RGGI Program Review Results in Proposal for Significantly Lower Cap

Posted on February 8th, 2013 by Shelley Welton

by Shelley Welton

On February 7, the Regional Greenhouse Gas Initiative released a new Model Rule that memorializes several important recommendations coming out of its 2012 review process. Most significantly, the new Model Rule calls for a major readjustment to the regional emissions cap, lowering the 2014 cap by 45% (from 165 million tons to 91 million tons). As in the old Model Rule, the cap would decline 2.5% per year from 2015 through 2020.

RGGI’s proposal emerged from the realization (discussed in more detail in previous posts) that the program’s initial cap was far too high—and, consequently, its allowance prices were far too low—to incentivize firms to undertake substantial emissions reductions.

In addition to lowering the overall cap, the Model Rule also calls for an “adjustment” for banked allowances of 2009-2013 vintage, based on formulas spelled out in the rule. These adjustments should help avoid the use of banked allowances as the predominant compliance strategy in the future.

To soften the impact to industry of the lowered cap, the rule proposes that a “Cost Containment Reserve” of allowances be established, which would be released if allowance prices rise too high. Although allowance prices to date have been at or near the price floor, presumably a tighter cap will push prices upward. The Cost Containment Reserve would give participating companies some certainty that prices will not skyrocket under the new proposed cap (though, of course, the release of additional allowances would come at the expense of environmental effectiveness, as they would effectively raise the cap).

RGGI’s ability to garner the support necessary from participating states to put forth the new Model Rule is impressive and heartening, at least for those of us who are eager to see RGGI improve its efficacy. Actual adoption of the new cap and accompanying rules, however, will have to await legislative or regulatory approval in each of the participating RGGI states. The Model Rule commits each state “to seek to establish” the necessary amendments by January 1, 2014. It will be interesting to see whether, and which, states find themselves having to mount a major political battle to pass amendments or adopt regulations. CCCL will continue to follow the topic as proposed legislation and/or regulations wend their way through state processes.

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