Cap and Trade Hype


Reggie2In the comics, it was Archie vs. Reggie, but in the US emissions markets, it is Arnie vs. ReGGI. Arnie Schwarzenegger pushed California cap and trade, now called the Western Climate Initiative, while nine northeastern states make up the Regional Greenhouse Gas Initiative.

The media is touting the “success” of ReGGI, saying it shows how states can comply with the EPA Clean Power Plan (whose implementation was stayed by the Supreme Court but proponents are undeterred.)

Climate Progress Gives the Rosy Outlook

The Regional Greenhouse Gas Initiative, known as RGGI (pronounced: Reggie), is a carbon pricing mechanism that limits emissions and invests in efficiency and low-emission generation. Since it was implemented in 2008, RGGI states have seen a 37 percent decrease in emissions from electricity, while simultaneously decreasing consumer costs. RGGI will also function as a compliance plan for the Clean Power Plan, according to multiple industry sources — if it stays effective.

Right now, RGGI is under review — and businesses, environmental groups, regulators, universities, and private citizens are encouraging the states to double down on the program. They say extending the program to 2030 and lowering the annual limit on emissions will ensure RGGI stays successful.

ReGGI’s Peformance, Warts and All

Actually, emissions came down because of market forces, and the cap was too high to have any effect on reductions. Instead a surplus of allowances drove the price down and investors bought them in lots to hedge against higher future prices. Buried in Acadia Center’s friendly review of ReGGI:

Emissions reductions have outpaced expectations since RGGI’s launch, creating allowance oversupply. Regional CO2 emissions in 2008 were 139 million tons, while the initial cap for the nine currently participating states8 was set at 165 million tons per year from 2009 through 2014. This initial oversupply was a result of a combination of electric sector trends already discussed in this report, conservative emissions projections, and actions taken by compliance entities in anticipation of RGGI implementation.9 With emissions falling significantly below the cap in RGGI’s early years (2008 to 2013) market participants bought tens of millions of low-priced allowances each year to be banked for future use. By the end of 2013, 140 million tons of these surplus allowances had been accrued.xxii This large bank suppressed allowance prices and removed the prospect of market scarcity.

RGGI currently employs price controls to contain allowance prices within predetermined ranges. The price floor represents the minimum price at which allowances can be sold at auctions; beginning at $1.86 in 2009 and rising gradually to $2.10 in 2016. Under the oversupplied cap from 2009 through 2012, the price floor preserved the value of RGGI allowances by preventing additional declines in allowance prices or sales and ensuring that surplus allowances were withheld from the market. As a result, 176 million allowances went unsold during this period.

Benefits Miscredited to ReGGI

ReGGI is also credited with participating states having lower electricity prices and higher economic growth. But depressed oil and gas prices caused the cheap electricity. And the depressed prices of the allowances meant that economic pain has yet to be inflicted. All that is about to change.

RGGI A Faulty Model for a Successful Cap and Trade from Institute for Energy Research

The trend of rising prices is only accelerating. In September 2015, prices breached $6 per ton, and in December 2015, clearing prices rose to $7.50—more than $2 above prices last December.[6] The graph below depicts how average clearing prices have risen after the regional cap tightened substantially in 2014. It compares RGGI emissions as a percentage of the cap with the quantity weighted average of auction clearing prices through the third quarter of 2015.[7].

As clearing prices for CO2 allowances become increasingly expensive and states encounter diminishing returns from cutting carbon dioxide emissions, RGGI members will have more difficulty meeting the regional cap. In fact, for the first three quarters of 2015, RGGI states have emitted about 68 million short tons of CO2 and are quickly approaching the 2015 regional cap of 88.7 million short tons.

Since carbon-trading schemes artificially make certain technologies less economical or even uncompetitive, they create conditions that cause existing power plants to prematurely retire and saddle families and businesses with higher energy bills. An IER study found that existing sources generate electricity more affordably than new sources of the same type. Moreover, electricity from existing coal is nearly 3 times more affordable than electricity from new wind turbines and almost half as expensive as electricity from new natural gas plants. This is particularly problematic for RGGI states because their average retail electricity prices are already above the U.S. average.


ReGGI prices are too low to take credit for reducing emissions, and raising them will show up in higher energy and electricity prices, and eventually, higher prices of everything.

The whole scheme is running along, disconnected from reality, doing no good, but not yet doing much harm.  And this is the argument for expanding it and building upon its “success.”

Oh. About Arnie’s California punch bowl, is that going better? Not really.

The problem is that the permits are selling at a slower and slower rate. The surplus of allowances is becoming so large in systems run by Europe, California and Quebec — which together account for more than 90 percent of global trading — that by 2022 it could cover the emissions spewing from every car on Earth for a full year, according to estimates by the London environmental group Sandbag Climate Campaign CIC and Bloomberg New Energy Finance.

In California’s market, all 23 million allowances sold in an auction in 2014. In May 2016, 7.3 million permits found buyers, only 11 percent of what was put up for sale.

Activists wear dark shades when pronouncing future climate catastrophes, but switch for rose-colored glasses when telling others to imitate these failed market experiments.




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