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Cap and Invest

How a Cap-and-Trade Program Can Reduce Energy Costs, Create Jobs, and Improve Energy Security

In 2007, the Nobel Prize–winning Intergovernmental Panel on Climate Change found that, if left unchecked, global warming will subject communities to worsening heat waves, more frequent drought, rising sea levels, and more extreme weather over the course of this century. Recent studies show that we may already be feeling the effects of global warming, in the form of more intense storms and increases in vector-borne diseases. To avoid the worst impacts of climate change, the United States must reduce its emissions at least 30 percent by 2020, and 80 percent by 2050.

Fortunately, we can tackle this challenge while expanding our economy, strengthening our energy security, and putting Americans back to work—if we create a comprehensive national climate policy that accelerates deployment of existing energy efficiency and clean energy technologies and develops new ones. Along with higher standards for energy efficiency and stronger incentives for renewable energy, the nation needs a strong federal cap-and-trade program that limits global warming pollution, auctions “allowances” to emit carbon, and reinvests the proceeds for public benefit.

In creating such a program, national policy makers can learn much from the Northeast’s successful Regional Greenhouse Gas Initiative, a cap-and-trade system that went into effect this year.

Crafting a “Cap-and-Invest” Program
A cap-and-trade program establishes a limit on emissions of global warming pollution, lowers that limit over time, and uses the power of the market to reduce emissions at the lowest cost. Owners of facilities such as electric power plants and oil refineries must buy a carbon “allowance” for every ton of pollution they emit. If companies find ways to reduce their pollution at a lower cost than the allowances, they can sell any surplus allowances to companies that cannot. The resulting market creates an incentive to implement cost-effective cuts in global warming emissions, and encourages investments in new low-carbon technologies.

To ensure that this market is fair and efficient, the federal government should auction all carbon allowances rather than give any to polluters for free. Auctioning allows the market to set the appropriate price for pollution (and avoided pollution), and steers the government clear of handing windfall profits to polluters. Revenues from the auction—which may amount to hundreds of billions of dollars each year—can be directed to:

• Investment in clean, renewable energy technologies and energy efficiency measures
  
• Energy assistance targeted to low-income families 
  
• Transition assistance for workers in sectors disproportionately affected by the program
  
• Adaptation assistance to help communities and ecosystems cope with the unavoidable effects of global warming

Investing auction revenue in energy efficiency and clean energy is the essential policy counterpart to the auctioning itself, because advances in both help reduce global warming pollution—thus lowering demand for allowances and enabling the cap-and-trade program to achieve its goals at the lowest possible cost. We significantly increase our chances of achieving an 80 percent reduction in emissions by 2050 if we invest auction proceeds to develop clean energy and energy efficiency technologies and overcome barriers to their private adoption.

A Working Model of Cap and Invest
The Northeast’s Regional Greenhouse Gas Initiative (RGGI, pronounced “reggie”) is the nation’s first and only cap-and-trade program for global warming pollution. RGGI—which caps global warming pollution from 233 electric power plants in 10 states from Maine to Maryland—went into effect on January 1, 2009. All 10 RGGI states have chosen to auction nearly all their carbon allowances, and to invest the proceeds in energy efficiency and renewable energy.

The first three quarterly auctions, held in September 2008 and January and March 2009, yielded a total of $262.3 million for the states. Policy makers in the Northeast know that reinvesting these proceeds in aggressive and innovative energy efficiency and clean energy measures will cut the electricity bills of consumers and businesses by $2 to $3 for every dollar spent. They base that knowledge on more than a decade of experience with ratepayer-funded energy efficiency and demand-reduction programs run by utilities such as National Grid and Connecticut Light and Power, government agencies such as the New York State Energy Research and Development Authority and the New Jersey Board of Public Utilities, and non-profit organizations such as the Vermont Energy Investment Corp.

In fact, revenues from the RGGI auctions are an important source of funding for the ambitious goals a number of Northeast states have set for energy efficiency improvement, clean energy development, and cuts in global warming pollution. (For examples, see the table below.)

(click to enlarge)

Numerous Studies, Same Conclusion
Studies conducted during RGGI’s planning stages consistently showed that auctioning allowances and dedicating the revenue to energy efficiency and clean energy measures would lower electricity costs and boost state economies. These studies—which included thorough modeling of the Northeast electric power system and careful analysis of RGGI’s potential economic impact—helped guide the design of this groundbreaking initiative, and gave policy makers confidence to proceed with it.

1. On behalf of the RGGI working group, the Massachusetts Department of Energy Resources commissioned runs of a model of the Northeast’s system for generating, transmitting, and distributing electricity, using various levels of energy efficiency, demand for power, and prices for allowances. The department then commissioned runs of a widely respected economic model using results from the first model.¹

The results showed that a doubling of energy efficiency from investing RGGI revenues in efficiency programs and tightening energy codes would reduce the average household electricity bill by a few dollars a month, even if demand for allowances—and thus their price—rose. Even without higher energy efficiency, the model predicted that RGGI would raise the average household electric bill just $1.25 per month by 2015 (Petraglia 2005).

2. New Hampshire officials commissioned their own analysis of various policy choices, including not participating in RGGI at all. Economists at the University of New Hampshire examined a range of scenarios—including a low and a high price for carbon allowances—over the nine-year RGGI timeframe. The study examined projected auction revenues; different uses of the funds, ranging from direct rebates to tax offsets to investments in energy efficiency (including combinations); and the impact on electricity bills of small and large businesses and residents.

The analysis found that directly rebating auction revenue from the auctions to households and businesses would not help the economy. However, devoting 100 percent of auction revenue to investments in energy efficiency had a small positive impact on employment and the overall economy, and was the only scenario that cut electricity bills for all utility customers (Gittell and Magnuson 2008).

3. The University of Maryland’s Center for Integrative Environmental Research examined the potential effects of spending 25 percent, 50 percent, and 100 percent of RGGI revenue on energy efficiency. The researchers found that devoting 100 percent would reduce electricity use more than 11 percent per capita by 2015. Electricity bills would also drop as much as 7 percent, saving the average household more than $72 annually by 2020. The study predicted that the 100 percent scenario would have the greatest impact on gross stateproduct, employment, and wages (Ruth et al. 2008).

4. In a report on the role of green jobs in an economic recovery, researchers at the Political Economy Research Institute at the University of Massachusetts– Amherst identified trades and professions that would see job gains given greater energy efficiency and spending on clean energy development (Pollin 2008). (See “Green Investments and Jobs” table.)

(click to enlarge)

Cap and Invest = Success
Although RGGI is still in its infancy, all available evidence suggests that

auctioning carbon allowances and investing the revenue in energy efficiency and clean, renewable energy provides the best deal for consumers, businesses, workers, and the economy. According to the American Council for an Energy-Efficient Economy and the Alliance to Save Energy (ACEEE 2006), increasing investment in energy efficiency will: Reduce carbon emissions

• Reduce energy prices
  
• Slow growth in demand for electricity
  
• Boost the region’s economy
  
• Reduce the need for new power plants
  
• Reduce the cost of carbon allowances

Specifically, doubling investment in energy efficiency will reduce consumer electricity bills by 12 percent and commercial electricity bills by 5 percent.

In addition, extensive modeling by the U.S. Energy Information Administration, the Lawrence Berkeley National Laboratory, the Union of Concerned Scientists, and others shows how increased investment in renewable energy reduces consumers’ energy bills by reducing demand for fossil fuels.

Drawing on years of experience with ratepayer-funded energy efficiency programs and thorough modeling, the 10 Northeast states participating in RGGI are providing a practical demonstration of how a federal cap and-trade policy can work.

References
American Council for an Energy-Efficient Economy (ACEEE) and the Alliance to Save Energy. 2006. Comments on the Regional Greenhouse Gas Initiative Draft Model Rule. Washington, DC. May 22. Online at http://www.rggi.org/docs/aceee-ase.pdf.

Gittell, Ross, and Matt Magnusson. 2008. Economic impact in New Hampshire of the Regional Greenhouse Gas Initiative (RGGI): An independent assessment. Durham, NH: University of New Hampshire. January. Online at http://des.nh.gov/organization/divisions/air/tsb/tps/climate/rggi/index.htm.

Petraglia, Lisa. 2005. REMI impacts for RGGI policies based on the standard reference case IPM model run and the high-emissions case IPM model run. Boston: Economic Research Development Group. November.

Pollin, Robert, et al. 2008. Green recovery: A program to create good jobs and start building a lowcarbon economy. Amherst, MA: Political Economy Research Institute, University of Massachusetts. September. Available at http://www.peri.umass.edu/green_recovery/.

Ruth, Matthias, et al. 2008. The role of energy efficiency spending in Maryland’s implementation of the Regional Greenhouse Gas Initiative. College Park, MD: University of Maryland. October. Online at http://www.cier.umd.edu/RGGI/CIER_RGGI_Energy_Efficiency_Spending_Study percent5B1%5D.pdf.

Endnote
1. The electricity system model was ICF International’s Integrated Planning Model (IPM®), and the economic model was Regional Economic Models Inc.’s (REMI) Policy Insight® model.