MARCH 6, 2019

COMMENTS ON VIRGINIA’S PROPOSAL TO REDUCE AND CAP CARBON DIOXIDE FROM FOSSIL FUEL FIRED ELECTRIC POWER GENERATING FACILITIES

FROM:  Paelina DeStephano, Eliza Harrison, Fanqi Jia, and Kunxin Zhu

Summary: In response to an unexpected reduction in carbon emissions, Virginia proposes a revision to its earlier cap-and-trade program to reduce allowable carbon dioxide emissions. While the proposal fails to address potential leakage concerns and the challenges of joining the RGGI cohort, we recommend the state adopt the Re-Proposed Resolution to begin to address environmental damage caused through greenhouse gas emissions from electricity generating power plants.

The Re-Proposed Regulation to adopt carbon trading in the state of Virginia lowers the initial annual Carbon Dioxide Base Budget from 33 million or 34 million tons to 28 million tons. The program maintains a 3% annual decline in the CO2 budget to allow the state to reduce its emissions 30-40% by 2030. The program allows for a reevaluation of the carbon budget every four years to assess the value in the trading program and determine whether the cap is sufficiently strict to encourage emissions reductions.

In response to Executive Order 57, the state regulatory committee has consistently attempted to follow the legal and policy approaches adopted through the RGGI. As with the original approach, the Re-Proposed Regulation exclusively targets power plants that generate more than 25 MW of electricity from fossil fuels. The Re-Proposed Regulation allows for two possible cases of exemption:

• Less than 10% of the net energy produced from the plant is passed into the grid,
• Less than 15% of the thermal energy generated through the energy generation process is passed on to another entity outside of the organization where the budget sources are created.

Six plants in VA would qualify for the exemption, whose annual emissions accounted for 1.2 million tons of CO2 in 2016.

Virginia reduces the volatility of credit prices by allowing the state to move tradable credits into Emission Containment Reserves (ECR) or Cost Containment Reserves (CCR). Moving permits into the ECR or CCR keeps prices from becoming too high or too low by changing the supply of credits in the public market.  Both effective price ceiling and floor will be determined by RGGI allowance prices.

The proposed allocation allowances would reserve 95% of the carbon base budget for conditional credits that would be sold at a quarterly auction through RGGI. These credits must be purchased at the auction and would allow for companies within the consortium states to meet increasingly strict regulatory requirements. The remaining 5% would be allocated to DEQ to support the department’s work in abatement and control measures related to atmospheric greenhouse gases.

Linking Virginia with RGGI states will lower credit prices and lower electricity costs as compared to a one-state market. In a multi-state market, there is a larger pool of heterogeneous firms to balance the costs of emission reductions. In the period of 2021 to 2030, allowance prices in an unlinked market would be lower than RGGI prices in the first 5 years but higher than RGGI prices in the second half of the decade.[1] Depending on the amount of allowance that Virginia would bring to RGGI, allowance prices in RGGI might also decline slightly. If Virginia is linked with RGGI states, it will have the same allowance trading standards as RGGI states. These standards allow for banking permits, allowing electricity generators to smooth emission reductions and minimize costs. Models show that electricity prices in Virginia will be lower if the state links with RGGI, savings that will be passed on to ratepayers.

The Re-Proposed Regulation is expected to result in 17 - 46 tons of CO2 abated between 2020 and 2030. At the high end, assuming a business as usual case of 28 million tons of CO2 emissions annually, a 3% annual reduction would lead to 46 million tons of CO2 abatement over the decade. While the base budget declines by 3% per year after 2020, integration with RGGI allows for trading allowances. Virginia will not necessarily realize that 3% annual decline. The IPM indicates a modest annual decline in emissions in the linked system. Between 2021 and 2030, the policy is expected to result in 17 million tons of abatement in the state of Virginia. This reduction in CO2 emissions come with various co-benefits. The IPM estimates the impacts of decreased levels of NOX, SO2, and fine particulate matter. These reductions will generate annual benefits reaching $8 million - $18.8 million in 2030.

The Re-Proposed Regulation cost fossil fuel-fired electric generating units approximately $131.49 million between 2020 and 2030. The estimate includes the abatement costs of 12 companies that operate the 32 electric power facilities that are under regulation. Assuming 17 tons of CO2 abatement, Virginia would need to buy 25.36 million tons worth of CO2 permits from other RGGI states. The average carbon price is expected to be $3.87 per ton across the 11-year period. Assuming the Virginian energy sector plans for long run, the marginal cost of abatement rises to $3.87 per ton when firms mitigate all emissions in 11-year period. The mitigation cost of companies is $131.49 million.

The Re-Proposed Regulation will moderately raise electricity prices, resulting in decreased electricity usage. IPM results show an average 0.7% annual increase in firm power prices and 0.8% annual increase in energy prices after implementation of Re-Proposed Regulation through 2020-2030.[2]  Increased energy prices are expected to decrease electricity usage, which results in a divergent change in electricity bills from residential (-0.4%), commercial (-0.6%), and industrial (-0.7%) sectors.[3]  Since the projected revenue from CO2 emission allowances, which is designed to be passed on to the consumer, exceeds the potential reduction in the electricity bill, different consumers could be better off after receiving distributed revenue.

Other costs associated with the Re-Proposed Regulation are expected to be minor. The Joint Legislative Audit and Review Commission estimates from 2017 Virginia Department of Planning and Budget (DPB) economic impact analysis suggest that the administrative cost of managing auction activities is estimated to be $95,000 per year, which is insignificant compared to other costs. Other unlisted costs (e.g. the use and value of private property, real estate development costs, and cost to other entity) would not likely change significantly due to the implementation of the regulation.

We recommend that Virginia adopt the Re-Proposed Regulation and consider key design changes to increase ambition. Adopting this rule and linking with RGGI will realize significant benefits due to decreased CO2, NOX, SO2, and fine particulate matter emissions. At a low end, these benefits are expected to total $8 million annually by 2030. Costs are expected to be significantly lower, totaling $4 million annually by 2030. This basic analysis indicated the regulation is worthwhile. However, a few design changes can improve outcomes by decreasing leakage and increasing energy efficiency standards.

Recognizing the risks of leakage through energy imports from other states, we recommend Virginia impose a tax or external fee on imported energy. Energy imports to RGGI are exempted from the cap, creating the potential for leakage.[4] RGGI states nearly doubled their energy imports between 2007 and 2015.[5] The increased level of imports counteracts the consortium’s ambitions to reduce carbon emissions. Considering these effects, Virginia must be considered at high risk of counteracting its carbon reduction efforts by joining the cohort. By imposing a tax on imported energy, Virginia could reduce the risk of leakage that might otherwise be associated with joining the consortium. Therefore, the state should adopt a more rigorous policy towards energy imports than currently exists for RGGI.

[1] Dallas Burtraw and Anthony Paul. (2017). Modeling Analysis of CO2 Emission Allowance Trading with RGGI and Virginia. Retrieved from http://people.virginia.edu/~wms5f/va_rggi_workshop/RFF-RGGI_VA_170711_ap.pdf

[2] Virginia Department of Environmental Quality. (2019). Virginia DEQ - Greenhouse Gases New and Existing Power Plants. Retrieved from https://www.deq.virginia.gov/Programs/Air/GreenhouseGasPlan.aspx

[3] Virginia Department of Environmental Quality. (2019). Virginia Department of Planning and Budget Economic Impact Analysis[Ebook]. Retrieved from http://www.townhall.virginia.gov/L/GetFile.cfm?File=1\4818\8476\EIA_DEQ_8476_v1.pdf

[4] Sheryl L. Musgrove, Geordi A. Taylor, Radina R. Valova, Karl R. Rábago . (2017). Emissions Leakage In RGGI: An Analysis of the Current State and Recommendations for a Path Forward. Retrieved from https://peccpubs.pace.edu/viewresource/5319719d12c3c3e/Emissions+Leakage+In+RGGI%3A+An+Analysis+of+the+Current+State+and+Recommendations+for+a+Path+Forward

[5] Stevenson, D. T. (2018). A Review of the Regional Greenhouse Gas Initiative. Cato J., 38, 203.