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Economic Effects of RGGI

How Selling Allowances Affects Consumer Prices

In other pollution reduction programs, power companies are given the allowances for free, the companies then pass through the "market value" of these allowances in their bills to consumers. This means that the cost of electricity to consumers will include as much of the cost of allowances as the law permits generators to add on, whether those allowances are purchased or obtained free of charge. Selling the allowances ensures that their proceeds will benefit the public by funding projects to conserve energy, reduce CO2 emissions and develop clean technologies.

The decision to sell allowances takes into account the European Union's experience. The E.U. gave away 90 percent of its allowances, thinking that would ease industry's compliance cost. However, that mechanism resulted in companies enjoying a windfall; power costs to customers increased to cover the cost of the allowances, but generators did not pay for the allowances. In the U.K. alone, free allowances amounted to a $1 billion grant to the power industry.

Likely Price Impact of RGGI

The cost of allowances, like the cost of fuel, will be built into generators' electricity prices. However, modeling analysis revealed that price impacts would be negligible. Economic modeling projected that RGGI would increase wholesale electricity prices by about 1.6 percent (78 cents per month for a typical residential customer) in 2015 and 2.4 percent ($1.13 per month for a typical residential customer) in 2021.

Economic models also projected that the price per allowance would be $2/ton in 2009. Though the projections were considered accurate, the regulations include some mechanisms to mitigate the risk of high prices. These mechanisms include expanding the use of offsets, adjusting compliance periods and holding frequent auctions. There is also a "circuit breaker" provision that expands offsets if the price of an allowance rises to $7/ton.

Analysis Group Report: The Economic Impacts of the Regional Greenhouse Gas Initiative on Ten Northeast and Mid-Atlantic States

According to the Analysis Group Report released in November, 2011, RGGI has raised over $1.6 billion for the ten participating states since the program began in 2008. Most of the funding from the auction proceeds was spent on energy efficiency programs, saving regional customers $1.1 billion in electricity bills, and over $174 million on natural gas and heating bills. RGGI programs also created 16,000 jobs throughout the region, and the region's payments for out-of-state fossil fuels decreased by over $765 million. (See link at right.)