The RGGI System and Carbon Market Design · Carbon Market Design. National Capital Area,...

The Regulatory Assistance Project (RAP)TM

The RGGI System and Carbon Market Design

National Capital Area, Association for Energy Economics20th Annual Conference

Presented by David Littell

April 13, 2016

Emissions Trading Around the World

2

FIGURE 0.1 Emissions Trading Around the World

ETS in forceETS scheduled ETS considered

RussiaManitoba

Ontario Québec

Washington European SwitzerlandUnion

Ukraine

Kazakhstan Republic Tianjin of KoreaBeijing

California

RegionalGreenhouse Gas Initiative (RGGI)

Turkey

China HubeiChongqing

Mexico

JapanSaitama TokyoShanghaiTaiwanThailandShenzhenVietnam Guangdong

BrazilRio de JanieroSão Paulo

ChileNew Zealand

Source: ICAP 2016i.

Regional Greenhouse Gas Initiative - RGGI

3

Image from CNY Energy Challenge

Regional Greenhouse Gas Initiative - RGGI

• Northeast and Mid-Atlantic states cap and reduce carbon dioxide emissions from the power sector– Power plants 25 MW or greater to hold one CO2 allowance for each

ton of CO2– Three-year control periods starting with 2009-2011, currently in

third control period (2015-2017)– 2015 first year of interim compliance

• CO2 Cap: 86.5 million short tons in 2016, and declines 2.5 percent each year until 2020– Two interim adjustments to the cap (2014-2020) to account for

banked allowances– 2016 RGGI adjusted cap is 64.6 million short tons– Cost containment reserve (CCR) of 10 million allowances

4

RGGI Mechanics in Brief

• Quarterly regional CO2 allowance auctions– CO2 allowances are issued by each state– Compliance occurs at the state level– One tradable CO2 allowance market - CO2 allowances are

fungible across the multi-state region– CO2 allowances issued by any participating state can be used for

compliance in any of the participating states

• Auction proceeds invested by the states • Centralized allowance tracking and emissions tracking

platform (RGGI COATS)— Market monitoring of CO2 allowance market— Limited use (3.3%) of offsets

5

RGGI States: Pollution Reductions with Economic Growth

6

RGGI Experience: Environmental Benefits

• Reinvestment of auction proceeds helps reduce GHG and traditional Clean Air Act pollutant emissions

— RGGI power sector CO2 emissions declined over 45 percent since 2005

• By 2020 RGGI power sector emissions projected 50 percent lower than 2005

• RGGI cap helps drive transition to cleaner fuel and energy sources

― In 2014, almost half of total power generation in the RGGI states was clean or renewable

7

RGGI’s Market-Based System

• CO2 allowance auctions are open to all prequalified bidders

• After seven years, no evidence of anti-competitive conduct

• 31 quarterly auctions held since September 2008– Total of 815 million CO2 allowances sold

• CO2 allowance auction clearing prices have ranged from $1.86 to $7.50.

8

RGGI Auction Clearing Prices Summary

9

RGGI Addition: Market Monitor

• RGGI retains Potomac Economics as an independent market monitor (MM)

• MM issues reports on each auction with aggregate data on the auction results

• MM reports quarterly on the secondary market• MM issues annual report on the RGGI allowance

market• Consistently found no evidence of market

manipulation or collusion

10

Firms with Different Abatement Costs

11

Marginal Savings from Emissions for High-Cost Corp. (Avoided Marginal Abatement Costs, MAC ) H

Low-Cost Inc. (L) and High-Cost Corp. (H) have very different marginal savings from emissions given very different Marginal Abatement Cost curves (MAC)

Marginal Savings from Emissions for Low-Cost Inc. (Avoided Marginal Abatement Costs, MACL)

High-Cost Corp.’s curve is steeper; its savings from not abating the 50th ton of emissions is almost twice as high as for Low- Cost Inc.’s. Its cost of having to go to zero emissions is too high to show on this graph.

0 50 100

Emissions from High-Cost Corp.

100 50 0 Emissions from Low-Cost Inc.

FIGURE 0.2 Example of Two Firms with Different Abatement Costs

Note: Two firms with different “abatement” (emissions reduction) costs: High-Cost Corp., with emissions shown from left to right, and hence abatement from baseline emissions in reverse, has a steeper incremental or marginal abatement cost curve and thus steeper marginal savings from emissions; Low-Cost Inc., with emissions plotted from right to left, has a flatter curve. Note that the total emissions are the same (and equal to 100) at every point along the horizontal axis; what changes is how those emissions are allocated between the two firms.

Cost

per

uni

t of C

O2

equi

vale

nt a

bate

d

International Bank for Reconstruction and Develop., The World Bank, PMR, ICAP, Emissions Trading in Practice, p. 26

(Marginal Savings fromEmissions for High-Cost Corp. (Avoided MarginalAbatement Costs, MAC )HLow-Cost Inc. (L) andHigh-Cost Corp. (H) have very different marginal savings from emissions given very different Marginal Abatement Cost curves (MAC)Marginal Savings from Emissions for Low-Cost Inc. (Avoided Marginal Abatement Costs, MACL)High-Cost Corp.’s curve issteeper; its savings from not abating the 50th ton of emissions is almost twice as high as for Low- Cost Inc.’s. Its cost of having to go to zero emissions is too highto show on this graph.050100Emissions from High-Cost Corp.100500Emissions from Low-Cost Inc.FIGURE 0.2 Example of Two Firms with Different Abatement CostsNote: Two firms with different “abatement” (emissions reduction) costs: High-Cost Corp., with emissionsshown from left to right, and hence abatement from baseline emissions in reverse, has a steeper incremental or marginal abatement cost curve and thus steeper marginal savings from emissions; Low-Cost Inc., with emissions plotted from right to left, has a flatter curve. Note that the total emissions are the same (and equal to 100) at every point along the horizontal axis; what changes is how those emissions are allocated between the two firms.) (Cost per unit of CO2 equivalent abated)

Marginal

Savings

from

Emissions

for

High

-

Cost

Corp.

(

A

voided

Marginal

Abatement

Costs,

MAC

)

H

Low

-

Cost

Inc.

(L)

and

High

-

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Corp.

(H)

have

very

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marginal

savings

from

emissions

given

very

different

Marginal

Abatement

Cost

curves

(MAC)

Marginal

Savings

from

Emissions

for

Low

-

Cost

Inc.

(

A

voided

Marginal

Abatement

Costs,

MA

C

L

)

High

-

Cost

Corp.

’

s

curve

is

steeper;

its

savings

from

not

abating

the

50th

ton

of

emissions

is

almost

twice

as

high

as

for

Low

-

Cost

Inc.

’

s.

Its

cost

of

having

to

go

to

zero

emissions

is

too

high

to

show

on

this

graph.

0

50

100

Emissions

from

High

-

Cost

Corp.

100

50

0

Emissions

from

Low

-

Cost

Inc.

FIGURE

0.2

E

x

a

m

p

l

e

o

f

T

w

o

F

ir

m

s

w

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T

wo

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(emi

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osts:

High

-

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Cor

p

.,

with

emi

s

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shown

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r

om

left

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o

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and

hen

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e

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f

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om

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eeper

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emental

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ginal

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ost

cu

r

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e

and

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eeper

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r

ginal

savings

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r

om

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Inc.,

with

emi

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plot

t

ed

f

r

om

rig

h

t

t

o

left,

has

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flat

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er

cu

r

v

e

.

No

t

e

that

the

t

otal

emi

s

sions

a

r

e

the

same

(and

equal

t

o

100)

at

e

v

e

r

y

point

along

the

horizontal

axis;

what

changes

is

how

tho

s

e

emi

s

sions

a

r

e

alloca

t

ed

between

the

two

firms.

Cost

per

unit

of

C

O

2

equivalent

abated

Marginal Savings from

Emissions for High-Cost

Corp. (Avoided Marginal

Abatement Costs, MAC )

H

Low-Cost Inc. (L) and

High-Cost Corp. (H) have

very different marginal

savings from emissions

given very different

Marginal Abatement Cost

curves (MAC)

Marginal Savings from

Emissions for Low-Cost

Inc. (Avoided Marginal

Abatement Costs, MAC

L

)

High-Cost Corp.’s curve is

steeper; its savings from

not abating the 50th ton

of emissions is almost

twice as high as for Low-

Cost Inc.’s. Its cost of

having to go to zero

emissions is too high

to show on this graph.

0 50 100

Emissions from High-Cost Corp.

100 50 0

Emissions from Low-Cost Inc.

FIGURE 0.2 Example of Two Firms with Different Abatement Costs

Note: Two firms with different “abatement” (emissions reduction) costs: High-Cost Corp., with emissions

shown from left to right, and hence abatement from baseline emissions in reverse, has a steeper incremental or

marginal abatement cost curve and thus steeper marginal savings from emissions; Low-Cost Inc., with emissions

plotted from right to left, has a flatter curve. Note that the total emissions are the same (and equal to 100) at

every point along the horizontal axis; what changes is how those emissions are allocated between the two firms.

Cost

per

unit

of

C

O

2

equivalent

abated

Applying a Uniform Standard to Each Firm

12


Comparing Trades to Prescribed Allocations to Each Company

13


RGGI’s Market-Based System

• RGGI states have distributed approximately 90% of allowances by auction

• More than $2.4 billion in auction proceeds through 31 auctions

• Invested more than $1 billion of auction proceeds in range of energy efficiency, clean and renewable energy, direct bill assistance, GHG abatement programs

14

RGGI Experience: Consumer Benefits

• More than 3.7 million households and 17,800 businesses are participating in RGGI proceeds-funded programs

• RGGI proceeds invested in energy efficiency, clean and renewable energy, energy bill assistance and GHG abatement through 2013 returning $2.9 billion in lifetime bill savings to consumers

15

RGGI Experience: Economic Benefits

16

• An independent 2015 report by the consulting firm Analysis Group found that RGGI’s second three years are creating:̶ $1.3 billion in net economic benefit̶ 14,200 additional job-years

• In addition to benefits from RGGI’s first three years:̶ $1.6 billion in net economic benefit̶ 16,000 additional job-years

• Benefits in each state – but more with higher energy efficiency investments

About RAP

The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power sector. RAP has deep expertise in regulatory and market policies that:

Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers

Learn more about RAP at www.raponline.org

David [email protected] 207 592 1188

mailto:[email protected]

The RGGI System and �Carbon Market DesignEmissions Trading Around the WorldRegional Greenhouse Gas Initiative - RGGIRegional Greenhouse Gas Initiative - RGGIRGGI Mechanics in Brief�RGGI States: Pollution Reductions �with Economic Growth�RGGI Experience: Environmental BenefitsRGGI’s Market-Based SystemRGGI Auction Clearing Prices SummaryRGGI Addition: Market MonitorFirms with Different Abatement CostsApplying a Uniform Standard to Each FirmComparing Trades to Prescribed Allocations to Each CompanyRGGI’s Market-Based SystemRGGI Experience: Consumer Benefits�RGGI Experience: Economic Benefits�Slide Number 17

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