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An Emissions Containment
Reserve for RGGI:
How Might It Work?
Moderator
Franz Litz
Collaborative for RGGI Progress
Acadia Center
Calpine Corporation
Exelon Corporation
National Grid
Natural Resources Defense Council
2
Webinar Agenda
10:00
Welcome and Introduction
Franz Litz, for the Collaborative for RGGI Progress
10:05
What is an “Emissions Containment Reserve” and
How Might it Work for RGGI?
Presenter: Dallas Burtraw, Resources for the Future
10:35
Respondents: What are the Opportunities and
Dan McGraw, ICIS
Jackson Morris, NRDC
Derek Furstenwerth, Calpine Corporation
Chris Hoagland, Maryland Department of Environment
11:00
Questions and Responses from the Audience
11:20
A Preview of Analytical Work to Examine ECR
Bill Shobe, University of Virginia
11:30
Adjourn
3
Speaker
Dallas Burtraw
Resources for the Future
4
An Emissions Containment Reserve for RGGI:
How Might It Work?
Dallas Burtraw
Resources for the Future
Why Cost and Emissions Containment?
• Prices in a market-based program are uncertain. In RGGI:
–
–
–
–
One finds volatility of natural gas prices and electricity demand.
Uncertain operation of existing nuclear fleet.
Program investments in energy efficiency help reduce emissions.
Federal and state programs provide incentives for development of
renewables.
• The possibility for a slack emissions cap going forward is real.
• Intuition and economic research indicate that investors and
consumers benefit from avoiding sudden extreme outcomes.
• If cost or emissions containment measures are triggered the
program continues to function between program reviews while
sending a signal to planners to evaluate the program design.
Cost Containment in RGGI
• Cost containment is two-sided.
• On the low side, a reserve price in the auction provides a price floor.
– The reserve price is the minimum acceptable bid. If market prices (and buyer
willingness to pay) is below the reserve price, then some portion of allowances
will not be sold or enter the market. Tighter supply will support the price.
– “Just like eBay!”
– In 2017 the reserve price is $2.15 and escalates at 2.5% per year.
• On the high side, a cost containment reserve provides additional
allowances at a ceiling price.
– The CCR ceiling prices: $4 in 2014, $6 in 2015, $8 in 2016, and $10 in 2017.
Each year after 2017, the CCR trigger price escalates by 2.5%.
– That ceiling price serves like a “reserve price” on the additional allowances.
– Up to 10 million additional allowances per year are available. If these allowances
were exhausted then prices would continue to rise. To date the CCR has added
15 million allowances to the market.
Experience with Allowance Prices
Million tons CO2
8
Illustrative Supply & Uncertain Demand Currently
Price ($/ton)
12
Intended
Cap
10
$10
DVery High
8
CCR (10 mty)
Supply
Schedule
6
DHigh
DExpected
4
2
$2.15
0
DLow
Allowances Sold in Auction
Perspectives on the Price Floor
• The price floor has played a crucial role in RGGI.
‒ Prices may have fallen to zero without the floor and the program
architecture may not have survived.
‒ The price floor guarantees a minimum return on innovation and early
action, which emissions trading intends to encourage.
‒ Roughly a billion dollars were raised when prices were at the floor,
funding program related measures and preserving expectations
about future carbon limits.
What is the Emissions Containment Reserve?
• The ECR would introduce a soft price “step” or
“steps” above the hard price floor.
• If the auction price falls below a given step, a
quantity (“lot”) of allowances would not enter
the market.
• By supporting the price and potentially reducing
allowances in the market, the ECR would
potentially reduce the size of the privately held
allowance bank. But it would not undermine the
incentive or logic of banking.
Why would RGGI consider this new feature?
•
Some states and constituencies (firms, schools, cities)
are taking additional actions.
•
Under a regional cap this leads to the waterbed effect.
 Prices fall, and emissions
go up somewhere else.
•
Indeed, price trends are
again headed down.
Why not adjust the existing features?
•
•
•
Reducing the intended cap could reduce emissions
o
This change may be necessary anyway. But this action is an administrative
decision that comes after the auction during program review.
o
It may difficult for investors to predict and for RGGI to negotiate and
execute.
Increasing the “hard” auction price floor could reduce emissions
o
This change may be a good idea anyway. The average of the last four
auction clearing prices is $4.47.
(Down from $7.50 in auction 30.)
The current price floor ($2.15) could ratchet up and protect prior actions.
o
Some stakeholders are concerned that the auction price floor would end
up setting the price.
In either case, extracurricular efforts by states and constituencies
still might not overcome the waterbed effect.
What would the ECR look like?
•
One or multiple steps would adjust supply in response
to prices, just like in other markets.
•
Under the ECR, when prices are low, the trading
program would acquire more emissions reductions.
•
The ECR price levels would remain subject to
programmatic review.
•
Between reviews, the ECR would provide a rule-based
approach that would help companies plan.
$/ton
A Supply Schedule without the ECR
12
Intended Cap
CCR
10
8
6
The waterbed effect:
Prices fall.
Regional emissions don’t change.
DExpected
4
2
Pmin
DLow
0
Allowances Sold in Auction
$/ton
A Supply Schedule with the ECR
12
Intended Cap
CCR
10
8
6
4
The ECR avoids build up of a
large bank. Savings are shared
with the environmental goal.
Multiple steps would lessen
chance any one price level is the
DExpected
outcome.
The outcome looks more like
other markets.
P2
min
DLow
0
How might ECR price levels be set?
• An easy way to implement the ECR would be as
a reserve price (minimum price) associated with
various lots of allowances.
• A discussion about price levels could be
informed by modeling (e.g. low gas prices, etc.)
• An example:




1 million tons would not be sold at bids below $10
1 million tons would not be sold at bids below $9
1 million tons would not be sold at bids below $8
etc.
What would happen to unsold allowances?
• Decision is similar to current hard price floor
o Presumably retire the allowances from circulation
o Possibly add to the cost containment reserve?
Summary

An ECR would be a supply control mechanism, not a price control
mechanism.

Additional efforts by states and constituencies would be recognized.

It would not prevent prices from dropping below the ECR’s price step(s).

The “correct cap” balances costs and benefits of emissions reductions.
•
If reductions cost significantly less than we anticipated, then we got that
balance point wrong….
•
The ECR would yield additional investments in the region, air quality benefits,
and GHG reductions at costs that are lower than were expected.
Respondents
Dan McGraw
Jackson Morris
Senior Strategist,
ICIS
Director,
Eastern Energy,
Natural Resources
Defense Council
Derek
Furstenwerth
Chris Hoagland
Senior Director,
Environmental
Services,
Calpine Corporation
Economist,
Maryland Department
of the Environment
20
Speaker
William Shobe
University of Virginia
23
THANK YOU