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 reveals that price impacts will be negligible. Economic modeling projects that RGGI will 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 further project that the price per allowance will be $2/ton in 2009. Though the projections are considered accurate, the proposed 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.