations. Because of the differences between the way affected sources operate and the way economic theory says they should operate, I have little faith in the models that predict future allowance margins.

The Acid Rain Program (ARP) was undoubtedly a successful program because it lowered emissions more than expected at far lower costs than predicted.  This program was open and transparent so all emissions and allowance data are available.  In order to meet the initial emission cap target of a 50% reduction, affected sources were awarded half of their historical emissions.  Although it is common practice to vilify this program for giving away the allowances for free the rationale is still valid today. The concept for the acid rain program was that power plants would install SO2 control equipment and if they over-controlled their emissions, they could sell the excess allowances earned to other facilities that could not install the control equipment as cost-effectively.  This approach incentivizes over-control because affect sources can subsidize control equipment investments they made by selling excess allowances.  This cost reduction efficiency brings down overall costs.   It turned out that fuel switching and technological improvements were so effective that far greater than expected reductions occurred.  Fuel switching occurred because technology to burn lower sulfur coal was developed and railroad de-regulation opened the market to transporting coal cost-effectively over very long distances. Another subtle point is that the ARP allowance bank was earned, that is to say excess allowances in the bank represent over-controlling emissions lower than the cap limits.

The Regional Greenhouse Gas Initiative (RGG) is a cap-and-invest program that has been touted as a model for a TCI cap-and-invest trading program because of its “success”.  Although the RGGI states claim that the program is open and transparent the fact is that there is no allowance ownership information available.  There is no question that CO2 emissions have come down in the RGGI states since the inception of the program but it is important to determine why they have come down.  I will address that point later on.  There is a fundamental difference in the way that affected sources treated RGGI as opposed to ARP, namely ARP was considered a control program and RGGI was considered a tax.  Because there are no cost-effective add-on controls for CO2 at existing power plants there are limited options to meet the cap.  Because allowances all have to be purchased and the incremental cost was low plant control programs to reduce CO2 through efficiency were not implemented.  The allowance bank does not represent earned reductions below the cap limits.  Instead the bank is made up of allowances purchased at auctions and on the market.  The RGGI states in their program reviews were very concerned that the allowance bank was large and have taken steps to adjust the allowances sold at auction to force the bank smaller.  In the naïve belief that RGGI investments significantly reduced emissions the RGGI states have also reduced the cap going forward.  As a result. RGGI going forward is going to be significantly different that RGGI in the past and that has ramification on its value as a model for TCI or any other future emissions trading program.

I noted above the distinction between the ARP “earned” allowance bank and the RGGI allowance bank.  Because the ARP affected sources over-controlled emissions below their cap levels, they earned the allowance bank.  That means the bank represents surplus allowances that are not needed for compliance so it does not matter who owns them.  On the other hand, all RGGI allowances were purchased at one time or another by anyone who offered a high enough price at an auction or on the market.  Because allowance ownership is not transparent, we only know the number of allowances owned in the following three categories:

      • Compliance-oriented entities are compliance entities that appear to acquire and hold allowances primarily to satisfy their compliance obligations.
      • Investors with Compliance Obligations are firms that have compliance obligations but which hold a number of allowances that exceeds their estimated compliance obligations by a margin suggesting they also buy for re-sale or some other investment purpose. These firms often transfer significant quantities of allowances to unaffiliated firms.
      • Investors without Compliance Obligations are firms without any compliance obligations.

To this point in 2019 the affected sources with compliance obligations have been able to get the allowances needed to cover their emissions from auctions and the market.  However, at some point going forward this will change and it will make a difference.  I have addressed the status of RGGI emissions and allowances elsewhere but briefly because the allowance cap is being reduced so much, the affected sources are going to have to go to the investors without compliance obligations.  This is uncharted territory and, at a minimum, I expect that the allowance prices will spike upwards.  Note that this price spike provides no dividends for CO2 reduction investments because the dividends are earned at the initial sale.  But it could be even worse if the entities without compliance obligations withhold allowances and create a shortage such that affected sources do not have enough allowances to run.

RGGI supporters who claim it is successful point to emission reductions of 40 to 50%.  In order to evaluate the RGGI emissions reduction claims I used data from the Environmental Protection Agency Clean Air Markets Division air markets program website.  Emissions data from the electric generating unit (EGU) sector are available from before RGGI started to the present, so I downloaded all the EGU data for the nine states currently in RGGI from 2006 until 2018.  In order to establish a baseline, I calculated the average of three years before the program started.  As shown in the RGGI Nine-State EPA CAMD Annual CO2 Emissions table the total emissions have decreased from over 127 million tons prior to the program to just under 75 million tons in 2018, for over a 40% decrease.  Note that these numbers are slightly different than the previous table because different sets of sources are used.

However, when you evaluate emissions by the primary fuel type burned it is obvious that emissions reductions from coal and oil generating are the primary reason why the emissions decreased.  Note that both coal and oil emissions have dropped over 80% since the baseline.  Natural gas increased but not nearly as much.  I believe that the fuel switch from coal and oil to natural gas occurred because natural gas was the cheaper fuel and had very little to do with RGGI because the CO2 allowance cost adder to the plant’s operating costs was relatively small.   There is no evidence that any affected source in RGGI installed add-on controls to reduce their CO2 emissions.  The only other option at a power plant is to become more efficient and burn less fuel.  However, because fuel costs are the biggest driver for operational costs that means efficiency projects to reduce fuel use means have always been considered by these sources.   Because the cost adder of the RGGI carbon price was relatively small I do not believe that any affected source installed an efficiency project as part of its RGGI compliance strategy.

As a result, the only reductions from RGGI that can be traced to the program are the reductions that result from direct investments of the RGGI auction proceeds. Information necessary to evaluate the performance of the RGGI investments is provided in the RGGI annual Investments of Proceeds update.  In order to determine reduction efficiency, I had to sum the values in the previous reports because the most recent report only reported lifetime benefits.  In order to account for future emission reductions against historical levels the annual reduction parameter must be used.  The Accumulated Annual Regional Greenhouse Gas Initiative Benefits table lists the sum of the annual avoided CO2 emissions generated by the RGGI investments from three previous reports.  The total of the annual reductions is 2,818,775 tons while the difference between the baseline of 2006 to 2008 compared to 2017 emissions is 59,508,436 tons.  The RGGI investments are only directly responsible for less than 5% of the total observed reductions!

In order to argue that RGGI emission reduction programs are a good investment relative to the expected societal cost of CO2 emissions the Social Cost of Carbon (SCC) parameter can be used.  SCC values range widely depending on assumptions, but if you use a discount rate of 3% and consider global benefits like the Obama-era Environmental Protection Agency (EPA) did then the 2020 SCC value is $50.  The Accumulated Annual Regional Greenhouse Gas Initiative Benefits table lists the data needed to calculate the RGGI CO2 reduction cost per ton.  From the start of the program in 2009 through 2017 RGGI has invested $2,527,635,414 and reduced annual CO2 emissions 2,818,775 tons.  The result, $897 per ton reduced, is 18 times than the current EPA SCC value for United States benefits.

There is another key lesson from RGGI that applies to any CO2 emissions marketing control program. There is an important difference between cap and trade programs for SO2 and nitrogen oxides (NOx) emissions and cap and invest programs for GHG emissions.  There are add-on control options for SO2 an NOx whereas there isn’t any cost-effective option for CO2.  In the ARP the affected sources could directly control their compliance.  In RGGI there were limited direct options for the affected sources and, going forward especially, they are going to have to rely on indirect reductions, i.e., someone will build a zero-emitting plant that displaces enough output from a fossil plant that enough allowances are available to cover the affected source requirements.  The ultimate control strategy for a emissions marketing CO2 control program is to run less and hope power is available from somebody else.

Conclusion

I believe that RGGI is not the success that its adherents believe. Based on the numbers there are some important caveats to the simplistic comparison of before and after emissions.  Fuel switching was the most effective driver of emissions reductions since the inception of RGGI.  Emission reductions from direct RGGI investments were only responsible for 5% of the observed reductions.  RGGI investments in emission reductions were not efficient at $897 per ton of CO2 removed.  In my opinion those are not the hallmarks of a successful program.

I want to highlight a related point.  In order to determine emission reduction efficiency from the RGGI investment reports, I had to sum the values in the previous reports because the most recent report only reported lifetime benefits.  The RGGI website only lists the lifetime benefits of RGGI investments in 2017 but those parameters are useless for the most obvious application.  In order to account for future emission reductions against historical levels the annual reduction parameter must be used.  It is hard to not believe that excluding the accumulated annual reductions was deliberate because the numbers are so poor.

As a model for future programs, RGGI successfully proved that a regional entity could implement a cap and auction program.  However, the actual cause of observed reductions and ability of affected sources to make the reductions proposed should be considered before other programs adopt the RGGI model.  I considered the use of the RGGI model in Transportation Climate Initiative Draft Framework Cap and Invest Caiazza Comments  that were submitted as part of their stakeholder process.  I concluded that there are so many differences between a program for mobile sources and electric generating units that simply implementing a tax and investing the proceeds as proposed would be less likely to have serious problems with unintended consequences and unanticipated issues.

As a result of the issues raised in this post, I believe that it is fair to ask whether any cap and trade program for CO2 can be successful if the ultimate goal is a significant reduction in emissions.  Because CO2 from fossil fuels is such an integral part of our lifestyles a large reduction in emissions is going to have to require changes in lifestyles.  Therefore, the question becomes will people accept lifestyle changes such as giving up the gas automobile with all its current advantages over any alternative as a result of indirect CO2 pricing?

RGGI Investment Report for 2017

UPDATE: November 15, 2019  – The lifetime totals listed in the originally posted text were wrong due to a copy and paste error.

In October 2019 the Regional Greenhouse Gas Initiative (RGGI) released their annual Investments of Proceeds update.  This post compares the claims about the success of the investments 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.

Background

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.  According to a RGGI website: “The RGGI states issue CO2 allowances which are distributed almost entirely through regional auctions, resulting in proceeds for reinvestment in strategic energy and consumer programs. Programs funded with RGGI investments have spanned a wide range of consumers, providing benefits and improvements to private homes, local businesses, multi-family housing, industrial facilities, community buildings, retail customers, and more.”

Released in October 2019, The Investment of RGGI Proceeds in 2017 report 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 investments made in 2017 include:

      • 9 million MWh of electricity use avoided
      • 6 million MMBtu of fossil fuel use avoided
      • 3 million short tons of CO2 emissions avoided
      • 13.9 million MWh of electricity use avoided
      • 22.6 million MMBtu of fossil fuel use avoided
      • 8.3 million short tons of CO2 emissions avoided

The report’s press release quotes Ben Grumbles, Secretary of the Maryland Department of the Environment and Chair of the RGGI, Inc. Board of Directors: “The 2017 report shows why RGGI is a climate leader globally and nationally, not only cutting emissions in half but generating revenues to strengthen local economies and communities.” Katie Dykes, Commissioner of the Connecticut Department of Energy and Environmental Protection and Vice Chair of the RGGI, Inc. Board of Directors said “RGGI states’ investments accelerate clean energy, reduce climate risk, and improve lives”.  Bruce Ho at the National Resources Defense Council blogged that the report “confirms that RGGI is a tremendous success story whose benefits continue to grow, and it shows how, in the absence of national leadership, states are forging ahead to protect our health, environment, and economy from the worst impacts of climate change.”

As I will show below, I disagree with these assertions of success.  I believe that the report mis-characterizes some of the numbers relative to the value of the program as an emission reduction approach.  This is because they present “lifetime” benefits of the investments.  Everyone is talking about emissions reductions from some annual value, usually 1990.  In order to determine effectiveness to meet those goals the only benefits that count are annual reductions due to RGGI.  While it may be appropriate to document the lifetime dollar savings for energy efficiency, I am convinced that using lifetime values for any other parameter is bogus.

Emissions Reductions

In the first year of the RGGI program, 2009, the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont emitted 123,880,601 tons of CO2.  This report was for 2017 and those states emitted 66,349,058 tons of CO2 so emissions the emission reduction was 46% which is close enough to half to accept the claim.  However, the real question is why did the emissions go down.  I believe that the real measure of RGGI emissions reductions success is the reduction due to the investments made with the auction proceeds.

The report does not provide the annual RGGI investment savings values accumulated since the beginning of the program.  In order to make a comparison to the CO2 reduction goals we have to sum the values in the previous reports to provide that information.  The table Accumulated Annual Regional Greenhouse Gas Initiative Benefits lists the annual avoided CO2 emissions generated by the RGGI investments from three previous reports as well as the lifetime values.  The total of the annual reductions is 2,818,775 tons while the difference between total annual 2009 and 2017 emissions is 57,531,543 tons.  The RGGI investments are only directly responsible for 5% of the total observed reductions!

Cost Efficiency

In order to argue that RGGI emission reduction programs are a good investment relative to the expected societal cost of CO2 emissions the Obama Administration developed a value for the social cost of carbon.  This parameter was developed to estimate the cost of the long-term (that is to say hundreds of years) damage done by a ton of carbon dioxide (CO2) emitted today. This dollar figure also represents the benefit of a CO2 reduction. I have posted on some of the issues with this parameter but for the purposes of this post you need to know that the values range widely depending on assumptions.  For example, if you use a discount rate of 3% and consider global benefits like the Obama-era Environmental Protection Agency (EPA) did then the 2020 SCC value is $50.  On the other hand, the current Administration EPA SCC value for SCC is $7 for a 3% discount rate and $2 for a 5% discount rate that represents only benefits to the United States.  The Institute for Policy Integrity report “Expert Consensus on the Economics of Climate Change” projected a higher 2020 SCC value of ~$140 based on a survey of experts.  A 2015 paper in Nature Climate Change “Temperature impacts on economic growth warrant stringent mitigation policy” suggest that the SCC value should be $220.

The Accumulated Annual Regional Greenhouse Gas Initiative Benefits table lists the data needed to calculate the RGGI CO2 reduction cost per ton.  From the start of the program in 2009 through 2017 RGGI has invested $2,527,635,414 and reduced CO2 2,818775 tons annually.  The result, $897 per ton reduced, is four times greater than the highest SCC value and two orders of magnitude greater than the current EPA SCC value for United States benefits.

Conclusion

The fact is that for policy purposes the annual reductions from RGGI have to be considered because that is the “apples to apples” comparison.  I have to believe the reason why the RGGI investment reports no longer report the accumulated annual benefits and only report the lifetime benefits is because the values appropriate for determining the effectiveness of this program as a control program reflect so poorly on the program.  Reductions of CO2 directly attributable to investments made from the auction proceeds only total %5 of the observed CO2 reductions from 2009 to 2017.  Those poor results combined with $2.5 billion investments costs result in a nearly $900 cost per ton of CO2 reduced.  That value far exceeds the social cost of carbon value contrived to prove the value of CO2 reductions.

NYSERDA RGGI Investments – Status Through 2018

I have written previously on the Regional Greenhouse Gas Initiative (RGGI) investment report such as The Investment of RGGI Proceeds in 2016  in this post.  This post covers the analogous New York State Energy Research and Development Authority (NYSERDA) report New York’s RGGI-Funded Programs Status Report – Semiannual Report through December 31, 2018 (“Status Report”).  I believe that the reported benefits for these investments fall far short of what is necessary to meet the RGGI reduction goals and are a warning sign that the Climate Leadership and Climate Protection Act goals are going to be even tougher to meet.

I have been involved in the RGGI program process since its inception.  I blog about these details of the 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.

Background

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.  The program sets a limit on CO2 emissions and auctions allowances for each ton in the cap.  As the cap is ratcheted down over time emissions necessarily have to go down.  The auction proceeds are used for investments in CO2 emissions reductions.

According to the NYSERDA Status Report:

The State invests RGGI proceeds to support comprehensive strategies that best achieve the RGGI CO2 emission reduction goals. These strategies aim to reduce global climate change and pollution through energy efficiency, renewable energy, and carbon abatement technology. Deploying commercially available renewable energy and energy efficiency technologies help to reduce greenhouse gas (GHG) emissions from both electricity and other energy sources in the short term. To move the State toward a more sustainable future, RGGI funds are used to empower communities to make decisions that prompt the use of cleaner and more energy-efficient technologies that lead to lower carbon emissions as well as economic and societal co-benefits. RGGI helps to build capacity for long-term carbon reduction by training workers and partnering with industry. Using innovative financing, RGGI supports the pursuit of cleaner, more efficient energy systems and encourages investment to stimulate entrepreneurial growth of clean energy companies. All of these activities use funds in ways that accelerate the uptake of low-to-zero emitting technologies.

That is the theory. In practice the results have been mixed and even environmental advocacy organizations have voiced their displeasure.  For example, Environmental Advocates of New York (EANY) recently released a report, “RGGI at a Crossroads”, that details the allocation of funds raised by the Regional Greenhouse Gas Initiative (RGGI) in New York State.  I published a post that agreed with their findings.  The overview for RGGI at a Crossroads states:

“For the past seven years, the Cuomo Administration has used funding made available to New York through the Regional Greenhouse Gas Initiative (RGGI) for some authentic climate mitigation purposes as well as some highly questionable ones. While programs like Green Jobs – Green New York, 76West, and the Drive Clean Rebate owe their success to RGGI funding; the Governor has also diverted RGGI funds to subsidize power rates for Long Islanders and plug budget holes. These diversions are bad policy precedents that squander the opportunity to better the environment. An upcoming revision to state regulations offers the Governor an opportunity to take his hand out of the cookie jar and invest RGGI proceeds in a way that will propel New York to the forefront of climate justice.”

However, while I agree that if RGGI is supposed to be a CO2 reduction program that the auction proceeds should only be used for CO2 emissions reductions, I am less impressed with the value of their investments than EANY as I will show in the following.

Social Cost of Carbon

In order to put the value of RGGI investments in context of potential benefits some background on the social cost of carbon (SCC) is necessary.  Regulators necessarily have to balance costs and benefits.  This parameter was developed to estimate the cost of the long-term (that is to say hundreds of years) damage done by a ton of carbon dioxide (CO2) emitted today.  This dollar figure also represents the benefit of a CO2 reduction. I have posted on some of the issues with this parameter but for the purposes of this post you need to know that the values range widely depending on assumptions.  For example, if you use a discount rate of 3% and consider global benefits like the Obama-era Environmental Protection Agency (EPA) did then the current SCC value is $50.  On the other hand, the current Administration EPA SCC value for SCC is $7 for a 3% discount rate and $2 for a 5% discount rate that represents only benefits to the United States.  Needless to say, New York’s preference is to use the $50 value.

December 2018 Semi-Annual Report Status Report

According to the Status Report, New York State has accumulated $1,184,631,180 either from direct auction proceeds from the sale of more than 366 million CO2 allowances or interest earnings as of December 31, 2018.  Note that while the allowance prices are increasing over time the total number of allowances sold is decreasing.  For the three-year control period ending in 2011 144,305,904 allowances were sold but in the control period ending in 2017 only 72,401,365 were sold.  The increase in allowance costs does not offset the drop in allowances sold so annual proceeds are decreasing over time.

The Status Report  2018 Investment Summary Table 1 deserves special comment.  The lifetime net energy savings 62,466,470 mmBtu, renewable generation 8,243,824 MWh, net efficiency electricity savings 17,446,899 MWh, and net CO2 emissions reductions of 20,762,489 tons are all big numbers.  When you consider that total investments are $558 million you could be led to believe that the cost benefit ratio dollars invested per ton of CO2 reduced is $26.88.  That is well below the NY SCC target of $50.  However, using expected lifetime savings is bogus.

The CLCPA has a target to reduce annual CO2 emissions to zero compared to the 1990 emissions.  The key is that we need to know what the program investments do to annual emissions.  The New York State Energy Research and Development Authority Patterns and Trends document provides CO2 emissions data and that shows that in 1990 the NY total was 235.8 million metric tons.  In order to assess progress against that goal annualized reductions are the only ones that matter so the only cost benefit values that matter are for annual reductions.

The Status Report  2018 Investment Summary Table 2 and Table 2 notes provides the information necessary to determine progress relative to the goals.  There are six program categories: Green Jobs – Green New York, Energy Efficiency, Renewable Energy, Community Clean Energy, Innovative GHG Abatement Strategies, and Clean Energy Fund. The Consolidated Summary of Expected Cumulative Annualized Program Benefits through 31 December 2018 table summarizes the benefits and costs for those categories.  Note that the cost benefit ratio is $463.54, nearly ten times the NY SCC value.

Green Jobs – Green New York

As shown in my Consolidated Summary table total program costs were $172.5 million through the end of 2018 for programs that reduced CO2 264,048 tons for a cost benefit ratio of $653.29 per ton reduced.  Green Jobs – Green New York provides “funding for energy assessments, low-cost financing for energy upgrades, and technical and financial support to develop a clean energy workforce”. It is administered by NYSERDA and made available by the Green Jobs – Green New York Act of 2009.  As I recall the administrative costs associated with this program are notable.

Energy Efficiency

As shown in my Consolidated Summary table total program costs were $260.2 million through the end of 2018 for programs that reduced CO2 611,898 tons for a cost benefit ratio of $425.23 per ton reduced.  These programs provide “comprehensive energy efficiency services for single and multifamily existing buildings and new construction, including low-income households”. RGGI funds are provided to the Long Island Power Authority support energy efficiency programs administered by PSEG Long Island.  RGGI funds were also used to “fill gaps in residential energy efficiency services, offering incentives to implement energy efficiency measures related to petroleum fuel opportunities, or opportunities on Long Island and municipal electric districts”.

Renewable Energy

As shown in my Consolidated Summary table total program costs were $79.9 million through the end of 2018 for programs that reduced CO2 144,408 tons for a cost benefit ratio of $553.29 per ton reduced.  One program in this category tries to increase the use of biomass for renewable heating. NY-Sun provides “declining incentives for the installation of systems and works to reduce solar electric balance-of-system costs through technology advancements, streamlined processes, and customer aggregation models” with a goal to “achieve a sustainable solar industry that does not depend on incentives”.  There is another solar incentive program that funded “221 solar electric system installations outside of Long Island”.  The Advanced Renewable Energy Program supports “projects that foster the market introduction of a broad range of promising new and advanced renewable energy technologies, including advanced biomass, tidal, and offshore wind technologies”.

Finally, in a vivid example of Cuomo Administration creative accounting, RGGI funds the New York Generation Attribute Tracking System that records “electricity generation attribute information within NYS, and processes generation attribute information from energy imported and consumed within the State as a basis for creating tradable generation attribute certificates”.  Although there is a tortuous path linked to emission reductions linked to this program it really is an example of the type of program that really should be funded by the State and not RGGI that the EANY RGGI at a Crossroads report described.

Community Clean Energy

As shown in my Consolidated Summary table total program costs were $21.8 million through the end of 2018 for programs that reduced CO2 130,662 tons for a cost benefit ratio of $166.84 per ton reduced.  There are seven component programs in this general category.  It is notable that this category’s emphasis on funding specific GHG reduction projects makes this most cost-effective program area.  Mind you the Reforming the Energy Vision Campus Competition Program component award for Bard College’s Micro Hydro for Macro Impact project that will use local dams to develop micro hydropower is probably not going to help much meet the CLCPA target.  The Status Report breathlessly notes that “the  project is expected to avoid 335 metric tons of GHG emissions annually, equivalent to taking 70 cars off the road”.

Innovative GHG Abatement Strategies

As shown in my Consolidated Summary table total program costs were $6.2 million through the end of 2018 for programs that reduced CO2 1,804 tons for a cost benefit ratio of $3,436.81 per ton reduced.  This includes a longer-term Industrial innovations program that “supports development and demonstration of technologies with substantial GHG reduction potential and technologies relevant to NYS manufacturing industries and building systems”.   Another creative accounting effort includes the Climate Research and Analysis Program that “supports research studies, demonstrations, policy research and analyses, and outreach and education efforts”. According to the report these activities address “critical climate change related problems facing the State and the region, including the needs of environmental justice communities”.  All well and good but this is a mission of NYSERDA and should be funded out of the Administration’s budget and not detract from the RGGI mission to reduce CO2 emissions.  Also included in this program is the Clean Energy Business Development program that “seeks to support emerging business opportunities in clean energy and environmental technologies while maintaining the goal of carbon mitigation”.  Perhaps I have been reading to much of this but I am getting a wift of crony capitalism for the well-connected in Albany.  There are several programs similar to those listed here.

Clean Energy Fund

As shown in my Consolidated Summary table total program costs were $17.4 million through the end of 2018 for programs that reduced CO2 50,961 tons for a cost benefit ratio of $341.44 per ton reduced.  This program area is not described in the document.

Cost Recovery Fee

For your information, this is another example of New York State bureaucracy at its best.  The New York State Cost Recovery Fee is imposed on the New York State Energy Research and Development Authority (NYSERDA) by law to reimburse the State for the cost attributable to the provision of central government services to NYSERDA.  The available RGGI funding budget at the end of 2018 is $1.245 billion and $11.9 million is reimbursed to the state for the privilege of adding money for reducing emissions.

Remarks

There is a wide range of cost benefit ratios for the six program areas. At the high end Innovative GHG Abatement Strategies have a cost benefit ratio of $3,347 per ton reduced and the at the low end Community Clean Energy has a cost benefit ratio of $167 per ton reduced. Overall the cost benefit ratio was $464.  The cost benefit ratios can be used to estimate the total costs to meet the CLCPA target to eliminate CO2 emissions from the NY electric sector.  The  Status Report cost to reduce NYS fossil fuel 2018 CO2 emissions to zero table multiplies the 2018 CO2 emissions from the electric sector (27,786,614 tons) by the cost benefit ratios.  If NY eliminates CO2 emissions using the approaches in use for the RGGI investments, the total costs range from $4.6 billion to $95 billion with an overall cost of $12.9 billion.

Another important point is that there is likely a reason for the range of cost benefit ratios.  At the high end, the GHG Abatement Strategies category emphasizes long-term research and development.  Because this research could make a cost breakthrough the investments make sense.  Looking at the other categories it appears that the more investments are focused on direct reductions rather than indirect investments the better the cost benefit ratio.  For example, the best ratio is in Community Clean Energy and that category includes direct support for renewable energy projects.  Although the Renewable Energy category would seemingly meet the criteria for direct support, remember that the Cuomo Administration has diverted funds for other program areas that do not directly support climate mitigation efforts.  The Energy Efficiency category is a better example of indirect support.  Investments in this category do not directly reduce emissions.  Instead reducing energy use reduces the need for energy production and indirectly reduces emissions.

Conclusions

The most important conclusion is that none of the NYSERDA investments of RGGI auction proceeds meet the social cost of carbon criterion of a cost-effective benefit.  New York proposes to use the Obama era SCC value which is $50 in 2019 and the best investment category cost benefit ratio is three times greater than that value.  The cost benefit ratio for all the investments is over nine times greater than the $50 SCC value.

I also believe that there are important ramifications to the apparent reason for the range of cost-benefit ratios.  I think that the more focus on direct investments in emission reductions the better the ratio.  On one hand it could be seen as intuitively obvious but the point is that carbon pricing proposals rely on a completely indirect impetus for emission reductions.  As such those proposals, as theoretically appealing as they may be, may be much less cost effective than suggested.

The Status Report includes a table that lists the expected lifetime benefits of the projects.  Because our primary concern is meeting annual limits those numbers are at best a distraction and at worst a coverup attempt of the poor return on investments.

Finally, the total costs are staggering.  I estimate that the projected costs will be over $25 billion for just the electric sector to meet the CLCPA targets.  If NY relies on the approaches used by NYSERDA for the RGGI investments to eliminate fossil fuel CO2 emissions, the overall cost is $12.9 billion.  I earlier made an estimate of the costs for energy storage if fossil fuels generation is eliminated and that came out to $12.5 billion.

New Jersey Re-Joins RGGI

On June 17, 2019 New Jersey rejoined the Regional Greenhouse Gas Initiative (RGGI). If there ever was any doubt that participation in RGGI is primarily politically motivated this should clear that up. It is another in a series of posts on RGGI that discusses how RGGI has fared so far. In particular this post compares New Jersey’s issues with RGGI under the previous administration and notes that with a new administration the state joined without getting them resolved.

I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. Because RGGI does not respond to critical comments and rebut concerns raised by stakeholders critical stakeholder comments have dropped off significantly. Nonetheless I have commented on the rules personally if for no other reason to be on the record. In this instance the New Jersey Department of Environmental Protection submitted comments for the record that should be publicized. 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.

New Jersey Comments on the 2017 RGGI Program Review

After the September 25, 2017 RGGI posted program review stakeholder comments and the New Jersey Department of Environmental Protection submitted comments. I will discuss a few of their comments.

The program review proposed to amend and extend a revised RGGI program out to 2030, with a goal of cutting CO2 emissions an additional 30% between 2020 and 2031.  The New Jersey comments pointed out that the cost of RGGI allowances under the new proposal may rise by a factor of 8 by 2030. Nothing changed when the plan was implemented,

Their review suggested that “the proposed RGGI program could result in significant increases in electricity rates for any participating RGGI state”. Quite rightly they pointed out that while energy efficiency (EE) can reduce the total amount spent on electricity and can offset increases in electric rates, there is a point where returns on EE investments diminish. RGGI never acknowledged that and they simply suggested that as more money is spent on EE, the savings will continue to rise proportionately.

The New Jersey comments asked RGGI to acknowledge and evaluate the impacts on individuals and businesses that will see increases in energy rates and little to no reductions in energy use. For those who have already invested in EE there is little opportunity for further reductions and they will have to bear the full increase in cost. This comment was ignored.

New Jersey noted that participating RGGI states already have some of the highest retail electricity rates in the nation, with six of the nine states in the top ten, and increased energy costs should be of major concern. If increased electric rates drive business and industry to other states or nations with less costly and more polluting electric power production, net increases in CO2 emissions would result, to the detriment of the environment as well as the local RGGI economies that have suffered the loss of business and industry. The proposed 8-fold increase in RGGI allowance costs will increase the difference in electric rates between RGGI and PJM states, causing a greater shift of electric production to PJM states. This is known as “Leakage”. RGGI did not address this in the final rule and this may result in a net global increase in CO2 emissions, even if the participating RGGI states reduce their own mass emissions.

These NJ comments show the downside if New Jersey were to join RGGI.

NJ spends the 2nd highest amount in the USA (after CA) and highest in the eastern USA on RPS compliance in 2016 (7.5% RPS costs vs 1.6% average for other states with RPS) with Massachusetts close behind. (Source: U.S. Renewables Portfolio Standards, 2017 Annual Status Report, Lawrence Berkeley National Laboratory, July 2017).  The 7.5 % of NJ electric bill that is dedicated to renewable energy and energy efficiency is high relative to the average state in the USA. Not further increasing the electric rates significantly is important in states like NJ that already have major EE and RE programs.

The New Jersey Board of Public Utility’s (BPU’s) energy efficiency program and Renewable Portfolio Standard (RPS) are well funded and effective. If NJ funded energy efficiency with RGGI allowance revenue, this would result in greater increases in the cost of wholesale power since the RGGI allowance value would be bid into the electricity markets. For every $1 in allowance revenue from RGGI NJ ratepayers would pay up to about $2 in increased electric costs. For every $1 invested in energy efficiency and renewable energy in NJ, the NJ ratepayers now pay about $1.

The societal benefit charge (SBC) which is used to fund energy efficiency in New Jersey, is placed on the retail use of electricity, not the wholesale production of electricity. Therefore, it has no direct effect on the wholesale price of electricity and does not cause a shift of electric production from clean NGCC units in NJ to much higher emitting coal units in non RGGI PJM states. While increasing retail electric rates, the SBC can also indirectly reduce wholesale electric rates because the energy efficiency financed by the SBC reduces the demand for electricity. That reduction in the demand for electricity reduces emissions of air pollutants. The reduction in wholesale prices of electricity may offset the price of the SBC.

The use of all SBC funds in NJ contributes to NJ’s economy. SBC funds do not flow to other states. Revenue amounts raised by the SBC and the effect on electric rates are predictable and certain compared to the revenue raised by selling RGGI allowances at an uncertain auction price. A dollar of ratepayer expenditure under the SBC results in a dollar of benefit to the NJ ratepayers. About half the ratepayer increase caused by RGGI would benefit the nuclear power industry.

Conclusion

In my opinion the New Jersey comments correctly identified several issues that were ignored when the final rule was promulgated. Moreover they also included comments that were good reasons for New Jersey to not join RGGI. As soon as there was a new administration these concerns were dismissed. Not because they were addressed or new analyses showed the problems were irrelevant.   They were dismissed because they were inconvenient.

RGGI in the Weeds

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.

RGGI Emission and Allowance 2018 Status

This is a post on the status of emissions and allowances in the Regional Greenhouse Gas Initiative (RGGI). It is another in a series of posts on RGGI that discusses how RGGI has fared so far and what might happen in the future. The fact is that RGGI is edging towards uncharted territory where affected sources that have to comply with the regulations are going to have to get the allowances they need for compliance from investors.

I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. After years dealing with RGGI I worry that whether due to boredom or frustration, that there is very little dissent to the program. It may be because, contrary to EPA and State agency rulemakings, RGGI does not respond to critical comments and rebut concerns raised by stakeholders. After years of making comments that disappear into a void, industry does not seem to think there is value to making comments. 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.

Emissions

RGGI Annual CO2 Emissions lists the total CO2 emissions from the states currently in RGGI. After pretty consistent reductions over time last year there was a six million ton increase from 2017. Stay tuned to another post that looks into the emissions data in more detail. However, note that I have previously posted on the reductions to date which suggest that further reductions will be much more difficult than in the past.

Allowance Status

RGGI is a cap and auction program. Allowances are sold in quarterly auctions to anyone and the proceeds are supposed to be invested in programs that reduce CO2 or ratepayer impacts. RGGI states have modified the original auction allocations to reduce the number or bank of the allowances that have been purchased but not used yet because the original estimate did not account for the possibility that natural gas would supplant coal to the extent observed. Up to this point the affected sources or compliance entities have been able to purchase the allowances needed to cover emissions from auctions. This is going to change in the next couple of years.

RGGI relies on Potomac Economics to provide technical analyses. Frankly, my impression is that the purpose of those reports is to obfuscate and confuse rather than clearly show the status of the program. One of my biggest frustrations is that there is no summary status report and I have inconsistencies in my summary estimates. I have made a couple of guesses at the status of the number of allowances that are held for compliance purposes after the 2018 RGGI emissions are fully surrendered.

According to the Potomac Economics Secondary Monitoring Report for the 3rd quarter of 2018, there were 155 million allowances in circulation and 72 million were held for “compliance purposes”. According to the Potomac Economics Market Monitor Report for the fourth quarter of 2018 entities purchasing allowances for “compliance purposes” bought 77% of the 13,360,649 allowances sold. In RGGI Allowance Allocation Status End of 2018 I added the fourth quarter allowances to get 168 million allowances in circulation and 82 million allowances held for “compliance purposes”. RGGI-wide CO2 emissions were 72 million tons in 2018. Ultimately only 10 million allowances will be in the “compliance purpose” bank. In all of 2018 54 million allowances were auctioned and barring a major reduction in emissions the 10 million ton “compliance purpose” bank will be gone next year.

The Potomac numbers do not include other transfers to the allowance banks. I tried to calculate the allowance bank based on the RGGI allowance distribution reports. (Note that RGGI compliance periods are three years long.) In RGGI Compliance Period Allowance Allocations and Compliance Period Emissions I list the allowances in circulation at the end of 2017 (total allowances released less total emissions). Adding the allowances added this year gives a bank of 140.7 million. I used Potomac Economic’s estimate that 50% of allowances were for compliance purposes to get 70.4 million allowances. In 2018 CO2 emissions were 72.3 million tons so according to this approach compliance entities are already in debt to the non-compliance entities.

Conclusion

I cannot emphasize enough that RGGI is headed towards a situation where the affected sources will have to go to the non-compliance entities to get enough allowances to cover their emissions. If you recall the proceeds that RGGI receives from the auctions are supposed to be used to reduce emissions and provide ratepayer relief. Ideally, the added costs of this carbon tax are offset by those investments. Now, however, the investors will be able to charge whatever they want for the allowances and their profit will be covered by increased costs to the consumer. (In the interests of full disclosure I bought 11,000 allowances in 2018 and will profit from this situation.) In my opinion, affected sources should buy allowances as needed and never run without enough to cover current emissions.

 

If an affected source does not have enough allowances on hand to cover their current emissions they are faced with two issues. When a source bids into the market they prefer to know the price of allowances so they can price their bid appropriately but if they don’t have them they don’t know the cost. Worse would be the case where a facility assumes that they can get allowances but eventually find out none are available at any cost. In that case then they would be out of compliance and would face significant fines. The worst case scenario is that a facility does not have allowances in hand, cannot purchase what is needed and then declines to bid. While unlikely, that could lead to reliability issues because you cannot force an owner/operator to run knowing they are out of compliance without a whole lot of histrionics.

Finally, note that RGGI has closely guarded the ownership of allowances. The market monitoring reports name who has bid but does not list who owns what. Instead they list ownership by three categories:

  • Compliance-oriented entities are compliance entities that appear to acquire and hold allowances primarily to satisfy their compliance obligations.
  • Investors with Compliance Obligations are firms that have compliance obligations but which hold a number of allowances that exceeds their estimated compliance obligations by a margin suggesting they also buy for re-sale or some other investment purpose. These firms often transfer significant quantities of allowances to unaffiliated firms.
  • Investors without Compliance Obligations are firms without any compliance obligations.

In my opinion those categories are pretty broad. In a transparent program there would be examples of which company is in which category but we are left in a position where we have to hope they got the definitions right. Finally, note that investors without compliance obligations could also include those who want to hold allowances to prevent emissions. If that is the case for a significant fraction of investors, then the market is in trouble.

Investment of RGGI Proceeds in 2016

This is a post on the Regional Greenhouse Gas Initiative (RGGI) report: The Investment of RGGI Proceeds in 2016 . It is another in a series of posts on RGGI that discusses how RGGI has fared so far and a follow up to the 2015 investments proceeds report post. Although the press release, RGGI Report: 2016 RGGI Investments Generate Environmental and Economic Benefits, describes the benefits of the program in glowing terms the fact is that the reported benefits for these investments fall far short of what is necessary to meet the RGGI reduction goals.

I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. After years dealing with RGGI I worry that whether due to boredom or frustration, that there is very little dissent to the program. It may be because, contrary to EPA and State agency rulemakings, RGGI does not respond to critical comments and rebut concerns raised by stakeholders. After years of making comments that disappear into a void, industry does not seem to think there is value to making comments. 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.

Summary

According to the Executive Summary in this report:

Proceeds from the Regional Greenhouse Gas Initiative (RGGI) have powered a major investment in the energy future of the New England and Mid-Atlantic states. This report reviews the benefits of programs funded in 2016 by $436.4 million in RGGI investments, which have reduced harmful carbon dioxide (CO2) pollution while spurring local economic growth and job creation. The lifetime effects of these RGGI investments are projected to save 30.4 million MMBtu of fossil fuel energy and 7.0 million MWh of electricity, avoiding the release of 6.4 million short tons of carbon pollution.

As a whole, the RGGI states have reduced power sector CO2 pollution over 50 percent since 2005, while the region’s gross domestic product has continued to grow. RGGI-funded programs also save consumers money and help support businesses. RGGI investments in 2016 are estimated to return $1.7 billion in lifetime energy bill savings to more than 182,000 households and 2,680 businesses which participated in programs funded by RGGI investments, and to more than 800,000 households and 100,000 businesses which received direct bill assistance.

The report describes how the RGGI investments were used 2016, a brief summary of cumulative investments, and then provides specific information for each state including an example of the programs.

Analysis

The claimed 2016 benefits are comparable to the 2015 report. This report says that $436.4 million in RGGI investments funded programs in 2016 as compared to $410.2 million in 2015. The lifetime effects of the 2016 RGGI investments are projected to save 30.4 million MMBtu of fossil fuel energy and 7.0 million MWh of electricity, avoiding the release of 6.4 million short tons of carbon pollution. The lifetime effects of the 2015 RGGI investments are projected to save 28 million MMBtu of fossil fuel energy and 9 million MWh of electricity, avoiding the release of 5.3 million short tons of carbon pollution.

In both Proceeds reports (2015 and 2016), Table 1 Benefits of RGGI Investments list the annual and lifetime benefits of the investments. Table 1 Comparison of 2015 and 2016 Proceeds Funding and Benefits lists the investment totals and the reported benefits for energy savings, electrical use and CO2 emissions reductions. I have also included the investment efficiency or $ per improvement.

Of particular interest is the cost per ton of CO2 reduced. The life time numbers ($64 per ton in 2015 and $82 per ton in 2016) are about twice the Obama era Social Cost of Carbon value of $36 for 2015 using a 3% discount rate. However, I don’t think using the lifetime values is appropriate.

The RGGI model rule updates agreed to by the RGGI States in December 2017 call for an annual post-2021 cap reduction of 2,275,000 tons per year. My question is how will the RGGI investments help meet that goal. In order to determine that you have to use the annual benefits of the investments. When you do look at the annual projections the results are pathetic. RGGI claims that its investments reduced CO2 emissions by 298,410 tons at a rate of $1,375 per ton in 2015 and 382,266 tons at a rate of $1,142 per ton in 2016. The 2016 investments fall short of the post 2021 cap reduction requirement by 1,892,734 tons.

How are the affected sources supposed to meet this reduction target? Although there have been significant reductions since the inception of the RGGI program most of those should be ascribed to economic fuel switching away from coal and oil to natural gas. As shown in a white paper submitted to RGGI by the Environmental Energy Alliance of New York the affected electrical generation units have made most of the cost effective reductions possible from their operations. As a result, future reductions will have to come from other investments such as RGGI. If the RGGI investments are the only way and the 2016 cost efficiency ($ per ton of CO2 reduced) is not improved then RGGI investments would have to be over $2.161 billion every year.

The RGGI model rule update caps emissions in 2021 at 75,147,784 tons. Trading program theory states that when there is allowance scarcity the price will rise and so you could expect that more money will be available for investments. The RGGI allowance price necessary to provide $2.161 billion for 2021 would be $28.75. There is a problem with this however. The RGGI model rule cost containment reserve trigger price (included to insure that allowance prices don’t go to high) is $13.00 in 2021. As a result, they cannot go that high.

The good news relative to this potential problem is that 2017 RGGI emissions were only 66,235,513 tons, well below the 2021 target. The question is why was there a 21.8% drop in emissions relative to 2015? If it was primarily weather related then emissions could go back up. Only time will tell but the point is that at least the emissions are close to the cap targets.

Conclusion

Ultimately these findings illuminate my problem with CO2 emissions trading programs. My particular concern is affected source compliance. Because there is no cost-effective add-on control system available for CO2 reductions, an affected source basically has to buy enough allowances to cover its planned operations. RGGI is hell-bent on reducing its caps despite the fact that its investments for emissions reductions fall far short of what the emissions reductions it has promulgated. There are many complications beyond the scope of this post that determine allowance availability but I believe that by 2025 the compliance entities in RGGI are going to have to pay exorbitant prices to get allowances that they need to operate and soon thereafter there won’t be enough at any cost. At that point, they will have no choice but to shut down.