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RGGI officials consider tighter emissions cap, tweaks to cost containment reserve

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RGGI officials consider tighter emissions cap, tweaks to cost containment reserve

Amid an ongoing review of the program's rules this year,Regional Greenhouse Gas Initiative officials are considering making some majorchanges to the Northeast carbon cap-and-trade program. While there are severalmarket design issues that will be scrutinized, first and foremost, RGGIofficials should look to tightenthe program's emissions cap and alter, or even do away with, the costcontainment reserve.

Ahead of an April 29 stakeholder review meeting held in Boston,various groups, including the Sierra Club and the Acadia Center, in commentsdated April 14, reiterated their position that the participating RGGI statesshould implement a tighter emissions cap between 2020 and 2030.

After the last comprehensive program review back in 2013 andin an attempt to recalibrate the program's cap with actual emissions levels,the RGGI states decided to cut the program emissions cap by 45%, to 91 milliontons, starting in 2014. The RGGI cap then declines 2.5% each year thereafterthrough 2020.

"The RGGI states have proposed to model a future carboncap that falls by 2.5 percent per year, while eliminating the current CostContainment Reserve (CCR). We support modeling this scenario. The CCR ascurrently designed enables millions of additional tons of carbon pollution, andundermines both RGGI's cap and the states' broader climate goals," theApril 14 commentssaid.

"We also strongly encourage the states to model a moreambitious cap reduction of 5 percent below 2020 levels per year, in line withthe annual reductions achieved under RGGI to date, while likewise assumingelimination of the CCR. A 5 percent trajectory would put the states on aclearer path to achieve a 40 percent reduction in economy-wide greenhouse gasemissions by limiting power sector carbon pollution to less than 40 milliontons in 2030," according to the comments.

During the previous RGGI stakeholder meeting held in earlyFebruary, participants reviewed potential policy scenarios in light of theClean Power Plan, including modeling by Synapse Energy Economics Inc. inpartnership with the Sierra Club.

In an updated modeling scenario from Synapse, commissionedby the Sierra Club and dated March 4, it was reiterated that a stricteremissions cap would be required from the RGGI participating states in order toachieve a goal of a 40% economy-wide reduction in emissions below 1990 levelsby 2030. The report found the least-cost strategy for the RGGI states to meettheir 2030 climate goals would result in a 40% CO2 emission reduction in thenine states by 2030 by lowering the program cap on electric sector emissionsfrom 78 million short tons in 2020 to 39 million short tons in 2030. Thisstrategy would also include the addition of new emission reduction measures inthe transportation, buildings and industrial sectors.

Because it inflates the RGGI's mass-based cap when thetrigger prices are reached, the CCR is another market design factor that needsto be altered, according to some. In 2014, also as part of the program review,the RGGI states implemented the use of the reserve during the program'squarterly auctions. The CCR creates a fixed additional supply of CO2 allowancesthat are available for sale only if prices exceed certain levels — $4 in 2014,$6 in 2015, $8 in 2016 and $10 in 2017, rising by 2.5% each year thereafter.

When the CCR is triggered, additional allowances are soldinto the market. In 2014, the additional amount was limited to 5 millionallowances. From 2015 to 2020, up to 10 million additional allowances would beup for sale each year if the trigger price is reached.

While the CCR serves as a cost management tool to control volatilityin the RGGI market in times of high demand, thus far, since its inception, theRGGI CCR has added about 15 million tons of CO2 allowances to the RGGI market.

Speaking at an April 29 learning session that followed thestakeholder review meeting, Dallas Burtraw, Darius Gaskins senior fellow atResources for the Future, said there are two sides to the cost containmentreserve. On the one side, there is a price floor implemented with a reserveprice, or minimum acceptable bid, in the auction.

"If market prices (and buyer willingness to pay) isbelow the reserve price, then some portion of allowances will not be sold orenter the market. Tighter supply will support the price," Burtraw said ina presentation.

In 2016, the RGGI auction reserve price is $2.10/ton andescalates at 2.5% per year.

On the flip side, a cost containment reserve provides anadditional quantity of allowances that can be purchased. That secondary auctionhas a reserve price also, which serves as a "trigger price" for theadditional allowances.

According to Josh Berman, Sierra Club's senior counsel,officials could get creative so that RGGI could potentially keep the CCR, whilealso retaining the integrity of the regional cap-and-trade program.

"[RGGI] could put the CCR under the cap," like inCalifornia, Berman told S&P Global Market Intelligence in a phone interview.

Under the California cap-and-trade program, the reserve ispopulated only if necessary, by borrowing allowances from future complianceperiods, as well as those that are not sold in the auctions.

"While firm-level borrowing may be a problematic ideadue to moral hazard (firms may go bankrupt, or gain an incentive to lobbyharder for loose caps), program-level borrowing from under the cap appears lessproblematic," according to Burtraw's presentation.

If RGGI proceeds with the use of the CCR, it must also bedesigned and possibly tweaked to meet proposed Clean Power Plan requirements.Several of the stakeholders said April 29 that if the RGGI states becomeinvolved in a broader trading scheme with more partners under the Clean PowerPlan rule, this could reduce the need for cost management, or the CCR under theprogram.

"Maybe we don't need a CCR, if RGGI is trading withmore states," Derek Furstenwerth, senior director of environmentalservices, Calpine Corp., said April 29.

On the other side of the coin though, if the RGGI statestrade allowances with other states that do not have a price floor, there couldbe equity issues, Peter Shattuck, director of the Clean Energy Initiative andDirector of the Massachusetts Office of the Acadia Center, said at the April 29meeting.

Entities may want to purchase Clean Power Plan allowancesfrom other states if their price is below the price floor. However, this couldcause emissions inside the RGGI region to exceed the RGGI budget. Additionally,RGGI would likely lose auction revenue.

In the end, the RGGI cap-and-trade program will surelycontinue to evolve in the months ahead and will likely retain an influence onprogram design in other states moving forward.

"We are building this airplane while we are flying it,"Furstenwerth said.

The RGGI is made up of Connecticut, Delaware, Maine, Massachusetts,Maryland, New Hampshire, New York, Rhode Island and Vermont. The participatingstates use a market-based cap-and-trade program to reduce greenhouse gasemissions from regional power plants, selling nearly all emissions allowancesthrough auctions and investing proceeds in energy efficiency projects in theresidential, commercial and municipal sectors.