As the plan evolved later, the states eventually decided to auction off most of the allowances instead of giving them away, with the money raised being used to subsidize energy efficiency improvements in businesses and homes, installations of solar panels, and other measures to create a cleaner energy economy.
But before it was finalized, the plan, dubbed the Regional Greenhouse Gas Initiative (RGGI), ran into stiff opposition. “There was a very sophisticated lobbying effort to derail it,” recalls Peter Iwanowicz, then director of New York’s Climate Change Office. Gavin Donohue, president of the Independent Power Producers of New York, which represents companies that generate more than 80 percent of the state’s power, argued that electricity prices would go through the roof, customers would be hit by blackouts, and businesses in New York would be put at a competitive disadvantage. “We were supportive of the goal of the program, but wanted to see a national program that had the endorsement of Congress,” Donohue says. And while Governor Eliot Spitzer was a strong supporter, “his conservative budget people were aghast,” says Iwanowicz.
In Massachusetts, the Associated Institutes of Massachusetts (AIM) warned that the plan “could have a devastating effect on all of us here in Massachusetts,” said AIM’s Robert Rio in early 2007 1. Defense contractors, especially Raytheon, were fierce opponents.
Under attack from within and without, the plan almost died. But the supporters persevered. On September 28, 2008, RGGI made history by holding its first auction. The states sold more than 12 million allowances at a price of $3.07 per allowance, bringing in more than $38 million2.
Between then and December 2015, the RGGI states (minus New Jersey after 2011) held 29 more auctions. The total proceeds: more than $2.2 billion.
The results? Since 2005, the region’s powerplant carbon dioxide emissions have dropped more than 40 percent. And far from devastating the economies of the nine states, the program has brought $2.9 billion in net economic benefits, according to the most recent estimates by the Analysis Group 3. On average, electricity bills are actually down, not up. That’s “because these states invested a substantial amount of the RGGI auction proceeds in energy-efficiency programs that reduce overall electricity consumption, and in renewable energy programs that displace higher-priced electricity generation resources,” the report says. Moreover, the program led to more than 30,000 new job-years (defined as one person working for one year). “RGGI has been a globally significant success,” says Richard Cowart, a former top utility regulator and current managing director of the Regulatory Assistance Project, who served as a technical advisor during RGGI’s development.
One key reason for the economic benefits is that money that used to flow out of the region to buy coal and natural gas stayed at home. “Anytime you stop sending millions, and maybe billions, of dollars out of the state to buy stuff and use that money locally, you will do well,” says Sonia Hamel, leader of Massachusetts’ efforts on RGGI and the state’s climate action plan.
More important is how that money has been used. Instead of going to general revenues, most of it has been used to fund energy efficiency improvements for homes and businesses, to invest in renewable power, and to provide assistance to low-income consumers to pay their electricity bills. “That has doubled the efficiency spending in the RGGI states and led to very low cost carbon reductions,” explains Cowart. “It also has lowered the price of power, moderated demand, and led to less stress on the system.”
In addition, says Cowart, “the important lesson from RGGI is that the carbon revenue [from auctioning allowances] is just as powerful a tool as the carbon price—and in some cases is a more powerful tool.”
Indeed, the price per ton of carbon emissions in the RGGI states has been too low to directly spur much investment in cleaner electricity generation, analysts say4 5., But at the margin, “including a price on carbon emissions in the dispatch decisions in the region shifts output to lower- carbon-emitting sources of power,” the Analysis Group report says6. In addition, the mere fact that a carbon price exists, along with the expectation that it will rise over time as the states ratchet down the cap as planned “gets people to include a price of carbon in their long term business decisions, which is a big benefit,” says Hamel. Explains Iwanowicz: “It sends the right signal that carbon pollution should be reduced in the electricity sector.”
Whatever the exact driver, it is clear that the northeastern states now have cleaner, cheaper power. In New York “we’re down to three percent or less of our generation from coal, and have over 6000 MW of renewables on the grid today, along with some of the most efficient power plants,” says Donahue. “It shows that the private sector is willing to make those capital investments.”
Even the original critics agree that RGGI has worked. “Prices have gone down, and emissions have gone down,” says Donahue. “You can’t deny the results of a 40 percent reduction in CO2 emissions.”
On the other hand, no one would argue that RGGI should get all the credit, or that everyone is better off now.
For one thing, critics argue, as the cap tightens and the carbon price rises, RGGI (along with cheap natural gas and tighter air pollution rules) will accelerate the trend of shutting down coal plants. The result: a major hit to school districts and local governments that depend on the tax revenues from local power plants.
For another, big electricity producers in the region believe that the program failed to live up to original promises to funnel at least some of the proceeds back to them for investments in cleaner generation, and to put caps on other sectors, such as transportation, as well.
A complication in assessing RGGI’s economic impacts is that the world around it changed dramatically. The first auction in 2008 took place just as the economy went into a tailspin. And at the time, no one anticipated that hydraulic fracturing would bring a new era of cheap natural gas. Both developments caused emissions to drop—well below the original RGGI cap. In fact, AIM’s Robert Rio argues that RGGI “would have been a disaster had things stayed the same. But the plunging price of natural gas completely changed the dynamic. We lucked out.”
That’s a minority view, one not reflected in the studies of RGGI’s benefits. Still, even supporters see room for improvement. While an estimated 80 percent of the auction revenues have been used for efficiency, renewables or other energy programs, governors haven’t been able to resist occasionally raiding the funds for their general budgets, as New York as done twice, for a total of $130 million. In addition, Governor Chris Christie was able to pull New Jersey out of RGGI in 2011, which other states fear is giving New Jersey’s power producers a competitive advantage in the regional electricity market. “The biggest lesson is that we would be well served to put RGGI into law, rather than having participation be at the whim of the governor,” says Iwanowicz. “The way the proceeds are used should be spelled out in law, so they’re less ripe for grabbing for other purposes.”
As U.S. Supreme Court Justice Louis Brandeis once wrote, states can serve as laboratories, trying “novel social and economic experiments without risk to the rest of the country.” There’s a broad consensus now that RGGI is one such experiment that has worked—and that it could be model for the whole country and other nations as well. “Climate change is too big an issue not to have a national program,” says Donahue. “But why reinvent the wheel? We should use the market-based allowance trading program that’s worked here.”