Regional Greenhouse Gas Initiative 

In September 2008, the first U.S. mandatory auction of CO₂ emission permits occurred among six States in the Northeast that are part of the Regional Greenhouse Gas Initiative (RGGI). The RGGI program includes 10 Northeastern States that have agreed to curtail and reverse growth in CO₂ emissions. It covers all electricity generating units with a capacity of at least 25 megawatts and requires them to hold an allowance for each ton of CO₂ emitted [46]. 

The first year of mandatory compliance is 2009 and each State’s CO₂ “carbon budget” already has been determined. The budgets consist of historically based baselines with a cushion for emissions growth, so that meeting the cap is expected to be relatively easy initially and become more difficult over time. Overall, the RGGI region must maintain emissions of 188 million tons CO₂ for the next 5 years, followed by a mandatory 2.5-percent annual decrease through 2018, when the CO₂ emissions level should be 10 percent below the initial calculated budget. The requirements are expected to cover 95 percent of CO₂ emissions from the region’s electric power sector. Each State has its own emissions budget, and the allowances will be auctioned at a uniform price across the entire region. 

Before the first auction, several rules were agreed to by the States: 

• Auctions will be held quarterly, following a single- round, sealed-bid format. 
• Allowances will be sold at a uniform price, which is the highest price of the rejected bids. 
• States may hold a small number of allowances for their own use; however, most States have decided to auction all their allowances. 
• Each emitter must buy one allowance for every ton of CO₂ emitted. 
• Future allowances will be made available for purchase up to 4 years before their official vintage date, as a way to control price fluctuations. 
• A reserve price of $1.86 per allowance in real dollars will be in effect for each auction, as a way to preserve allowance prices in auctions where demand is low and to avoid collusion among emitters that could threaten a fair market. 
• The revenue from the auctions can be spent at the State’s discretion, although at least 25 percent must go to a fund that benefits consumers and promotes low-carbon energy development. 

In the first auction, the six participating States (Connecticut, Maine, Maryland, Massachusetts, Rhode Island, and Vermont) sold 12,600,000 allowances at a price of $3.07 per allowance [47]. The next auction, held in December 2008, included the original six States along with New York, New Jersey, New Hampshire, and Delaware. Issues such as emission leakage [48], which is especially relevant in the Mid-Atlantic region, have been studied, but no specific solutions have been implemented. 

RGGI is included in the AEO2009 reference case. The effect is minimal in the early years, given the relatively generous emissions budget. Because it is difficult to capture the nuances of State initiatives in NEMS, which is a regional model, independent estimates were made for the Mid-Atlantic region to determine eligible generation facilities and their emissions caps (for Pennsylvania, an observing member that it is not participating in the cap-and-trade program and is not subject to any mandatory reductions, emissions are not restricted). 

Western Climate Initiative 

Developed independently of RGGI, the Western Climate Initiative (WCI) [49] is also a regional GHG reduction program. Participants in the WCI include seven U.S. States (Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington) and four Canadian Provinces, with additional observer States and provinces in the United States, Canada, and Mexico. 

The WCI seeks to reduce GHG emissions to levels 15 percent below 2005 emissions by 2020. Reductions will be achieved through an allowance cap-and-trade program, and each participating State or province will be able to determine its own allowance allocation method. Allowances will be based on a regionally agreed emissions estimate, likely taking into account some growth in GHG emissions through the first year of mandatory compliance in 2012. Although each jurisdiction will choose the specifics of allowance distribution, a minimum of 10 percent of allowances must be auctioned in 2012, and the requirement rises in subsequent years. In the initial compliance year, electricity generators and large industrial facilities in the WCI region, as well as outside facilities with energy products consumed in the region, will be required to provide one allowance for each ton of CO₂ equivalent released into the atmosphere. 

WCI is similar to RGGI, but they also have important differences. Although the first phase of the WCI program (2012 to 2015) will not cover emissions from fossil fuels used in smaller facilities or in mobile sources,  all fuels are expected to be covered by 2015, including those used in the transportation, industrial, and residential sectors (none of which is covered by RGGI in any period). All fuels will be regulated upstream at the distributor level. The 2015 cap will grow above the first phase cap, which covers only facilities emitting more than 10,000 tons CO₂ equivalent annually. Those sources will continue to be covered after the inclusion of combustion fuels, but the emissions will not be counted twice. Larger stationary facilities will be regulated at the emission source, and their fuels will not be subject to upstream regulation. Mandatory emissions monitoring of the stationary sources will begin in January 2010. 

Another distinction is that the WCI will account for nitrous oxide, methane, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride, not just CO₂ as in RGGI. The additional GHGs will be measured in terms of their CO₂-equivalent global warming potentials, and allowances will be issued accordingly. WCI documents estimate that 90 percent of the region’s GHG emissions will be subject to regulation after additional combustion fuels are included in 2015. 

Although no final caps have been determined, the permissible GHG ceiling will decline over the program, which currently ends in 2020. No formal determination of how to continue the program beyond 2020 has been made. In order to control the price of allowances, a reserve price will be set as the floor. Up to 49 percent of emissions reductions may occur through offset programs such as forestation and agriculture reform. The list of qualifying offsets remains to be determined but must be agreed on by all participants. There are still some details to be worked out between the WCI and the individual jurisdictions within the region that have their own GHG mitigation laws. Two prime examples are California, which has passed its own GHG legislation, and British Columbia, which is mitigating emissions through a tax. The issues will be addressed after the specifics of the program have been determined. 

Unlike RGGI, the WCI is not included in the AEO2009 reference case, because the WCI model rules were released after November 2008. Similarly, the Midwestern Climate Initiative, which is in a preliminary stage, is not included in AEO2009. Regional and State GHG initiatives continue to evolve rapidly, and it is likely that AEO2010 will include additional programs.

46.  Regional Greenhouse Gas Initiative, “About RGGI,” web site www.rggi.org/about/documents. 

47.  Regional Greenhouse Gas Initiative, “RGGI States’ First CO₂ Auction Off to a Strong Start” (September 29, 2008), web site www.rggi.org/docs/rggi_press_ 9_29_2008.pdf. 

48.  Regional Greenhouse Gas Initiative, “Potential Emissions Leakage and the Regional Greenhouse Gas Initiative (RGGI)” (March 2008), web site http://rggi. org/docs/20080331leakage.pdf. 

49.  Western Climate Initiative, Design Recommendations for the WCI Regional Cap-and-Trade Program (September 23, 2008), web site www. westernclimate initiative.org/ewebeditpro/items/ O104F19865.PDF.

Contact: Michael Leff/Robert Smith
Phone: 202-586-1297/202-586-9413
E-mail: michael.leff@eia.doe.gov/robert.smith@eia.doe.gov