Lower CO2 Emissions Cap May Mean Higher Allowance Prices for Fossil-Fueled Plants in Northeast, Mid-Atlantic States

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Fossil-fueled power plants in a nine-state U.S. region may be paying more for carbon dioxide (CO2) allowances, following adoption of a proposal from the Regional Greenhouse Gas Initiative Incorporated (RGGI) (New York, New York) that would reduce by 30% the emissions available for auction between 2020 and 2030.

The proposal represents a consensus among states that are RGGI members. Each state now must go back and update their regulations. No state is expected to walk away from the proposal.

The RGGI is the first mandatory, market-based, cap-and-trade regulatory program in the U.S. to reduce greenhouse gas emissions. There are roughly 164 fossil-fueled power plants operating in RGGI states. Fossil-fueled power plants operating in nine Northeastern and Mid-Atlantic states are required to hold one CO2 allowance for each ton of CO2 emitted over a three-year period. The RGGI board of directors comprises regulatory officials from Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont.

Each quarter since September 2008, the RGGI has auctioned CO2 allowances, which are created by the participating states. Unlike other allowance markets, companies do not have the option of over-controlling emissions and selling excess allowances.

In the early years of the auctions, allowance prices stayed flat at about $2 from September 2009 through December 2012. But after the RGGI decided to reduce its emissions cap 45% starting in 2014, allowance prices rose and became more volatile. The most recent auction, held September 7, produced a clearing price of $4.35 per allowance.

Click on the image at right to see a line graph showing RGGI allowance prices since 2008.

This past August, the RGGI board proposed lowering the CO2 cap by 30% between 2020 and 2030, a move that must be approved by all nine states. Basic economics, plus the results of the earlier 45% cap reduction, suggest fossil-fueled power plants in that applicable region likely will pay more for allowances going forward.

CO2 emissions have dropped significantly in the RGGI states over the years. In 2012, emissions were capped at 165 million short tons, RGGI data shows. By 2020, emissions are slated to fall to about 75 million short tons; by 2030, emissions are scheduled to reach about 53 million short tons. If each target is met, CO2 emissions from power plants in the nine-state area would fall by about 112 million short tons, or about 68%, between 2012 and 2030.

Since 2008, the allowance auctions have generated a total of about $2.8 billion, which states can use to invest in energy-efficiency programs, renewable-energy generation, greenhouse gas abatement and direct bill assistance. That sum also includes New Jersey, which was a participant in the RGGI from 2008 to 2011. The states have wide latitude as to where they invest the RGGI allowance proceeds. In 2015, the RGGI said the largest share of the allowance proceeds, about 64%, went to energy efficiency. Clean and renewable energy projects garnered about 16% of allowance proceeds that year.

Click on the image at right to see a table of total RGGI allowance proceeds by state.

In a recent report, the RGGI said its member states invested more than $410 million of auction proceeds in energy-efficiency programs, renewable energy generation, greenhouse gas abatement and direct bill assistance in 2015. Those investments are projected to generate lifetime benefits of about $2.31 billion in lowered energy bills.

The group said total investments made between 2008 and 2015 are projected to provide a total of more than $7 billion in energy savings to participating households and businesses in the region. "These benefits build on the positive trends already seen in the region, which has experienced declining power-sector pollution coupled with economic growth," the group said in an October 8 press release.

"From the start of the program, RGGI's auctioning of allowances and reinvestment of proceeds has been praised as an innovative and effective program design element," Katie Dykes, chair of the Connecticut Public Utilities Regulatory Authority (New Britain, Connecticut) and chair of the RGGI Incorporated board of directors, was quoted as saying. "The reinvestment of RGGI auction proceeds has driven significant bill savings, pollution reductions, and other consumer benefits. For instance, in 2015, Connecticut invested its auction proceeds in clean-energy and energy-efficiency programs throughout the state, avoiding over 450,000 tons of CO2 emissions and helping families and businesses save $149 million on their energy bills over the lifetime of the funded measures."

In further comments, Jared Snyder, deputy commissioner at the New York State Department of Environmental Conservation (Albany, New York) and vice chair of the RGGI board, said: "This report highlights RGGI's benefits as it continues to improve and further reduce climate-altering greenhouse gases. The RGGI states recently announced consensus on an additional 30% emissions reduction from 2020-2030, which will help enable RGGI to continue to reduce pollution while also boosting local economies."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle TM, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.