Tuesday, July 19, 2011

Overallocation in RGGI

Last week I posted about the overallocation of pollution allowances in the Acid Rain Program. Another celebrated cap-and-trade program that suffers from overallocation is the Regional Greenhouse Gas Initiative (RGGI).

RGGI began in January 2009 with the participation of ten Northeastern and Mid-Atlantic states: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. The program was designed to cap the carbon dioxide emissions from about 250 power plants in those states at 2009 levels for the years 2009 through 2014. Then from 2015 through 2018 the cap declines 2.5% per year such that 2018 emissions would be 10% lower than 2009 emissions.

The problem is that the projected level of 2009 emissions (upon which all those caps were based) was way too high: 188 million tons. Actual 2009 emissions from the power plants were only 124 million tons (see a report here) -- far below the cap of 169 million tons that RGGI aspired to reach by 2018. Emissions in 2010 were 137 million tons (see a report here), a 10% increase over 2009 but still far below the 2010 and 2018 caps.

The result is a huge oversupply of allowances.  RGGI allowances are auctioned quarterly, and the overallocation is evident in declining prices and volumes of auctioned allowances. In the most recent auction, in June 2011, allowances sold at the reserve price, $1.89, and less than a third of the allowances offered were bid on and sold (see a report here). In contrast, in the first auction of 2009, the average bid price was $3.51, and the demand for allowances was 2.5 greater than the supply (see chart here).

Now, as you might have heard, overallocation isn’t the only problems that RGGI is dealing with. New Jersey and New Hampshire have threatened to pull out (here and here), and a lawsuit is pending that challenges New York’s participation (for a link to the complaint and a good summary of recent developments see here).

All of this goes to show the difficulty of designing an effective cap-and-trade program. The European Union Emissions Trading Scheme (EU ETS) provides a good example of the type of active management and reform that seems necessary for a successful program. More on that next week…

- Lesley McAllister


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