Regional Climate Program Considers New Reserve Mechanism

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By Gerald B. Silverman

Nov. 21 — The nine states in the Regional Greenhouse Gas Initiative want to ensure that emissions continue to decrease even when carbon allowance prices drop as part of a new reserve mechanism being considered for the cap-and-trade program.

The proposed mechanism, an emissions containment reserve (ECR), would be triggered when prices drop below an as-yet-to-be-determined price, at which point the RGGI emissions cap would be lowered as well, RGGI officials told stakeholders Nov. 21. The possible addition of the new reserve mechanism is significant because it could ensure that states continue to control carbon emissions even when market forces and other factors dampen carbon prices.

RGGI already has a cost containment reserve, which is designed to increase the supply of carbon allowances when carbon prices are high. The new mechanism would complement that by decreasing the supply when carbon prices are low.

In addition, RGGI auction prices are subject to a hard floor—called the auction reserve price— currently set at $2.10. The emissions containment reserve is intended to act as “a soft floor,” according to a summary of the RGGI proposal.

Market Impact

“Despite the stated intent of ‘supply,’ rather than ‘price’ control, we think an ECR will impact market pricing expectations,” Timothy T. Cheung, vice president of Washington, D.C.-based ClearView Energy Partners LLC, told Bloomberg BNA in an e-mail.

“It’ll be interesting to see how the new mechanism develops and where RGGI states will set the ECR trigger price,” he said.

The new reserve mechanism was applauded by two of the original architects of the RGGI program, William M. Shobe, director of the Center for Economic and Policy Studies at the University of Virginia, and Dallas Burtraw, senior fellow at Resources for the Future.

“Some guide rails on the path of allowance prices in an emissions trading program are essential to the integrity of the program,” Burtraw told stakeholders in a webinar-based meeting.

RGGI will be accepting public comments on the reserve mechanism and other issues involving its ongoing program review through Nov. 30. The next major step in the program review is the release of a proposed model rule incorporating changes to the program.

Key Decision

The key decision that RGGI states need to make is how to adjust the program’s emissions cap after 2020, when the current cap expires. They are considering a continuation of the current trajectory, which lowers the cap by 2.5 percent per year, or one that lowers the cap by 3.5 percent per year.

Some environmental groups were pushing RGGI to go even further and lower the emissions cap by 5 percent per year.

Chris MacCracken, principal at Fairfax, Va.-based ICF International Inc., told the webinar that the RGGI emissions cap would decline from 78 million tons in 2020 to 57 million tons in 2031, under a scenario where the cap is reduced by 2.5 percent per year. If the emissions cap was reduced by 3.5 percent per year, it would decline to 48 million tons in 2031, he said.

MacCracken said the projected price of RGGI carbon allowances, depending on the cap and emissions trends, would range from a low of $9 per ton in 2031, if no changes are made to the program, to a high of $36 in 2031.

Andrew McKeon, executive director of RGGI, reaffirmed the initiative’s commitment to go forward despite any changes at the federal level.

“We don’t know exactly what the future will bring,” he told the webinar, in a reference to the recent election. “The RGGI states’ commitment to reducing greenhouse gas emissions is unchanged.”

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y. at GSilverman@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

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