RGGI expansion: The Road Ahead
2018 will be a big year for the longest operating carbon dioxide (CO2) cap-and- trade program in the US. The nine-state Regional Greenhouse Gas Initiative (RGGI) will take steps to implement important program revisions that will take effect in 2020. Meanwhile, its highly likely RGGI will welcome two new members, New Jersey and Virginia, to the electric power CO2 emissions trading market. In this note, we examine the emissions and allowance price implications of RGGI expansion.
A Tale of Two States
New Jersey and Virginia both held off-year elections for Governor in 2017. In New Jersey, Governor-elect Phil Murphy (D) campaigned on a promise to get his state to rejoin RGGI. All signs point to him following through on that promise. While New Jersey had been a founding member of the program, Governor Chris Christie (R) pulled the state out at the end of 2011. Meanwhile, Virginia Governor-elect Ralph Northam (D) ran on a promise to implement a power sector cap-and-trade program that the outgoing administration already had under construction. Absent any surprises it looks like both states are on course to join RGGI by 2020. However, the circumstances surrounding each state’s approach to participation diverge sharply from conditions in the current nine-member region. These differences could have significant implications for the expanded market.
In 2015, Virginia’s electric power sector emissions were 30% below 2005 levels, the initial reference year for the RGGI program. RGGI states have reduced emissions by 50% over the same time frame. Looking forward, we expect Virginia’s power sector emissions to continue to decline out to 2030 in the range of 47-57% below 2005 levels under current policy. The range represents market uncertainty around the price of natural gas and the cost of renewable energy technologies in line with our national Taking Stock projections.
As part of its proposed cap-and-trade regulations, Virginia is considering imposing a carbon cap of either 34 million or 33 million short tons that would decline at the same roughly 3% rate as the currently proposed RGGI cap. We find that either cap would allow Virginia to cumulatively emit more CO2 between 2020 and 2030 than our projections under current policy (Figure 1). The gap could be as narrow as 4 million tons under our high emissions scenario if the state imposes a tight cap, or as wide as 71 million tons under our low emissions scenario if decisionmakers opt for the loosest cap under consideration. The latter represents emissions 22% lower than the proposed cap. While forecasts by others suggest Virginia’s emissions may be higher, we find that the state may want to consider a more ambitious cap if the goal of the program is to drive down CO2 emissions.
New Jersey is in a tighter spot. The state’s electric power sector emissions remained roughly flat between 2005 and 2015. Looking forward, we expect New Jersey’s power sector emissions under current policy to rise by another 5 to 17% above 2005 levels by 2030 — the opposite direction of the rest of RGGI. Since New Jersey doesn’t have a proposed regulation under development, it’s not at all clear how its new cap might look. State officials will need to craft a proposal as they engage the other RGGI states and stakeholders. We constructed two options for this analysis: a loose cap where emissions are limited to 2015 levels in 2020 and then decline in line with the broader RGGI reduction schedule; and a tight cap where New Jersey picks up where it left off when it departed the program in 2011 having adopted all the same downward adjustments the other 9 states have made to the regional cap over the years.
We find under both our emissions scenarios that either cap would bind the state to make further CO2 cuts with a large spread between outcomes. Depending on New Jersey’s approach, cumulative emissions reductions could range from 50 million to 202 million short tons between 2020 and 2030. We do not expect RGGI carbon allowance prices to spike if New Jersey chooses one of these caps. The state represents 25% of the expanded RGGI market and as we’ll show the regional cap may not be binding. However, New Jersey may have fewer allowances to auction which could lead to a possible transfer of allowance value out of the state. Of course, New Jersey could put forward a less stringent cap than what we consider here but it will need to consider how to frame a more lenient approach when surrounded by more ambition.
The Regional Implications
Given the starkly different situations in Virginia and New Jersey, what will their expected participation in RGGI mean for the region as a whole? Probably modest impacts on both emissions and allowance prices. Without New Jersey and Virginia, we expect RGGI emissions to just exceed the cap in our high emissions scenario, however under our low emissions scenario we see a gap of 53 million tons or 9% of the cap. This all assumes RGGI states reduce their carbon caps to soak up most surplus allowances banked in the system through 2019. If the RGGI cap is as tight as it gets by fully leveraging the new Emissions Containment Reserve (ECR) then under our low emissions scenario the cap would curb up to 18 million short tons of emissions.
With New Jersey and Virginia folded into the regional market we see a similar story under our high emissions scenario. Cumulative emissions would be just 12 million short tons or 1% higher than the cap if RGGI opts for a loose cap that does not trigger the ECR while New Jersey and Virginia opt for the less ambitious caps considered in this analysis. Under our low emissions scenario the loose cap would not require any additional CO2 cuts. Overall, the expanded RGGI market could see allowance prices in the range of the ECR minimum ($6 per short ton starting in 2021 and rising to $11 per short ton in 2030). If New Jersey and Virginia opt for the most ambitious caps considered in this analysis we do expect the region-wide cap to force further emissions reductions under both emissions scenarios. This could drive emissions as much as 13% lower than our low emissions scenario on a cumulative basis and allowance prices could be higher than the ECR minimum price path. While the ECR prices are substantially higher than the latest RGGI auction clearing price of $3.80 per short ton they are still well below the 2018 floor price of $13.18 per short tons in California’s cap-and-trade program. We see no reason to expect allowance prices to hit the RGGI Cost Containment Reserve (CCR) price set to start at $13 per short ton in 2021 and then rise by 7% annually.