Nine Northeast and Mid-Atlantic states participating in the Regional Greenhouse Gas Initiative (RGGI) will see a 45% lowering of the market-based regulatory program’s carbon dioxide (CO2) cap in 2014, under an updated model rule released last week. The change is expected to reduce projected 2020 power sector CO2 emissions from the region to more than 45% below those in 2005.

The Updated Model Rule is expected guide the RGGI states as they follow state-specific statutory and regulatory processes to propose updates to their CO2 budget trading programs. The decision from the nation’s first regional cap-and-trade program for greenhouse gases was based on five years of "success" in addressing CO2 pollution and it would strengthen the program moving forward, the initiative said.

Improvements outlined in the updated rule call for a reduction of the 2014 regional CO2 budget (“RGGI cap”) from 165 million to 91 million short tons. The cap will thereafter drop 2.5% each year from 2015 to 2020. Additional adjustments to the RGGI cap from 2014 to 2020 will also account for the private bank of allowances held by market participants before the new cap is implemented in 2014. From 2014 to 2020 compliance with the applicable cap will be achieved by use of “new” auctioned allowances and “old” allowances from the private bank.

It also calls for a cost containment reserve (CCR) of allowances that creates a fixed additional supply of allowances, and which will only be available for sale if CO2 allowance prices exceed certain price levels ($4 in 2014, $6 in 2015, $8 in 2016, and $10 in 2017, rising by 2.5%, to account for inflation, each year thereafter). Unsold 2012 and 2013 CO2 allowances will not be reoffered for sale.

The new rule will mean participants—including the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont—must now revise their CO2 budget trading programs through state statutory and regulatory processes before Jan. 1, 2014.

RGGI claims, citing an independent report by the Analysis Group, that initiative proceeds from the first three years have generated $1.6 billion in economic benefits for the region. The changes would "preserve the significant reductions that have already occurred in power sector CO2 emissions, and drive further reductions. The new cap is projected to generate approximately 80-90 million tons of cumulative emission reductions by 2020, when compared to the current RGGI program, and annual emissions in 2020 are projected to be approximately 14-20 million tons lower than they would be otherwise," RGGI said.

Consumer power bills will be minimally impacted by the change. Overall, the average electricity bill for residential, commercial, and industrial customers is projected to increase by less than 1%.

Under the carbon trading initiative, a regulated power plant must hold CO2 allowances equal to its emissions to demonstrate compliance at the end of each three-year control period. RGGI’s second control period began on January 1, 2012 and extends through December 31, 2014.

Sources: POWERnews, RGGI

—Sonal Patel, Senior Writer (@POWERmagazine)