In November 2019 the Regional Greenhouse Gas Initiative (RGGI) released their annual RGGI electricity marketing report. I have not been following this annual report but have been looking at emissions leakage and realized that it is supposed to address RGGI leakage.
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.
Emissions leakage refers to the situation where a pollution reduction policy simply moves the pollution around geographically rather than actually reducing it. Ideally if you want to solve global warming with a carbon price then you want to apply it to all sectors across the globe so that it cannot occur. In general, I don’t think a global carbon pricing scheme is ever going to happen because of the tradeoff between the benefits which are all long term versus the costs which are mostly short term. I don’t see how anyone could ever come up with a pricing scheme that equitably addresses the gulf between the energy abundant “haves” and those who don’t have access to reliable energy such that “have nots” will be willing to pay more (as carbon taxes) as they catch up with those who have abundant energy.
Despite this potential problem, carbon pricing schemes including the RGGI cap and auction program have been implemented in small jurisdictions. When RGGI was being developed emissions leakage was a big concern. In March 2007, the Emissions Leakage Staff Working Group submitted a report: Potential Emissions Leakage and the Regional Greenhouse Gas Initiative (RGGI): Evaluating Market Dynamics, Monitoring Options, and Possible Mitigation Mechanisms. The report noted that “Under a “middle-of-the-road” scenario, cumulative emissions leakage was estimated at 27% of net CO2 emissions reductions through 2015” but “Projected emissions leakage is predominantly in the form of a shift in the location of new natural gas-fired power plant builds, rather than decreased utilization of existing plants”. In an independent analysis, Kolodziej and Wing (2008) used theoretical and numerical general equilibrium models to evaluate potential leakage and concluded that “Although RGGI’s economic impacts are small, they induce substantial increases in power exports from unconstrained states which result in emission leakage rates of more than 50%”.
The 2007 Emissions Leakage Staff Working Group report recommended that “for the purpose of quantifying and determining the extent of potential emissions leakage, ensuring that leakage does not undermine the emissions reductions achieved by the program, and supporting RGGI’s goals of monitoring emissions leakage, it is essential to be able to track and verify the environmental attributes associated with all the power being generated and used within the RGGI region, as well as the environmental attributes of power generated in adjoining regions”. The emissions page in the allowance tracking category of the RGGI website notes “As part of RGGI’s program design process, the participating states determined that regular reports would be made to monitor and track power generation serving load in the RGGI region, as well as the emissions associated with that generation.”
I believe that the RGGI electricity marketing reports represent the commitment to track leakage. They summarize data for electricity generation, net electricity imports, and related carbon dioxide (CO2) emissions for the states in RGGI. One metric presented could “provide a preliminary or potential indication of emissions leakage, or a lack thereof”. However, there is a caveat: “because this report does not establish the causes of observed trends, it should be emphasized that this report does not provide indicators of CO2 emissions leakage”.
The most recent report, CO2 Emissions from Electricity Generation and Imports in the Regional Greenhouse Gas Initiative: 2017 Monitoring Report, states that:
Annual average net electricity imports into the nine-state RGGI region increased by 22.2 million MWh, or 39.6 percent, during the 2015 to 2017 annual average compared to the 2006 to 2008 base period. CO2 emissions related to these net electricity imports decreased by 2.3 million short tons, or 9.1 percent, during this period, indicating a reduction in the average CO2 emission rate of the electric generation supplying these imports of 317.0 lb CO2/MWh, a reduction of 35.0 percent.
Compared to the annual average during the 2006 to 2008 base period, 2017 electric generation from RGGI generation decreased by 54.6 million MWh, or 31.7 percent, and CO2 emissions from RGGI generation decreased by 73.9 million short tons of CO2, or 53.4 percent. The CO2 emission rate of RGGI electric generation decreased by 509.4 lb CO2/MWh, a reduction of 31.7 percent.
One could easily assume that at least some of the observed decrease in generation within the RGGI states was caused by the increased imports. In the worst case 22.2 million MWh of the observed decrease in the 2017 54.6 million MWh electric generation decrease from RGGI generation could be caused by leakage. However, in order to make that assumption you have to presume that the RGGI effect on prices was the only driver of imports. I have found analyses that claim RGGI’s effect on emissions ranged from 17% and 24% but because the cost adder of the RGGI carbon price was relatively small I do not believe that the RGGI price drove affected source control decisions. As a result, I believe that 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. Therefore, RGGI investments are only directly responsible for less than 5% of the total observed reductions. As a result, that suggests that the change in imports wasn’t primarily caused by RGGI but other factors so leakage is not an issue at this time.
However, there could be big changes to RGGI compliance coming. Because the allowance cap is decreasing and the share of banked allowances owned by investors is increasing, I believe that there will be a significant price increase in the next several years. Moreover, there are few opportunities left for fuel switching left at RGGI-affected sources and that has been the primary cause for the observed emissions reductions to date. That will put additional pressure on RGGI region prices. As a result, leakage may become an issue soon. One caveat is that New Jersey joined the program in 2020 and Virginia will join soon thereafter and that could defer these issues down the road.
I have to comment on one disappointing aspect of the RGGI monitoring reports. Leakage was a major stakeholder concern going into the program and I believe that this report was intended to address that concern. However, the report notes that “because this report does not establish the causes of observed trends, it should be emphasized that this report does not provide indicators of CO2 emissions leakage”. With all due respect, I think the report should actually make its best estimate of CO2 emissions leakage because it is a potential problem. However, if the report showed that leakage was a problem, then that would be embarrassing if not a flaw in RGGI. As a result, it is not surprising that the report ducks the issue.
I conclude that to this point leakage has not been an issue. However, the lack of leakage is because fuel switching reduced emissions without raising prices. When fuel switching no longer becomes an option, I expect that the costs to reduce emissions will create a boundary price differential that will lead to RGGI leakage. Unless the addition of New Jersey and Virginia create opportunities for cost-effective reductions then RGGI leakage will become a problem in the next several years.