The Regional Greenhouse Gas Initiative (RGGI, pronounced “Reggie”) is an eleven-state, cooperative climate effort created in 2006 to reduce carbon dioxide (CO2) emissions from regulated power plants within each participating state located in the Eastern U.S.:
Across these states, there is a total cap on annual CO2 emissions, composed of individual state CO2 programs. The cap for 2022 stands at a total emissions level of 97,022,454 short tons (st, which equals 2,000 pounds and differs from much of the carbon credit and offset market that generally transacts in metric tons which equal 2,204 pounds) for the eleven states, increasing by 78,000,000 st if/when Pennsylvania joins, almost doubling the program size. Each participating state originates allowances in proportion to its share of the overall RGGI cap. The overall cap declines each year until it meets its 2030 goal of reducing power sector CO2 emissions 30% below 2020 levels, its most recently calculated target. The program target is reviewed over time and adjustments are made as some states enter/leave/re-enter the program.
(Source: Center for Climate and Energy Solutions)
RGGI is a market-based, mandatory cap-and-trade program. Within the RGGI states, regulated power plants must acquire one CO2 allowance for every short ton of CO2 they emit. Within the RGGI states, fossil-fuel-fired electric power generators with a capacity of 25 megawatts or greater (15 megawatts in New York) are required to hold allowances equal to their CO2 emissions over a three-year control period. Compliance is due each March 1st for 100% of the previous year’s emissions, meaning facilities must have allowances in their RGGI account no later than this date. They may acquire allowances by purchasing them at quarterly auctions and/or through secondary markets. These auctions are sealed-bid, uniform price auctions that result in a single quarterly clearing price. As speculative investment has entered the carbon markets such as California’s and Europe’s cap and trade emissions schemes, RGGI has also attracted similar interest, helping push recent RGGI secondary market allowance prices higher.
The proceeds of these auctions are used by the states to invest in consumer benefit programs, including energy efficiency, renewable energy, direct bill assistance, and greenhouse gas abatement. Since its inception, RGGI has raised over $4 billion to invest into these efforts.
As a part of the auction process, states hold a limited number of allowances in set-aside accounts to sell at a fixed price or otherwise distribute outside of the auction process. A Cost Containment Reserve (CCR), consisting of a quantity of allowances in addition to the overall cap which are held in reserve. These are sold if allowance prices exceed predefined price levels, so that the CCR will only trigger if emission reduction costs are higher than projected. The CCR is replenished at the start of each calendar year. The CCR trigger price is $13.91/st in 2022 and will increase by 7% per year thereafter. The size of the CCR is 10% of the regional cap each year.
Conversely, an Emissions Containment Reserve (ECR) will withhold allowances from circulation to secure additional emissions reductions if prices fall below an established trigger price. The ECR will trigger only if emission reduction costs are lower than projected. The ECR trigger price is $6.42/st in 2022 and will increase by 7% per year thereafter. The size of the ECR is 10% of the budgets of the states implementing the ECR. Note that two RGGI participating states, Maine and New Hampshire, do not participate in the ECR.
In the first quarterly auction for 2022 on March 9th, RGGI’s 55th such auction, 21,761,269 CO2 allowances were sold at a clearing price of $13.50/st, a historical high. Bids for the CO2 allowances ranged from $2.44/st to $30.00/st. The auction generated $294 million for states to reinvest in their local strategic programs. Given the auction price of $13.50/st, 11.61 million CCR allowances were available for sale, but no CCR allowances were sold, while 10.96 million ECR allowances were available for withholding but, as well, no ECR allowances were withheld. As of March 14th, these allowances were trading in the secondary market for approximately $13.40/st.
Historical quarterly auction clearing prices for RGGI allowances are shown as follows:
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