Econ-Utopia: The Northeast’s Regional Greenhouse Gas Initiative

By Matthew Riddle, CPE Staff Economist

The Regional Greenhouse Gas Initiative, or RGGI, grabbed headlines in Massachusetts recently when Governor Deval Patrick signed onto it, committing Massachusetts to a cut in its emissions of greenhouse gasses from power plants, and reversing Mitt Romney’s decision to abandon the agreement. In addition to rejoining RGGI, Patrick also outlined some proposals for its implementation, which may prove to be even more significant than his decision to join.

But before going into the details, I should explain what RGGI is, how it came about, and why we should care. In 2003, the governors of nine northeastern states, from Delaware to Maine, got together to create a regional plan to reduce carbon dioxide emissions from power plants, in an effort to combat global climate change. They agreed on an approach often referred to as a: cap and trade’ system. Each state would set a cap on the total level of carbon emissions by releasing a fixed number of emission permits. Companies could then trade these permits to determine where the cuts would be made, but the total number of permits would not change.

This approach provides another solution to the problem raised in our last econ-utopia: that the market price of fossil fuels is too low because the costs of pollution and other: externalities’ are not taken into account. A cap and trade program would raise the cost of burning fossil fuels to bring it closer to its true level by forcing companies to pay for emission permits in addition to the price of the fuel.

The first use of a cap and trade system for controlling air pollution was introduced in the US as part of the Clean Air Act Amendments of 1990, where it was used to limit sulfur dioxide emissions from power plants. More recently, one of Europe’s key programs to meet its targets under the Kyoto Protocol is a cap and trade system for large emitters of carbon dioxide.

While these programs have been effective at cutting emissions, they suffer from one significant drawback: in the initial allocation, the emission permits were distributed to polluters at no cost. The result, which may sound surprising, is that electricity prices have been rising just as they would have if the emission permits were sold, and most of the additional revenue from these higher prices is captured by electricity generators as windfall profits. A recent study by IPA Energy Consulting found that under the European cap and trade system, companies in the UK would make £800 million ($1.4 billion) per year in additional profits beyond what they would have made with no restrictions. Meanwhile, consumers have to bear the cost, by paying higher prices for electricity.

On the other hand, if the permits were sold to polluters, this money could be collected for public use. It could support greater spending on energy efficiency and renewable energy, provide assistance to displaced workers, be redistributed to consumers, or any combination of these options. In one proposal, known as a: Sky Trust,’ the money would be evenly distributed to each person in the country. For the majority of the population, and especially for low income families, the payment would more than compensate for the higher energy prices.

The RGGI agreement among Northeastern states shows progress over these earlier programs: instead of giving all the permits away for free, the agreement requires that states auction at least 25% of the permits to polluters. In his announcement last month, Governor Patrick went farther, joining New York Governor Eliot Spitzer and the Vermont legislature in committing to auctioning not 25%, but 100% of the permits. The revenue from the auction in Massachusetts will be used to fund a new program promoting energy efficiency and the development of renewable energy, which would generate additional energy savings and help to reduce costs for consumers.

In addition to its direct benefit in the northeast, RGGI could also set an important precedent for the design of a nationwide system. If a nationwide cap and trade program were imposed that covered all US carbon emissions, the permits could be worth as much as $100 billion. If used effectively, this money could have an enormous positive impact. But if the permits are given away for free, the money would instead go to enhance the profits of polluters, and this opportunity would be lost.

Sources:

For an overview of RGGI, see

For coverage of Governor Patrick’s recent announcement, see

For more on the importance of auctioning permits, see

For information about the Sky Trust proposal, see

© 2007 Center for Popular Economics

Econ-Atrocities and Econ-Utopias are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.