September 01, 2013

RGGI gets revamped: A look at the updated Model Rule and implications for its future

Jennifer Drust

Following a comprehensive review, the Regional Greenhouse Gas Initiative (RGGI), consisting of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont, continued to refine its carbon dioxide (CO2) program. RGGI is a cap-and-trade program for CO2 emissions from fossil fuel-fired electric generating units greater than 25 megawatts (MW) located within a participating state. The emissions cap is based on a number of available allowances for affected emissions sources that individually represent one ton of CO2 emissions. Affected electric generators are required to surrender allowances equal to their CO2 emissions in a particular control period.

A Model Rule provides the framework for the program, and the RGGI states commit to its adoption in either statutory or regulatory form. From the beginning of the program in 2009, the RGGI states intended to analyze their vanguard CO2 cap-and-trade effort and make any necessary changes to the program to ensure its efficacy. While legislative attempts to develop a national carbon trading rule continue to seem unlikely, there is speculation that RGGI, the nation’s first multistate CO2 trading program, could serve as a model for a future national program.

As the 2012 program review began, debate swirled over whether RGGI had, in fact, been successful in reducing CO2 emissions. New Jersey withdrew from the program effective December 31, 2011. The state’s governor, Chris Christie, branded RGGI ineffective and “a failure” citing low allowance prices and market changes independent of the program as effectively reducing New Jersey’s emissions below the goals set for 2020. See Mireya Navarro, Christie Pulls New Jersey From 10-State Climate Initiative, N.Y. Times, May 26, 2011. New Hampshire passed legislation that would allow the state to withdraw from the program if two other New England states, or one state that accounted for 10 percent of the load total for all New England states, also withdrew. See Matthew Spolar, Bill That Reforms RGGI Becomes Law, Concord Monitor, June 26, 2012.

Despite the novelty of the interstate approach to controlling greenhouse gas emissions, the changes in the electricity market (i.e., the high price of coal relative to the low price of natural gas), the economy, energy conservation programs, and the weather are indisputably factors that have reduced demand and increased the pressure on power plants to switch fuels from coal to less carbon-intense natural gas. RGGI allowances were clearly in overabundance; allowances distributed by auction generally sold at or near the auction reserve price by the end of 2010, and many allowances were not purchased at all. The RGGI states were well aware of these issues and criticisms, and the program review entailed a detailed look at all components of the program.

In the updated Model Rule, the RGGI states adopted the most widely anticipated change to the program: the 2014 CO2 emissions cap was lowered from 165 to 91 million tons. The cap will drop 2.5 percent annually between 2015 and 2020 under the updated Model Rule, just as it would have in the original Model Rule. In recognition of the glut of banked allowances, which had accrued due to the oversupply of allowances in earlier control periods, the updated Model Rule includes two adjustments to each state’s budget.

The updated Model Rule also includes some significant changes to allow the use of offset allowances. Offset allowances are derived through emissions offset projects “that have reduced or avoided atmospheric loading of CO2, CO2 equivalent or sequestered carbon” and meet the stringent qualification requirements established by the Model Rule. Model Rule at XX-10.1. A regulated source cannot comply with RGGI requirements through offset allowances alone. Model Rule at XX-6.5(a)(3). Moreover, only certain types of projects are available to generate offset allowances. But, as of January 2012, no offset allowances had been awarded in the RGGI region, and the RGGI states were interested in evaluating why that had occurred, as well as exploring how offsets could be made more available. While the offset-eligible projects are still narrowly defined in the updated Model Rule, the RGGI states did expand their program to accept offset allowances generated through certain forest projects that improve forest management, avoid conversion of forest land, or reforest land. See generally Model Rule at XX-10.3(a)(1). RGGI based its forest offset protocol largely on that developed by the California Air Resources Board. It did so in order to capitalize on an anticipated supply of these offsets due to the expected California market and leverage the work already done in the area of developing forest offset protocols. There is some indication that the new forest offset system may keep New Hampshire in the RGGI group. David Brooks, New Hampshire Considers Whether to Strengthen RGGI Cap-and-Trade Program, Nashua Telegraph, Feb. 24, 2013.

The updated Model Rule is also equipped with a safety valve in the form of a cost containment reserve. Model Rule at XX-5.3(d). The cost containment reserve is triggered only if demand for allowances above the “trigger price” exceeds the number of allowances available for purchase. Model Rule at XX-9.1(b)(1). The trigger price increases over time, beginning at $4 in 2014 and increasing by $2 annually to $10 in 2017, and then increasing by 2.5 percent thereafter. Model Rule at XX-1.2(r).

The updated Model Rule does not include any provisions designed to address the issue of leakage, i.e., the concern that emissions reductions from a regulated unit will be offset by increases in emissions from a unit not subject to RGGI. The RGGI states intend to further analyze the underlying facts associated with emissions from imported electricity and to continue researching the legality of mechanisms to address such emissions. See RGGI 2012 Program Review: Summary of Recommendations to Accompany Model Rule Amendments at 3, available at www.rggi.org/docs/ProgramReview/_FinalProgramReviewMaterials/Recommendations_Summary.pdf.

Now that the Model Rule has been updated, each state participating in the program will endeavor to pass enabling rules or legislation to include the changes to its existing program. Such authority must be effective by January 1, 2014.

A question that remains unanswered after the RGGI revamp is whether the bellwether CO2 trading program will serve as a model for, or a permissible state plan under, the widely anticipated New Source Performance Standards (NSPS) guidelines for existing power plants. The U.S. Environmental Protection Agency has not announced a timetable for the promulgation of existing-source NSPS, and it is behind schedule in finalizing the necessary precursor rule, the NSPS for new sources. The RGGI states intend to conduct another program review no later than 2016, which could coincide with a federal NSPS proposal for existing power plants. If RGGI can serve as a state plan for purposes of complying with federal Clean Air Act section 111(d) standards, the ranks of RGGI participating states may swell, or RGGI may serve as a model for similar regional programs in other parts of the country. While the future is uncertain, it nonetheless appears that, despite its growing pains (or perhaps because of them), RGGI will play the important role of demonstrating how to implement a CO2 cap-and-trade program.

Jennifer Drust

Jennifer Drust is an associate at Ballard Spahr in Philadelphia and is a Year in Review vice chair of the Section’s Climate Change, Sustainable Development, and Ecosystems Committee.