Agencies | Governor
Virginia Regulatory Town Hall
Agency
Department of Environmental Quality
Board
Air Pollution Control Board
chapter
Regulation for Emissions Trading [9 VAC 5 ‑ 140]
Action Reduce and Cap Carbon Dioxide from Fossil Fuel Fired Electric Power Generating Facilities (Rev. C17)
Stage Proposed
Comment Period Ends 4/9/2018
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4/9/18  5:00 pm
Commenter: Institute for Policy Integrity, NYU School of Law

Comments on Virginia’s proposal to join the Regional Greenhouse Gas Initiative Part 1
 

To read our full comments, please visit the following link: 

http://policyintegrity.org/documents/Institute_for_Policy_Integrity_Comments_to_Virginia_on_joining_RGGI_20180409.pdf

April 9, 2018

Karen G. Sabasteanski

Department of Environmental Quality

1111 East Main Street

Suite 1400

P.O. Box 1105

Richmond, VA 23218

 

VIA ELECTRONIC SUBMISSION

Subject:  Comments on Virginia’s proposal to join the Regional Greenhouse Gas Initiative

Dear Ms. Sabasteanski:

The Institute for Policy Integrity at New York University School of Law[1] (“Policy Integrity”) respectfully submits the following comments on Virginia’s proposal to join the Regional Greenhouse Gas Initiative (RGGI).[2] Policy Integrity is a non?partisan think tank dedicated to improving the quality of government decisionmaking through advocacy and scholarship in the fields of administrative law, economics, and public policy. Policy Integrity regularly conducts economic and legal analysis on pricing of greenhouse gas emissions, among other environmental and economic topics.

Including Virginia energy producers in RGGI will greatly expand the scope of the market, improving market efficiency, competitiveness, and lowering carbon abatement costs. Policy Integrity offers the following comments on Virginia’s proposal to join RGGI:

  • The Virginia Department of Environmental Quality should provide a thorough discussion of the forecast of state CO2 emissions to help the public assess whether the initial permit allocation will match Virginia’s expected emissions;
  • Adding Virginia electricity generators to RGGI will improve electricity market efficiency. Virginia’s State Corporation Commission should ensure that regulated power producers do not receive a windfall from Virginia’s unique consignment auction process.

Introduction

By joining RGGI in 2020, Virginia will take an important step toward internalizing the environmental externality caused by emissions of carbon dioxide. Virginia will also substantially expand the scope and market size of RGGI, helping to improve market competitiveness and trading efficiency. Joining RGGI will likely also reduce the cost of CO2 abatement by allowing the marginal cost of abatement to equilibrate across a larger set of emitters. The result will be a lower marginal cost of abatement, which will enable RGGI states to meet carbon emission reduction goals more cost effectively.

Reducing carbon dioxide emissions provides important economic and environmental benefits, as Virginia has shown in its cost-benefit analysis of the proposal to join RGGI. In that proposal, Virginia correctly calculated the value of joining RGGI by using the Interagency Working Group (IWG) Social Cost of Carbon to calculate the benefits of reduced carbon pollution.[3] The Social Cost of Carbon measures and monetizes the damage that results from emission of a ton of CO2 into the atmosphere. The IWG’s 2016 Social Cost of Carbon estimate is the best available consensus estimate for the external cost of CO2 emissions.[4] IWG’s methodology has been repeatedly endorsed by reviewers. In 2014, the U.S. Government Accountability Office concluded that IWG had followed a “consensus-based” approach, relied on peer-reviewed academic literature, disclosed relevant limitations, and adequately planned to incorporate new information through public comments and updated research.[5] Leading economists and climate policy experts have endorsed the Working Group’s values as the best available estimates.[6] Also, in 2016, the U.S. Court of Appeals for the Seventh Circuit held that the Department of Energy’s reliance on IWG’s Social Cost of Carbon was reasonable.[7] Therefore, Virginia’s decision to use the IWG Social Cost of Carbon to value the benefits of reduced carbon pollution is both reasonable and appropriate.

The details of how Virginia integrates itself into RGGI have the potential to affect the aggregate emissions, compliance costs for polluters in other states, and the competitiveness of generators in Virginia. Thus, some of the specific aspects of Virginia’s proposal warrant careful attention to ensure that the highest possible welfare gains are achieved. In particular, Virginia should carefully estimate the number of permits offered and should ensure that the consignment auction process is truly revenue neutral for regulated power producers in the state.

The Virginia Department of Environmental Quality should provide a thorough discussion of the forecast of state CO2 emissions to help the public assess whether the initial permit allocation will match Virginia’s expected emissions.

When Virginia joins RGGI, the total emissions regulated by RGGI will rise by over 40%.[8] Thus, the choice of Virginia’s emissions cap will substantially affect the total number of allowances available at each auction and may have a large effect on the stringency of the RGGI cap. Changing the stringency of the RGGI cap will, in turn, affect future permit prices, affecting all participants in RGGI auctions. In particular, power plants in other states will be able to purchase permits at a lower price, leading to less abatement. Therefore, the achievement of environmental goals by RGGI will also be a function of Virginia’s cap choice.

A new state joining RGGI could either increase or decrease the stringency of the total emission cap.[9] These comments focus on the negative consequences of a potential loosening of the cap. The RGGI price is currently below the socially optimal price for a ton of CO2, and the price ceiling in RGGI is also below this level, so a less stringent cap would result in lower social welfare when compared to a tighter cap. If Virginia’s cap is set relatively tight,  leading to a lower total number of allowances than required to maintain the RGGI’s stringency, then RGGI permit prices will increase, possibly even hitting the price ceiling. This would not constitute an inefficiency from a social point of view. In 2020 the Social Cost of Carbon—the value for the external damage that occurs per ton of CO2 emitted and therefore the price that should hold in a cap and trade market to fully internalize the CO2 pollution externality—will be $49 in current dollars.[10] Even if the generators were paying the full Cost Containment Reserve (CCR) Trigger Price, which in 2020 will be equal to $10.77, the permit price would still be too low to fully internalize the externality caused by carbon emissions.[11] By the same token, depressing the allowance price by decreasing the stringency of the cap would lower social welfare.

If Virginia chooses to issue allowances for more emissions than its generators would emit under a business-as-usual scenario (in other words, the “counterfactual emission level”), this will loosen the emission cap for all of RGGI.[12] Unless allowance prices are at the price floor, the price will go down, causing the aggregate emissions to increase compared to a scenario where Virginia does not join RGGI.[13] A fall in the permit price will also decrease the revenue that the other states receive from RGGI auctions. The magnitude of those adjustments will depend on the magnitude of the changes in RGGI’s cap.

For a decrease in total emissions to happen, the number of permits issued in Virginia must therefore be set below the Virginia’s counterfactual emission level. To achieve that goal, a reliable prediction of the future emissions path is required. However, various future developments that can swiftly and significantly affect Virginia’s emission levels are highly uncertain, for example the rate of fossil fuel retirements and the additions of carbon-free renewables.[14] The Virginia Department of Environmental Quality (DEQ) should provide a thorough discussion of their forecast of state CO2 emissions to help assess the likelihood that the Virginia permit allocation will be too high (or too low). Currently, little information is available about the assumptions underlying the forecasts[15]   Based on DEQ’s predictions, Virginia’s proposal is to set the CO2 base budget at 33 or 34 million allowances (while putting an additional 3.3 to 3.4 million CO2 allowances into the Cost Containment Reserve).[16] This proposal might turn out to be too generous, even when future declines in the budget are considered. For instance, Joint Stakeholder Comments submitted to RGGI (by, among others, Arcadia Center, Natural Resource Defense Council and Sierra Club) suggest that 2020 baseline should be set in the range of 30-32 million short tons.[17] The choice of the initial budget needs a sound justification given its potential impact on the RGGI total pollution and the permit prices.

It is worth noting that the allowance price will decrease slightly even if Virginia sets the cap exactly equal to its counterfactual 2020 emissions or just below them. This effect operates through two channels. First, cheap, and until now untapped, pollution abatement possibilities may exist for Virginia’s electricity generators that have already been implemented in the other RGGI states. Second, if the current RGGI cap is more restrictive for generators (“more binding”) than the cap chosen by Virginia, the total effective cap will be less stringent than without Virginia joining the system.[18] However, the price decline will not be accompanied by an increase in total emissions compared to the scenario without Virginia’s entry. Therefore, a falling permit price, by itself, will not be informative as to whether RGGI’s expansion will decrease total CO2 emissions.

As RGGI prices are already close to the reserve price, if Virginia enters RGGI with a loose state cap, this will increase the probability of the Emissions Containment Reserve (ECR) becoming operative.[19] In accordance with ECR, states can withhold up to 10 percent of the allowances in their base annual budgets in order to ensure additional emissions reductions if prices fall below the specified trigger prices.[20] As Maine and New Hampshire do not intend to implement the ECR and will thus not withhold allowances when the trigger price is reached,[21] this will create redistributional effects between the states.[22]

 


[1] No part of this document purports to present New York University School of Law’s views, if any.

[2] Proposed Regulation, Regulation for Emissions Trading Programs (adding 9VAC5-140-6010 through 9VAC5-140-6430), 34 Va. Reg. Regs. 924 (Jan. 8, 2018).

[3] Economic Impact Analysis, Virginia Department of Planning and Budget, Town Hall Action/Stage: 4818 / 8130 (December 13, 2017), available at

http://www.townhall.virginia.gov/L/GetFile.cfm?File=C:\TownHall\docroot\1\4818\8130\EIA_DEQ_8130_v2.pdf (last visited April 6, 2018)

[4] For more on the Interagency Working Group on the Social Cost of Greenhouse Gases, its SCC, estimates, and the SCC’s applications in state policy, see Iliana Paul et al., Institute for Policy Integrity, The Social Costs of Greenhouse Gases and State Policy 9-12 (2017), available at http://policyintegrity.org/files/publications/SCC_State_Guidance.pdf. 

[5] Gov’t Accountability Office, Regulatory Impact Analysis: Development of Social Cost of Carbon Estimates 12-19 (2014). Available at http://www.gao.gov/assets/670/665016.pdf.

[6] See, e.g., Richard Revesz et al., Best Cost Estimate of Greenhouse Gases, 357 Science 655 (2017); Michael Greenstone et al., Developing a Social Cost of Carbon for U.S. Regulatory Analysis: A Methodology and Interpretation, 7 Rev. Envtl. Econ. & Pol’y 23, 42 (2013); Richard L. Revesz et al., Global Warming: Improve Economic Models of Climate Change, 508 Nature 173 (2014) (co-authored with Nobel Laureate Kenneth Arrow, among others).

[7] Zero Zone, 832 F.3d at 679.

[8] This follows from comparison of the Virginia’s proposed base budget of either 33 million or 34 million tons of CO2 allowances to RGGI’s total carbon budget for 2020. See Proposed Regulation, Regulation for Emissions Trading Programs, supra note 2, at 927 and Regional Greenhouse Gas Initiative, 2016 Program Review: Principles to Accompany Model Rule Amendments, available at https://www.rggi.org/sites/default/files/Uploads/Program-Review/12-19-2017/Principles_Accompanying_Model_Rule.pdf.

[9] “Stringency of the cap” refers to how tightly the cap on emissions binds for all of RGGI. If the cap on emissions binds, then emissions allowances are scarce and they trade with a positive price. The stringency of the cap determines how scarce the allowances are. An increase in the stringency of the cap would push the price of allowances up, potentially to the price ceiling. A decrease in the stringency of the cap would make allowances less scarce, leading to a drop in the permit price. If the price drops all the way to the price floor, then the emissions cap would not be binding.

[10] U.S. Interagency Working Group on the Social Cost of Greenhouse Gases (IWG), “Technical support document: Technical update of the social cost of carbon for regulatory impact analysis under executive order 12866 & Addendum: Application of the methodology to estimate the social cost of methane and the social cost of nitrous oxide” (2016; https://obamawhitehouse.archives.gov/omb/oira/social-cost-of-carbon), at 16. Prices have been updated to 2016 dollars using the Consumer Price Index.

[11] Proposed Regulation, Regulation for Emissions Trading Programs, supra note 2, Table 140-1A at 933.

[12] As Virginia issues more permits than its generators would use in absence of any regulation, the demand for permits in Virginia will be less that the number of allowances. Consequently, the “surplus” permits occur in the amount equal to the difference between the cap and the Virginia emissions under business-as-usual scenario.

[13] This follows from laws of supply and demand – as permits’ supply increases, their price will drop. See, e.g. Paul Krugman & Robin Wells, Microeconomics (Second ed. 2009), chapter 3. 

[14] See Joint Stakeholder Comments Regarding Virginia’s Potential Participation in RGGI Market (February 9, 2018), available at https://www.rggi.org/sites/default/files/Uploads/Participation/2018-01-26-Meeting/Comments/Joint_Comments_VA_Participation.pdf at 3-5. See also Comments on Virginia’s proposal to join the Regional Greenhouse Gas, Initiative Institute for Policy Integrity (February 9, 2018) at 3-4, available at https://www.rggi.org/sites/default/files/Uploads/Participation/2018-01-26-Meeting/Comments/IPI_Comments.pdf.

[15] The emissions forecast is shown in the “Carbon Dioxide Trading Program (Rev. C17) Proposed Regulation” presentation by State Air Pollution Control Board http://www.deq.virginia.gov/Portals/0/DEQ/Air/GHG/C17-pro.pdf?ver=2017-11-20-153710-670 (Nov 16, 2017).

[16] As stipulated in Proposed Regulation, Regulation for Emissions Trading Programs, supra note 2, at 927.

[17] Joint Stakeholder Comments Regarding Virginia’s Potential Participation in RGGI Market (February 9, 2018), supra note 13.

[18] For example, if in 2020 Virginia issues permits covering 100% of its emissions but other RGGI states auction off permits worth 97% of the counterfactual emissions, the total system would have permits equal to roughly 97*0.6 + 100*0.4 = 98 percent of emissions.

[19] The most recent RGGI permit auction settled at $3.80. See, Regional Greenhouse Gas Initiative, Auction 38, (Feb. 4, 2018), https://rggi.org/auction/38.

[20]  Regional Greenhouse Gas Initiative, 2017 Model Rule, available at https://www.rggi.org/sites/default/files/Uploads/Program-Review/12-19-2017/Model_Rule_2017_12_19.pdf

[21] Regional Greenhouse Gas Initiative, 2016 Program Review: Principles to Accompany Model Rule Amendments, supra note 2.

[22] Assuming that all other states participate in the ECR symmetrically, the Maine and New Hampshire will increase their share in the total permit revenues.