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  5:03 pm
Commenter: Institute for Policy Integrity, NYU School of Law

Comments on Virginia’s proposal to join the Regional Greenhouse Gas Initiative Part 2
 

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

Subject:  Comments on Virginia’s proposal to join the Regional Greenhouse Gas Initiative Part 2

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. In Part 1 of our comments, Policy Integrity offers noted that :

  • 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;

In this second part of our comments, Policy Integrity offers that

  • 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.

To maximize the gains to market efficiency from the addition of Virginia generators, Virginia should verify, to the extent possible, that the consignment auction process is revenue neutral

Adding Virginia electricity generators to RGGI will improve market efficiency for current RGGI-participating states and will help Virginia cost-effectively meet its carbon pollution reduction goals. Because of the unique consignment auction mechanism being used to distribute conditional allowances and RGGI proceeds in Virginia, the Virginia State Corporation Commission should ensure that all participants in RGGI are on an equal playing field to maintain market efficiency. One concern with the consignment auction is that some power generators in Virginia might be able to keep the revenue disbursed by RGGI, while, ideally, the consignment process should be revenue neutral for all compliance units.

Regulated power producers in Virginia will be required by the Virginia State Corporation Commission to pass all revenue from RGGI auctions on to state electricity consumers. The State Corporation Commission will be in charge of verifying that the consignment auction is indeed revenue neutral for those units. [1] Vertically integrated utilities could potentially gain revenue from the auctions by substituting RGGI-derived revenue for other customer support payments that they are currently making or plan to make.

For instance, if a state-regulated utility has a program to promote customer energy efficiency, then the utility could potentially remove that program and replace it with a program funded by revenue from the RGGI auctions. In that case, the producer would effectively receive a revenue windfall. A similar situation could occur if a power generator was already planning to pay for a customer support program but chooses to fund the program using RGGI auction proceeds rather than another funding source. Like the above example, if the generator chooses not to follow through on the original plan, then the revenue from RGGI would not result in truly additional customer support and the generator would receive a windfall relative to what it would receive in the absence of RGGI participation. In principle, only newly conceived customer support programs should be funded using RGGI revenue to ensure that the support is additional to any other support that the generator might have offered. The State Corporation Commission will need to be proactive in protecting Virginia consumers to prevent behavior by generators that results in windfall revenue.

Windfall revenues would place the producer at a long-run competitive advantage relative to electricity generators that participate in RGGI but that do not receive revenue from the auctions. Because conditional permits will be allocated based on electricity generation rather than CO2 emissions,  clean generators could even see their profits increase if they manage to receive revenue from RGGI.[2] This could happen for a generator that receives more conditional allowances than it needs to buy from RGGI to cover its own emissions, consequently receiving  more revenue from RGGI than it spends at RGGI auctions.

If non-regulated, private generators in Virginia subject to the proposed regulation do not have a revenue neutrality requirement, those generators will receive a revenue windfall in the form of proceeds from RGGI auctions.[3] Some of the cleanest private resources might even experience a profit windfall. As a consequence, this might create a competitive advantage for private generators over the regulated resources located in Virginia. This could send incentives for new private power generation to locate in Virginia rather than neighboring RGGI states.

However, even if these generators receive revenue from the auction, joining RGGI will improve market function relative to the current status quo. Right now, emitting generators in Virginia are receiving an implicit subsidy, as they are not paying for the environmental damage caused by their emissions. Internalizing this externality will eliminate the perverse incentives for high emitting generators to locate themselves in Virginia relative to other RGGI states.

The pass-through of the permit price from generators to customers will ultimately determine the extent to which generators themselves face the incentive to reduce carbon emissions. If the State Corporation Commission allows generators to increase their electricity rates in response to the costs of purchasing RGGI permits, then consumers will face an incentive to reduce their electricity consumption and invest in energy efficiency. At the same time, higher energy prices may slow down the rate of electrification of the automotive and heating sectors. To the extent that the State Corporation Commission wants the incentive for abatement of CO2 to fall on the generators, it should work to limit the pass-through of permit prices to consumer electricity prices—either through limits on the approved rate increases by regulated generators or through volumetric rebates of RGGI proceeds to consumers. Similarly, if Virginia has a goal of increasing electrification of other sectors of the economy, it should prevent pass-through of permit prices to consumer electricity prices.

Importantly, electricity generators in Virginia will be incentivized to reduce CO2 emissions whether or not the consignment auction is fully revenue neutral. A requirement to hold a permit for each ton of CO2 emitted provides a marginal incentive to reduce emissions. This marginal incentive to abate will be present regardless of whether generators receive lump-sum revenue from RGGI. The RGGI-derived revenue would affect the long-run profitability of the generators if it is not fully distributed to consumers, so over time higher or lower emitting generators might be more likely to enter or exit the market. However, the marginal incentives to abate will be realized as long as the requirement to hold a permit to emit is in place. Moreover, were Virginia not to place any price on carbon, it would impede efficient market operation by implicitly subsidizing fossil power generators in the state. Therefore, including Virginia in the RGGI trading program will help improve market function and promote a level playing field between generators.

The way in which the revenue from the consignment auction is passed to consumers—for instance, volumetrically (based on electricity consumed), as a fixed payout notwithstanding energy consumption, or through energy efficiency programs—will also have important implications for environmental outcomes and final energy demand. If the consignment auction revenue is passed to consumers on a volumetric basis, consumers will see a lower per-kilowatt hour price for electricity, reducing the incentive to pursue energy efficiency but also preserving the incentive for electrification.[4] The design of the respective regulation needs to balance those trade-offs, considering Virginia’s long-term goals.

Finally, the consignment auction mechanism also creates different incentives among the generators inside Virginia. Because the permit allocations and updates are based on net electricity output, the cleanest fossil fuel plants will have an extra incentive to expand their electricity generation compared to higher emitting generators. This added incentive should make the Virginia generation fleet even cleaner, leading to quicker decreases in emissions. In sum, adding Virginia generators to RGGI will increase environmental quality and improve market efficiency.

Respectfully submitted,

 

Sylwia Bia?ek, Ph.D.

Jeffrey Shrader, Ph.D.

 


[1] Michael G. Dowd, Virginia DEQ, Virginia Executive Directive 11 and Proposed Virginia Carbon Dioxide Trading Rule (Jan. 26, 2018), available at https://rggi.org/sites/default/files/Uploads/Participation/2018-01-26-Meeting/VA_Presentation_2018_01_26.pdf.

[2] Proposed Regulation, Regulation for Emissions Trading Programs, supra note 2, at 947.

[3] All private producers who qualify under Proposed Regulation, Regulation for Emissions Trading Programs, supra note 2, at 938.

[4] See, e.g. Samuel A. Newell et al., Pricing Carbon into NYISO’s Wholesale Energy Market to Support New York’s Decarbonization Goals (2017) (showing that (i) in the context of New York State, a carbon charge on electricity generation would potentially raise prices for customers, affecting demand for energy efficiency as well as electrification, and (ii) that the price change and consumer response can be affected by whether the revenue from the policy is returned to customers volumetrically or lump sum).


[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).