RGGI Decides to Retire Unused Allowances

by Shelley Welton, Deputy Director & Fellow

As I blogged about last October, the Northeast’s Regional Greenhouse Gas Initiative (RGGI) is currently undergoing its 2012 program review. This review will look at many aspects of the program’s design and functioning, with the aim of determining whether major reforms are necessary after several years of learning from the current design. Participating states already made one critical decision: at the end of January, officials from six RGGI states decided to retire those emissions allowances that had previously been issued but have not yet been purchased. . . .

States made this decision because RGGI suffers from an allowance oversupply. When the program’s allowance budgets were set for the years 2009 through 2012, administrators assumed that natural gas prices would remain high and that electricity demand would be robust and growing. In actuality, natural gas has become an economic substitute for coal and the nationwide recession has led to a dip in energy demand. As a result, more allowances have been created than are necessary for annual compliance with RGGI caps, such that leftover allowances remain from the first three years of the program. Until the recent states’ decision, these excess allowances could have been purchased by companies to meet their future compliance obligations.

For companies required to comply with RGGI, the upshot of this oversupply was that allowance prices would remain low. But RGGI was designed to incentivize businesses to invest in carbon reduction strategies. With excess allowance supply eliminating price pressure, these investments would have been unlikely to happen.

For this reason, states have taken the step of retiring unused past allowances. This decision ensures that RGGI has more of an impact in helping drive climate change solutions, and augurs well for the 2012 program review as a time to take serious steps to make RGGI into the most effective, efficient cap-and-trade program possible.

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