Overhaul is near for Regional Greenhouse Gas Initiative

For all the expectations around Tuesday’s meeting of the nine member states of the Regional Greenhouse Gas Initiative — the nation’s first power plant emissions trading and reduction program — the result was a bit anti-climactic.

It will still be another month or so before any anticipated changes to the initiative are known. Several adjustments, discussed during a nearly eight-hour meeting in New York City, are under consideration. The plan is to address the problem that has bedeviled the program since it began in 2009 with the goal of lowering emissions in the Northeast 10 percent by the end of 2018.

The RGGI progam (pronounced reggie) empowers the states to sell emission allowances through auctions, then to invest at least a portion of the proceeds in consumer benefits: energy efficiency, renewable energy, and other clean energy technologies.

But no one predicted that natural gas prices would fall so low that power plants would, on their own, switch to using it. This helped push emissions to record low levels: 91 million tons at the moment, which is 45 percent below the current RGGI cap of 165 million tons.

Those low emissions, while a boost for air quality, have meant the revenues from RGGI, while considerable, are less than they might have been.  Through Dec. 5, RGGI has raised more than $1.1 billion for the region and more than $65 million for Connecticut. The somewhat disappointing financial return has caused some states to question whether RGGI is of any value — most famously Gov. Chris Christie of New Jersey who pulled his state out of the compact a year ago.

“The bottom line is that we’re looking at a variety of ways to tighten the RGGI marketplace, and the cap is one area where I think we are committed to lowering it,” Esty said. But he emphasized that just focusing on the cap would be “an analytical mistake.”

“The cap’s the most important thing. The cap is the backbone of the program,” said Peter Shattuck, director of market initiatives for Environment Northeast, an advocacy group that has become something of an unofficial RGGI watchdog. “By reducing the cap, you’re bringing supply and demand more in line and it would cause more scarcity of allowances.”

And that would likely push their price up.

Under RGGI, the 209 power plants in the region from Maine to Maryland pay for the right to pollute. For every ton of carbon dioxide each emits, a plant must buy one allowance from the state at quarterly auctions.

But with lower emission levels due in large part to the increased natural gas use, several things have happened. Not all the allowances are being sold. Only 53 percent of them were sold at the Dec. 5 auction, for instance. For those that have been sold, the auction price has been at the lowest allowable level — right now $1.93. And some power plants have bought up extra allowances while the prices are low to use at another time.

Esty said the principles agreed on at Tuesday’s meeting are to be included in a draft of program changes. In addition to “modernizing the cap to reflect current market conditions,” these proposals are addressing imported power, which currently doesn’t have to get RGGI allowances; retiring unsold allowances, which represents about a quarter of those that have been available over the four years of the program; and dealing with the glut of banked allowances, which could drive prices down.

The idea of reducing the cap has been kicking around for more than two years when RGGI members first began preparing for the mandated three-year review a year ahead of its official start in January 2012. Despite the early effort, the process slowed down, which Shattuck attributes to the election year and an effort to keep the review off the political landscape.

In that time, New Hampshire and Maine, whose support for RGGI had wavered, turned more Democratic politically, which both Shattuck and Esty said will help keep RGGI stable.

Also during that time, proposals for lower caps were offered. Shattuck believes only the lowest of them, 91 million tons, would have any real impact, though he still considers it modest.

“We want to see a cap that actually reduces emissions and reduces emissions significantly,” said Shattuck. “Some folks in the environmental community say we should be looking at an even lower cap.”

Environment Northeast would like to see a cap of 85 million tons, which Shattuck said could push auction prices to over $8 by 2020.

Esty said Connecticut is not ready to commit to a particular level yet.

“We are waiting to get the final analysis so that we can make a determination which cap we can support,” he said. “But we will make that decision with an eye on rate impacts as well as the environmental gains.”

The rate impact concern could prove to be gnarly. Power plants are allowed to pass along their auction costs. Estimates have been that the current bottom rate of $1.93 adds about 30 cents a month to consumer electric bills in Connecticut. With a lower cap and higher auction prices, it’s not clear what that would mean for ratepayers. Esty said Gov. Dannel P. Malloy has made it clear that increases must be modest.

But higher rates do not necessarily mean higher bills, Shattuck pointed out. Rates are lower now than when RGGI started out and energy efficiency can help mitigate costs further.

Which gets to one of  RGGI’s critical elements — its requirement that at least 25 percent of the auction proceeds go to consumer energy benefits. In Connecticut, nearly 70 percent goes to consumer energy efficiency, mainly through the Energy Efficiency Fund. Twenty-three percent goes to the Clean Energy Finance and Investment Authority for renewable energy and the remainder goes to other energy efficiency programs and administration.

RGGI staff will be drafting new rules in the next few weeks. The goal is to release a final program update by the end of January.