Seven states in the Northeast agreed to implement a cap-and-trade program to lower carbon dioxide (CO2) emissions from power plants. Forward movement on the regional greenhouse gas initiative (RGGI) came after Massachusetts Gov. Mitt Romney pulled his state out of the effort and the chief executive of Rhode Island decided not to sign on to the effort at this time. RGGI is the first mandatory cap-and-trade program for CO2 emissions in U.S. history.
States signing the regional memorandum of understanding for RGGI are: New York, Connecticut, Delaware, Maine, New Hampshire, New Jersey and Vermont.
In 2003, New York Gov. George Pataki initiated the RGGI process by sending a letter to Northeast states inviting them to pursue "a course of cooperation" and work together "to develop a strategy that will help the region lead the nation in the effort to fight global climate change." For the past two-and-a-half years, state representatives have been working to develop the program.
Under RGGI, the seven states will create a regional cap-and-trade system that utilizes emissions credits or allowances to limit the total amount of emissions. Beginning in 2009, emissions of CO2 from power plants in the region would be capped at current levels -- approximately 121 million tons annually -- with this cap remaining in place until 2015. The states would then begin reducing emissions incrementally over a four-year period to achieve a 10% reduction by 2019.
Under the cap-and-trade program, the states will issue one allowance, or permit, for each ton of CO2 emissions allowed by the cap. Each plant will be required to have enough allowances to cover its reported emissions. The plants may buy or sell allowances, but an individual plant's emissions cannot exceed the amount of allowances it possesses. The total amount of the allowances will be equal to the emissions cap for the seven-state region. Electric generating units with a capacity of 25 MW or more will be included under RGGI.
The RGGI agreement calls for at least 25% of a state's allowances to be dedicated to strategic energy or consumer benefit purposes, such as energy efficiency, new clean energy technologies and ratepayer rebates. A power plant also could purchase these allowances for its own use. The funds generated from these sales will be used for beneficial energy programs.
The agreement allows power plants to utilize "offsets" -- greenhouse gas emission reduction projects from outside the electricity sector -- to account for up to 3.3% of their overall emissions. Offset projects provide generators with additional flexibility to meet their compliance obligations at the lowest cost. A power plant owner/operator will be allowed to select the lowest cost emission reductions and apply them to a portion of the plant's emissions requirement.
Examples of offset projects include: natural gas end-use efficiency, landfill gas recovery, reforestation, and methane capture from farming or natural gas transmission facilities. Under the program, offset projects will be accepted from anywhere in the United States, with a 2:1 preference for projects undertaken in the participating RGGI state.
The program incorporates additional measures to ensure that the cost of allowances remains affordable. For example, if the average annual price of an emission allowance were to rise above $7, offsets would then be allowed from anywhere in North America at a 1:1 ratio and could be utilized to offset up to 5% of a plant's reported emissions.
The agreement also establishes a $10 per allowance "safety valve." Under this provision, if allowances exceed $10 for a sustained period of time, the compliance period would be extended by the states and the generators would be allowed to use offsets for up to 20% of their reported emissions. Under the safety valve, offset projects also would be allowed from international trading programs.
Pataki's office said that any price impacts of this program are expected to be minimal, with estimates projecting that average household bills could increase by approximately $3-21 annually. However, it also is anticipated that RGGI will generate significant new investments in innovative and cleaner technologies and energy efficiency, which could lower electricity rates.
In declining to sign on to RGGI at this time, Rhode Island Gov. Donald Carcieri expressed concerns about the impact of the agreement on energy prices throughout the region. "Specifically, a regional plan to reduce greenhouse gas emissions may significantly increase energy prices in participating states," said Carcieri press secretary Jeff Neal. Romney has expressed concerns about the price tag of the greenhouse gas reduction effort for businesses, according to a recent report in the Boston Globe.
Meanwhile, the participating states plan to issue a draft model regulation for public review and comment in early 2006. Each individual state will then proceed with the required legislative or regulatory approvals to adopt the program. Pending the completion of this process, the RGGI program is slated to begin on Jan. 1, 2009.
The memorandum of understanding also allows other states to join the regional program.
"We believe that the agreement reached to cap CO2 emissions from electric generating plants in the Northeast is a creative model to address this global problem," said Robert Catell, CEO of KeySpan, noting that KeySpan has actively participated in the RGGI stakeholder process since its inception.
The Independent Power Producers of New York Inc. (IPPNY) said that while the announcement is an improvement over previous proposals, many questions remain unanswered.
IPPNY applauded the states' efforts to increase flexibility and guard against rising compliance costs, but said the program needs additional flexibility, less complicated implementation and more detailed commitments to studying its reliability and market impacts.
The power producers' group said it is unclear how the program will work with only seven states participating. "Concerns about program costs, market impacts, emission leakage, reliability and whether there will actually be any net reductions in the northeast need to be addressed with new economic and electric system modeling sooner rather than later," said IPPNY CEO Gavin Donohue. "Furthermore, the new proposal also decreases the total number of tons allocated to New York, making compliance here more difficult."
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