North America’s longest-running carbon market just set a new mark for carbon pricing across the Northeast US, passing a significant revenue milestone years ahead of schedule, and continuing an impressive winning streak for American and Canadian carbon auctions.
The Regional Greenhouse Gas Initiative (RGGI) recently held its first 2015 quarterly carbon auction, selling out of all 15.2 million available carbon dioxide allowances at a clearing price of $5.41 per ton of CO2 emitted and generating over $82 million for clean energy and consumer benefits.
Nimble Carbon Market Design Prevents Oversupply
Last week’s auction was the 27th in RGGI’s history, and it set a new mark for the amount polluters pay for the right to emit a ton of greenhouse gases. The $5.41 allowance price was 20 cents more than the previous high of $5.21, set in December 2014, and marked the ninth consecutive auction to sell out of all available allowances. RGGI also passed a milestone — $2 billion in cumulative proceeds.
While the total auction proceeds were the lowest since late 2012, this is a result of fewer allowances being offered amid declining emissions across the system. RGGI reduced the regional CO2 budget (the “cap” in cap-and-trade) in 2014 to recognize declining power sector emissions and prevent an allowance oversupply by reducing the cap 2.5% every year from 2015 to 2020.
RGGI’s nimble design has helped it avoid the European Union’s Emissions Trading System‘s nagging allowance oversupply in recent years, and is similar in design to the California–Quebec linked carbon markets, which declines 3% annually.
Keep pricing context in mind here — it’s important considering RGGI’s allocation prices and revenue are significantly lower compared to those in California–Quebec. RGGI only covers power plant emissions across a combined population of roughly 42 million people, while California–Quebec covers power plant and transportation emissions across nearly 47 million people. RGGI’s prices have also steadily risen since it tightened the cap, whereas California (and Quebec, once they linked) started out with a reduction mechanism in place.
Pricing context is also important when it comes to placing an accurate dollar figure on the damages carbon emissions cost society. Neither RGGI’s $5.21/ton nor California-Quebec’s $12.10/ton price approach the US federal government’s $37/ton social cost of carbon estimate or Stanford University’s staggering $220/ton social cost of carbon, both of which estimate the value to society of reducing carbon emissions.
RGGI Reaches $2 Billion Milestone Five Years Early
Still, RGGI allowance prices are rising steadily, cutting emissions while funding new clean energy projects and reaching revenue projections years ahead of schedule. In 2013 an independent analysis projected RGGI wouldn’t pass $2 billion in cumulative revenue until 2020, but every single member state has pulled in millions of dedicated funding for renewables, energy efficiency, emissions reductions, and consumer utility bill relief.
Given its well-functioning system, dedicated revenue may be the most contentious aspect of RGGI. New York’s governor and state senate have urged significant portions of its revenue be diverted to farmland conservation and habitat restoration, while New Hampshire’s legislature has urged more funding go to consumer bills instead of clean energy investment. Meanwhile, New Jersey’s governor has drawn fire for withdrawing the state from RGGI, a move that’s cost it $114 million to date and an estimated $387 million through 2020.
Value Far Beyond The Northeast US
Regardless of how RGGI revenue is being spent, its overall value is clear. Not only is it decarbonizing our economy while boosting economic growth, but the system is also providing valuable lessons for cutting emissions over a diverse region.
At a recent public event, Maryland Public Service Commissioner Kelly Speakes-Backman said RGGI member states expect easier compliance with the EPA’s Clean Power Plan because they can comply with emissions reductions targets through a regional approach.
Regional cap-and-trade systems have been proposed as an option for other US states to cut emissions through the Clean Power Plan, and California and Quebec have already proposed linking to RGGI. Six years into existence, it’s easy to envision RGGI’s experience holding the key to carbon market success not only in North America, but in the 60+ national and subnational markets implementing carbon pricing.