Unlike a standard regulatory approach that simply limits emissions, the new “cap and trade” RGGI system adopted by Maryland, Delaware, New Jersey, New York, and the six New England states (Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island) is a market-based approach.
RGGI mandates that regional power plant emissions not exceed 188 million tons of CO2 annually for six years. After that, the cap drops 2.5 percent per year. By 2018, power plant emissions – and the cap – will have dropped 10 percent. Unlike previous cap-and-trade attempts, RGGI will auction nearly all its allowances instead of giving them free of charge to industry or “grandfathering” them.
When Europe’s carbon-trading scheme began in the early part of the decade, carbon permits were given to power companies to compensate them for the cost of cutting emissions. But power companies were also allowed to pass along the higher costs to consumers. The CO2 allowances, when sold on the carbon market, were a multibillion-dollar windfall.
“If power companies are given allowance for free, and they’re able to pass on their costs to ratepayers, they’re able to have a net profit from that policy,” says Richard Newell, a Duke University economist. “Auctions provide a mechanism for government to capture that potential windfall.” Those policymakers and economists who believe carbon regulation is inevitable say auctioning most allowances may be the fairest way to proceed.