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Voluntary RE Market Will Reduce Emissions under RGGI

October 2008 - Under the rules set up by states participating in the Regional Greenhouse Gas Initiative (RGGI), voluntary renewable energy purchases may count towards the emission reduction aims of the program. The first mandatory carbon dioxide (CO2) cap-and-trade program to be implemented in the U.S. and scheduled to commence in January 2009, RGGI covers the electric power generation sector in 10 states in the Northeast and Mid-Atlantic regions of the U.S. Under the program, CO2 emissions from power plants in the ten-state region will be capped and then reduced to 10% below 2009 levels, by 2018.

Each participating state has a proportional share of the regional emissions cap. Based on its CO2 emissions budget, each state will issue CO2 allowances to emitting power plants. Each CO2 allowance represents a permit to emit one ton of CO2. The states will sell all or a portion of their CO2 allowances via periodic auctions, beginning with pre-compliance auctions in September and December of 2008. Proceeds from the sale of allowances will fund state programs that promote energy efficiency and projects for renewable energy.

Renewable energy generation sources typically do not emit CO2 (or emit significantly less than fossil fuel generation sources). Without an emissions cap, renewable energy generation displaces fossil generation on the margin, resulting in a reduction of carbon emissions. However, where CO2 emissions are capped and the number of allowances is fixed and distributed only to emitting sources, renewable energy purchasers cannot claim CO2 emissions reductions, because their purchases do not reduce the number of allowances in circulation. Instead, their purchases simply free up more allowances that emitters can trade. Only the retirement of allowances, or a reduction in the number issued, reduces overall CO2 emissions levels. Purchasers’ inability to make claims of CO2 emission reductions is potentially problematic, because such claims often motivate the renewable energy purchases, and climate change has been a significant driver for the voluntary renewable energy market.

Most RGGI states address this difficulty through the mechanism of voluntary renewable energy set-asides. Recognizing the emissions reductions benefits of voluntary purchases, 9 out of the 10 states participating in RGGI (all but Delaware) will "set aside" a certain number of allowances (typically 1-2% of the states’ allowance budgets) for voluntary renewable energy purchases, reducing the number of allowances available to be auctioned. At the end of each year, renewable energy providers must apply to each state in which voluntary purchases were made. Based on appropriate documentation, the states will retire an equivalent number of emission allowances. In this way, the purchases will have the desired effect of reducing CO2 emissions. To date, it is unclear whether other CO2 cap-and-trade programs, such as those being planned through the Western Climate Initiative and the Midwestern Regional Greenhouse Gas Accord, will adopt similar set-aside provisions for voluntary purchase markets.

Webinar Materials - EPA Green Power Partnership Webinar on Retiring Allowances under RGGI

Additional Information - Regional Greenhouse Gas Initiative Program

Additional Information - Midwestern Regional Greenhouse Gas Accord (PDF 296 KB) Download Adobe Reader

Additional Information - Implications of Carbon Regulation for Green Power Markets (PDF 984 KB) Download Adobe Reader

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