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RGGI finalizes rule to cut emissions 30% from 2020 to 2030

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Political and economic risk

Supply and demand

Policy and regulation

Liberalization and market design

Supply security

The nine-state Regional Greenhouse Gas Initiative has finalized an updated Model Rule designed to cut carbon dioxide emissions by 30% between 2020 and 2030, after having set a cap this year that is already almost 49% lower than 2012 levels.

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"The finalized RGGI Model Rule is essentially unchanged from the draft that was unveiled in August, leaving little surprise for the market," said Roman Kramarchuk, managing director of global power, emissions and clean energy at PIRA Energy, an analytics unit of S&P Global Platts, in an email Wednesday. "A key feature for the program after 2021 remains a full bank adjustment, attempting to address market oversupply."

In Tuesday's statement, RGGI said the rule sets the regional emissions cap in 2021 at about 75.148 million st and subtracts 2.275 million st/year of CO2 thereafter, declining to less than 54.7 million st in 2030, compared with 84.3 million st in 2017.

The RGGI states currently are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont, but following recent elections, New Jersey and Virginia are expected to join in coming years.



In 2012, the year after New Jersey exited the RGGI, the cap was set at 165 million st.

As RGGI states have shifted their generation fleets away from fossil fuels and toward more zero-emissions resources, they have built up excess allowances, but the updated Model Rule allows for the 2021-25 emissions caps to be adjusted for pre-2021 vintage allowances in excess of the total quantity of 2018-20 emissions. This would be the third adjustment for such banked allowances.

After adjusting for banked allowances, the 2017 CO2 cap is 62.5 million st, nearly 22 million st less than the unadjusted emissions cap.

In November, the Virginia Air Pollution Control Board voted unanimously to set a cap for the state's fossil fuel-fired power plants with more than 25 MW of capacity starting in 2020 and then require a 30% emissions reduction over the next 10 years, consistent with Gov. Terry McAuliffe's directive in May to develop a "trading-ready" regulation to lay groundwork for linkage with RGGI.

The cap would be 33 million st based on modeling using Virginia assumptions, or 34 million st on modeling using RGGI assumptions.

New Jersey participated in RGGI from 2009 through 2011, but Republican Governor Chris Christie announced plans in 2011 to drop participation. Democrat Phil Murphy won the governor's race this November, and he supports a 100% renewable portfolio standard by 2050.

Each state in RGGI will have to revise its CO2 budget trading program to be consistent with the updated Model Rule.

An ICF International analysis of the economic effects of the updated Model Rule's emissions cuts shows "initial slight negative economic impacts," which "quickly grow to small, but consistent, economic benefits," even without counting health, environmental and climate-related benefits. Benefits that were counted include reinvestment of the proceeds from emissions allowance sales.

The Solar Energy Industries Association applauded the updated RGGI Model Rule. "As a zero-carbon electricity source, solar stands ready to assist the RGGI-participating states in achieving their goals," Sean Gallagher, the Solar Energy Industries Association's vice president for state affairs, said in an Wednesday in an email. "In addition to cleaner air and affordable electricity, expanded deployment of solar energy will also result in more well-paying jobs in these states and economic investment."

To enhance the ability of the cap-and-trade program to encourage emissions reductions, the updated Model Rule provides for an emissions-containment reserve, which states can use to respond to market forces if emissions reduction costs are lower than expected.

At prices below a threshold price, states could withhold as much as 10% of their CO2 budgets to keep in their ECRs.

The threshold price will be $6/st in 2021, rising 7%/year thereafter. Maine and New Hampshire have said they do not plan to implement an ECR.

"Platts Analytics/PIRA does not expect ECR allowances will be needed right away in 2021, but sources may wish to buy these at the lower starting trigger prices (and the increased supply would ultimately prove bearish for market balances)," PIRA's Kramarchuk said.

--Mark Watson, Markham.watson@spglobal.com

--Edited by Valarie Jackson, valarie.jackson@spglobal.com