Regional Greenhouse Gas Initiative
www.rggi.org
Overview
Additionality and Quantification Procedures
Overview
Type of System/Program and Context
The Regional Greenhouse Gas Initiative (RGGI) is a multi-state mandatory cap-and-trade program to reduce CO2 emission from electricity generation. It was established in 2005 by governors of seven US states in the Northeast and Mid-Atlantic regions and has since expanded to include 10 states. The program applies to fossil fuel-fired electric generating units 25 megawatts and larger.
RGGI went into effect on January 1, 2009, as the first mandatory cap-and-trade program to regulate GHGs in the US. Its objective is to reduce CO2 emissions in the electric generation sector by 10% from 2009 to 2018. It will start by setting a regional cap to stabilize emissions from 2009 through 2014 at 188 million short tons of CO2 and then reduce the cap by 2.5% each year through 2018. More than 85% of the regional emissions budget is being allocated through auctions, with auction proceeds used by participating states to accelerate the deployment of end-use energy efficiency and clean energy technologies and provide other consumer benefits.
Offsets serve as a limited compliance flexibility mechanism for regulated facilities under the RGGI program. The program is designed to prioritize emissions reductions within the capped electric generation sector of RGGI participating states. The quantitative limit on offsets was set at a level that approximates the amount of offsets equivalent to 50% of the projected avoided emissions that would need to be achieved to comply with the emissions cap (RGGI, 2006). At the start of the program, a regulated facility will be able to meet 3.3% of its compliance obligation during a compliance period through the use of offsets. If the emissions allowance price rises above a specified level, or price trigger, a regulated facility can use a higher percentage of offsets to meet its compliance obligation. (The price trigger is evaluated based on long-term price signals. These signals are determined based on a 12-month rolling average price, following a 14-month market settling period, which commences at the start of each new compliance period.) If the price exceeds USD 7 (stage-one trigger), a regulated facility can use offsets to meet up to 5% of its compliance obligation; and if it exceeds USD 10 (stage-two trigger), it can use offsets to meet 10% of its compliance obligation. Both stage-one and stage-two price triggers are calculated based on formulas in RGGI Model Rule definitions of stage-one and stage-two “threshold price”.
Standard Authority and Administrative Bodies
The program authority for RGGI is distributed among the participating states with each state’s environmental regulatory agency serving as the administrative authority in its state. RGGI is composed of individual CO2 Budget Trading Programs in each of the ten participating states (RGGI, 2007a). These ten programs are implemented through state regulations, based on a RGGI Model Rule, and are linked through CO2 allowance reciprocity. Owners and operators of regulated power plants will be able to use a CO2 allowance issued by any of the ten participating states to demonstrate compliance with the state program governing their facilities. Taken together, the ten individual state programs function as a single regional compliance market for carbon emissions.
Each state agency is responsible for the administrative tasks related to implementation of its state CO2 Budget Trading Program, such monitoring compliance, tracking emissions and allowances, approving offset projects, and awarding offset allowances to offset projects in its state (RGGI, 2007a). However, the participating states utilize a shared regional administrative infrastructure to help implement the program, including a single regional platform for CO2 emissions and allowance tracking and offset project tracking, and a regional auction process that relies on a single regional auction platform. The U.S. Environmental Protection Agency (EPA) provides administrative support to the RGGI program through the receipt and processing of quarterly CO2 emissions data reports.
Regional Scope
As of July 2009, the RGGI program had 10 participating US states in the Northeast and Mid-Atlantic regions: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.
Recognition of Other Standards/ Linkage with Other Trading Systems
As launched on January 1, 2009, RGGI is not linked to any other trading system. If the stage-two allowance price trigger is reached, regulated facilities will be able to utilize offsets credits or allowances generated by offset projects located outside the United States to meet a portion of their compliance obligation. This is limited to offset credits or allowances issued pursuant to a mandatory carbon constraining program outside the US that places a specific tonnage limit on GHG emissions, or GHG emission reduction credits certified pursuant to protocols adopted through the UNFCCC process (RGGI, 2007). This provision provides the opportunity for linkage with both of the project-based mechanisms of the Kyoto Protocol, including offset credits from the CDM and Joint Implementation (JI), and potentially other mandatory programs too.
State staff members involved in the RGGI program are actively engaged in the WCI and Midwestern Regional Greenhouse Gas Reduction Accord processes, supporting these efforts using the experience they have developed through the RGGI program. Links between RGGI and other mandatory programs are seen as a long-term goal, and five RGGI states are members of the International Carbon Action Partnership (ICAP), a group of countries and regions that have implemented or are actively pursuing the implementation of carbon markets through mandatory cap-and-trade systems.Market Size and Scope
Tradable Unit and Pricing Information
The tradable units generated from offset projects created under the RGGI program are referred to as ‘CO2 offset allowances’ and measured in units of short tons of CO2e. The RGGI program uses units of short tons in order to be consistent with current U.S. EPA CO2 emissions reporting in the US for certain power plants and industrial sources.
Participants/Buyers
Regulated facilities under the RGGI program include all fossil fuel-fired electric generating units with a capacity greater than 25 megawatts within the boundaries of the 10 current participating US states. There are no limitations on who may participate in the RGGI offset market. Any person may submit an offset project to a state agency for regulatory review. Such persons are referred to as offset “project sponsors”.
Current Project Portfolio
RGGI’s first three-year compliance period started in January 2009. The program is expected to cap CO2 emissions at 188 million short tons to the end of 2014. Although trading of RGGI emission allowances has begun, with the first auction having taken place in September 2008 , no offset credits have yet been traded under the RGGI program. As the use of offsets for compliance can change with the emission allowance price triggers, it remains to be seen what the future role and size the offset market will be under the RGGI program (Point Carbon, 2008).
Offset Project Eligibility
Project Types
The RGGI program uses a top-down model for assessing the eligibility of offset projects. Currently, only five offset project types are eligible under RGGI:
1. landfill methane capture and destruction;
2. Sulfur hexafluoride (SF6) emission reduction in the electricity transmission and distribution sector;
3. carbon sequestration through afforestation activities;
4. CO2 emission reduction or avoidance from natural gas, oil or propane combustion due to end-use energy efficiency in the building sector; and
5. avoided methane emissions from agricultural manure management operations.
Detailed requirements for the above offset project types are included in state CO2 Budget Trading Program regulations, which are based on the RGGI Model Rule. The participating states have also indicated their intention to expand the number of eligible offset project types over time.
Project Locations
Currently, eligible offset projects must be located within a RGGI participating state, or any other state or US jurisdiction where a cooperating regulatory agency has entered into a memorandum of understanding (MOU) with the appropriate regulatory agency in all 10 RGGI participating states to provide oversight support for the project. However, if the stage-two trigger comes into effect, the geographic project location boundary will be expanded to allow, under certain conditions, offsets from any mandatory carbon constraining program outside the US (see Recognition of Other Standards).
Project Size
There are no project size requirements for the offset project types currently approved by RGGI participating states.
Start Date
Offset projects must have commenced on or after December 20, 2005.
Crediting Period
The initial crediting period for all offset projects is 10 years. Once a project is approved, it can be renewed for an additional 10 years, pending project resubmission and regulatory approval. For afforestation offset projects, the initial period is 20 years and the renewal period is for an additional two 20-year periods, if approved after expiration of the previous period.
Co-benefit Objectives and Requirements
There are no additional co-benefit objectives or requirements for offset projects under the RGGI program. However, potential co-benefits were one criterion considered in the process of selecting eligible project types under the RGGI program (Sherry, 2008).
Additionality and Quantification Procedures
Additionality Requirements
RGGI takes a standardized approach to evaluating additionality through benchmarks and performance standards. Additionality is evaluated through a combination of general additionality requirements for all eligible offset projects and specific requirements for each project type designed to address project-specific issues, which are specified in state regulations. The general requirements specify that CO2 offset allowances are not awarded to offset projects that:
- Commenced prior to December 20, 2005;
- Are required pursuant to any local, state or federal law, regulation or administrative or judicial order;
- Include an electricity generation component, unless the project sponsor transfers the legal rights to all attribute credits (other than CO2 offset allowances) generated by the project that may be used to complying with a renewable portfolio standard or other regulatory requirement to the state regulatory agency or its agent;
- Receive funding or other incentives from incentive programs funded by electricity or natural gas ratepayers, or through proceeds from the auction of CO2 allowances;
- Are awarded credits or allowances under any other mandatory or voluntary GHG program. (RGGI, 2007).
In addition, offset project applications must be submitted within six months of project commencement.
Quantification Protocols
Quantification protocols for establishing emissions baselines, determining emissions reductions or carbon sequestration, and monitoring and verification are based on a top-down approach. Specific quantification protocols and requirements for each project type are included in state regulations, which are based on the RGGI Model Rule. The protocols provide detailed requirements and formulas for the determination of emission baselines, the calculation of emissions reduced or sequestered, and for monitoring and verification. There are no provisions for addressing potential project emissions leakage. The protocols also require that the monitoring and verification plans of all projects be evaluated by an independent state-accredited verifier, and that offset project applications and monitoring and verification reports include a certification statement and certification report from a state-accredited independent verifier. Specific protocols have been developed to address the issue of permanence in connection with afforestation offset projects. Project developers are required to place the land developed for afforestation projects under a legally binding permanent conservation easement, which requires that the land be managed to maintain long-term carbon density in accordance with environmentally sustainable forestry practices (RGGI, 2007). In addition, sequestered carbon is discounted by 10% prior to the award of CO2 allowances to account for potential reversals of sequestered carbon, unless the offset project sponsor holds long-term insurance, approved by the state regulatory agency, that guarantees replacement of lost sequestered carbon for which CO2 allowances were awarded.
Project Approval Process
Validation and Registration
Validation, referred to as ‘consistency determination’, is the first step of the application process for offset projects under the RGGI program. The RGGI participating states have jointly developed detailed project applications for each eligible offset project category that specify project documentation requirements to demonstrate conformance with regulatory requirements. The project’s validation application, referred to as a ‘consistency application’, must include a certification statement and certification report from a independent verifier that is accredited by the RGGI participating state in which the offset project is located, and then must be submitted to the appropriate state regulatory agency in the state where the offset project is located. The state agency then evaluates and approves or rejects the project based on demonstrated consistency with state regulations and documentation required in the consistency application.
Monitoring, Verification and Certification
The submission of an annual monitoring and verification report by the offset project developer to the appropriate regulatory agency is the second step in the application process under the RGGI program. A monitoring and verification report must demonstrate the precise amount of GHG emissions reduced or sequestered during the reporting period. It must also include a certification statement and certification report from a state-accredited independent verifier demonstrating that it was reviewed by an accredited independent verifier. The monitoring and verification report is then evaluated by the state regulatory agency to determine whether and in what amount CO2 offset allowances will be awarded.
Registries and Fees
RGGI has set up an emissions and allowance registry called the RGGI CO2 Allowance Tracking System (RGGI COATS). The RGGI participating states have developed an offset module for RGGI COATS (RGGI, n.d.). While individual RGGI participating states may require state-specific application procedures, RGGI COATS is used for all project registration, tracking of offset project consistency application and monitoring and verification report submissions, project regulatory status, and the state award of CO2 offset allowances. There are no fees associated with use of the registry but each state may develop a fee structure to cover the administrative costs related to processing offset project applications.
Selected Issues
As the first mandatory cap-and-trade program in the US to regulate GHGs, RGGI is expected to set the stage and serve as the model for future US climate change policy, including the development of the WCI and of potential future programs at the federal level. It has already set precedents for other programs to follow such as the collaboration between energy and environmental agencies in designing the program, and a new approach to allocating allowances through auctions (Sherry, 2008).
RGGI just recently began in 2009, so the expected volume, price, and eligibility of offsets under RGGI are not yet known. Furthermore, since the use of offsets for compliance under the program can increase depending on the price of emission allowances, the role offsets will play over the long-term remains to be seen. Some regulated facilities and investors have expressed concern that the system of price triggers adds additional uncertainty about offset eligibility and compliance requirements (Natsource, 2007). Reviews of the RGGI program design have presented what are, in some cases, conflicting concerns regarding the challenges of too small or too large an offset market. Limiting the offset project location and type has raised concern that the RGGI offset market may encounter a liquidity problem and present a missed opportunity to use the efficiency of the global markets (Capoor and Ambrosi, 2007). Several interested parties in the region have requested that the eligible project types be expanded. For example, the Forest Guild, a forestry network, recommended that forest management projects be allowed as an offset project type (Point Carbon, 2007b), and the US Department of Agriculture recommended that avoided methane emission from aerobic treatment systems be allowed (USDA, n.d.). In contrast, others are concerned that the state environmental regulatory agencies lack the administrative capacity to handle the additional workload associated with expanding eligible offset project types.
The distributed regional regulatory structure of the RGGI program has also raised concerns that it may become an overwhelming administrative burden for the state environmental regulatory agencies, which may not be evenly distributed if some states have a greater potential for offset project development. The lack of timely and accurate tracking and reporting of emissions experienced in the European Union Emission Trading Scheme and CDM programs, in addition to the inefficiency of the project approval processes, demonstrated that such a distributed regulatory structure can significantly impede investment decisions regarding trading and offset project development (Point Carbon, 2007a; Natsource 2007). RGGI’s administrative structure is consistent with the distributed legal structure of the program, which is based on individual state regulations in each participating state.
How the program performs administratively remains to be seen. The participating states have coordinated to develop consistent applications and submittal materials and are using a regional registry to track project status and the state award of CO2 offset allowances.
References
Natsource LLC (2007). Realizing the Benefits of Greenhouse Gas Offsets: Design Options to Stimulate Project Development and Ensure
nvironmental Integrity. National Commission on Energy Policy. January 2007.
RGGI (2006). Analysis Supporting Offsets Limit Recommendation.
RGGI (2007). Regional Greenhouse Gas Initiative Model Rule, January 5, 2007.
RGGI (2007a). Overview of RGGI CO2 Budget Trading Program
RGGI (n.d.). Regional Greenhouse Gas Initiative: Emissions and Allowance Trading.
Sherry, Christopher (2008). Personal communication, [June 2009].
Point Carbon Research (2007a). Emissions Trading in the US: Is RGGI Over-allocated? Carbon Market Analyst, August 17, 2007.
Point Carbon Research (2007b). RGGI Should Expand Forestry Offset Options: Report (fee required).
Point Carbon News (2008). Carbon Market North America (fee required) February 27, 2008.
USDA (n.d.). Comments on Regional Greenhouse Gas Initiative (RGGI) draft Model Rule.