Greenhouse gas compact challenged by changing energy landscape

Supporters of the 2½-year-old Regional Greenhouse Gas Initiative like to remind those who would criticize, if not outright kill, this first-in-the-nation carbon dioxide trading and reduction program of two things.

First, the idea for it came from a Republican, former New York Gov. George Pataki.

And second, it was modeled on a federal program to curb acid rain also started by a Republican, former President George H.W. Bush.

As applied to acid rain, the emissions trading program was a great success said Paul Farrell, assistant director for the bureau of air management planning and standards division of the Connecticut Department of Environmental Protection.

“If you limit the total amount of emissions in the universe of what sources can emit, you leave it to them essentially how to distribute the reductions. It worked like a charm,” he said.

But RGGI, pronounced Reggie, while similar, apparently is not charming enough for New Jersey Gov. Chris Christie. His announcement in late May that his state would pull out at the end of this year has RGGI participants explaining the vagaries of the program and justifying its philosophy and existence more than usual.

At its core, RGGI is a clean air compact among 10 Northeast and Mid-Atlantic states from Maine to Maryland. It is most frequently described as a cap-and-trade system, but RGGI is more cap-trade-and-invest, with what would appear to be very pronounced economic benefits.

The problem is, while the financial benefits are significant–nearly $900 million realized so far–it’s not totally clear they’re the result of RGGI.

RGGI sets a cap for carbon dioxide emissions from the more than 200 power plants in the region, including 14 in Connecticut–188 million tons a year for the first six years, then a decrease of 2.5 percent for each of four years–to reduce emissions by 10 percent by the end 2018.

Essentially the plants pay for the right to pollute. For every ton of carbon dioxide they emit, power plants must buy one allowance from the states through quarterly auctions. The cost of the allowances is added to the price consumers pay for power. In Connecticut’s case, that’s about an extra 30 cents a month, or about a penny a day.

At the end of the first three-year compliance period, which is the end of this year, the power companies must submit all their allowances.

RGGI also requires each state to use at least 25 percent of the auction proceeds for “consumer benefit or strategic energy purpose,” though each state has its own allocation formula, and in most cases nearly all of the money is being spent on such programs-mainly energy efficiency.

In Connecticut through the first 12 auctions – the last of which took place June 8 — 28.7 million allowances have been auctioned, 22.2 million of which were sold, totaling nearly $51 million. More than $35 million of that, or 69.5 percent, went to energy efficiency, distributed proportionally among Connecticut Light & Power, United Illuminating and the Connecticut Municipal Electric Energy Cooperative.

Twenty-three percent, or nearly $12 million, went to the Clean Energy Fund. And the remainder, 7.5 percent or nearly $4 million, went for other energy programs and administration.

The advocacy group Environment Northeast has crunched numbers that show those investments act as multipliers, creating energy efficiencies that further reduce electricity use as well as create jobs. In Connecticut, ENE calculates that the RGGI funds have created more than $127 million in energy savings and more than 41 job-years of employment per million efficiency dollars spent.

Peter Shattuck, ENE’s carbon markets policy analyst, also pointed out this is money that stays in a local economy, unlike money spent on purchasing fossil fuels, all of which come from outside the state, if not the country.

A few of the states, New Jersey chief among them, have raided their RGGI funds to close budget gaps. New Hampshire took ten percent, $3.1 million, New York took 28 percent, and New Jersey took $65 million, which is 56 percent.

But since RGGI was first floated by Pataki in 2003, and outlined in a memorandum of understanding in 2005 before going effect Jan. 1, 2009, the energy and economic landscapes have changed. Natural gas prices have declined, resulting in many plants switching to this cleanest among the fossil fuels. Warmer weather has moderated fuel use, as has conservation due to the overall poor economy. And a large push on the energy efficiency front has reduced the need for electricity.

The upshot: Emissions from RGGI plants are well below the cap. In 2009 they emitted approximately 124 million tons of CO2, 34 percent below the cap. Emissions increased nearly 11 percent in 2010, most likely a function of a very hot summer and increased use of air conditioning, to 137 million tons, still 27 percent below the cap.

“We didn’t have a crystal ball in 2008 to know about gas prices going low,” Farrell said. “RGGI is functioning as it was intended to function. It’s behaving as expected.”

Nonetheless, that situation is what gave Christie ammunition to pronounce RGGI “a failure” and brand it a “tax” because of the cost to consumers. That sentiment has been pushed most by Americans for Prosperity, an advocacy group founded by the wealthy Koch brothers whose Koch Industries includes oil refineries. The group has protested at RGGI auctions.

“Our goal is to see that this entire program is dismantled,” said Mike Proto, spokesman in Americans for Prosperity’s New Jersey office.

“RGGI is nothing less than a tax on electricity,” he said. “It will drive up our electric rates and ultimately will kill jobs across 10 states. The worst thing — it’s a stealth tax; people don’t see it.”

While it’s difficult to establish cause and effect, only 30 percent of the available allowances were sold in the auction about two weeks after the Christie announcement. And their price was the lowest allowed by RGGI, $1.89.

“Bottom line – the region is achieving long-term emission reduction for the electricity sector,” said Jonathan Schrag, executive director of RGGI, Inc., the non-profit established by RGGI’s 10 states to administer and implement the program. “That’s a good story and good result regardless of the factors.”

The end of the first three-year compliance period includes a review and the option to reset caps and other measures. Even RGGI advocates admit that changes are likely and most support lowering the cap, possibly to 2009 levels or to the average of the three years 2008 to 2010. Most also support retiring unsold allowances, about 14 percent of the allowances offered so far.

Further complicating matters are federal Environmental Protection Agency emission standards for individual power plants based on the fuel they use, due out in the next few months. All the RGGI states except New Jersey and Maine recently sent a letter to the EPA requesting greater flexibility on how those standards are met because of the regional model already in place.

“One of the fundamental things RGGI has done is created an expectation that CO2 emission will be regulated,” said ENE’s Peter Shattuck. “It’s a little early to say RGGI has had a direct effect, though long term, it is sending a market signal.”

Like other advocates, he called Christie’s move symbolic and political. And noted that other states, regions and even countries are exploring RGGI-style programs.

“We’re not even through the first three years,” the DEP’s Farrell said, “We have to give the program a chance to work, a chance to prove its success.”