U.S. carbon trading under the Regional Greenhouse Gas Initiative aims to reduce CO2 emissions by another 30 percent over the next decade. But will northeastern states achieve their climate change goals when power plants are no longer the main polluters?
- U.S. carbon trading under the Regional Greenhouse Gas Initiative (RGGI) is evolving for the next decade, with new states set to be added to the current nine participants.
- States have agreed to reduce the program’s CO2 limit by 30 percent between 2021 and 2030, building on the 47 percent reduction achieved for their power plants since 2008.
- U.S. carbon trading under RGGI won’t be enough for states to achieve their climate change goals, since power plants are no longer the main emitters in the region.
The oldest U.S. cap-and-trade program for CO2 emissions is poised to become increasingly active over the next decade as the Regional Greenhouse Gas Initiative (RGGI) grows to cover more states and participants adjust to a new framework governing trading fundamentals.
The RGGI, which started a decade ago, currently involves the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont in a joint effort to cap and reduce CO2 emissions from the power sector.
New Jersey will join next year, increasing the range of the program, while Virginia is poised to join in the coming years. Pennsylvania may one day be the market’s largest member.
U.S. carbon trading changes
The addition of at least one new member, along with updated market rules, should lead to greater liquidity while also tightening supply and demand dynamics, with the intent of pushing allowance prices higher.
It should also help reduce the overall costs of complying with the program’s CO2 limits, by allowing the states to find the lowest-cost source of emissions reductions.
While greater access to CO2 reductions would put downward pressure on allowance prices, structural changes to the market will have the opposite effect.
New carbon emissions target
From 2021-2030, the RGGI states have agreed to reduce the program’s CO2 limit by 30 percent, building on the 47 percent CO2 reduction the states have already achieved for their power plants since 2008.
The states have also agreed to add a new mechanism, called an emissions containment reserve, to the market in 2021.
The reserve is meant to speed CO2 reductions by removing allowances from RGGI’s quarterly auctions if the clearing price falls below a predetermined threshold, which will start at US$6/st in 2021.
Essentially, this new mechanism reduces supply in the market to better match demand, in the case that CO2 emissions covered by the program fall faster than anticipated.
Cap-and-trade for transportation?
Recently, many of the RGGI states have committed or recommitted to ambitious policies to address climate change, such as reducing economy-wide greenhouse gas emissions by 80 percent by 2050.
The framework the states have established for the 2020s ensures that RGGI will remain a key part of that effort.
But RGGI alone will not be enough for the states to achieve their larger climate change goals, since power plants are no longer the main emitters in the region.
Instead, many of the same northeastern U.S. states are considering creating a separate cap-and-trade program for the transportation sector, the largest source of CO2 in the states and across the country.
That program could work in tandem with RGGI to help the states use markets to drive emissions lower.
Enhanced market coverage
Reducing emissions in the transportation sector will require electrification of cars and trucks, and that will make reducing emissions from power plants that much more critical.
Moving off gasoline and diesel for transportation, in favor of electrons, will only get the states so far down the road to decarbonization if their generators are still relying on fossil fuels like natural gas. That should help preserve RGGI’s role as it enters a new decade.
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