Background

What is the Cap-and-Trade System?

The Environmental Defense Fund states that the best climate policy - environmentally and economically - limits emissions and puts a price on them. The cap-and-trade system is one solution that does both. The cap refers to the firm limit on greenhouse gas emissions that drive global warming. The trade refers to the resulting market that allows companies to buy and sell allowances. Typically, a single allowance is equivalent to one ton of emissions. Governments usually grant these allowances to companies for free or through an auction. As the cap decreases over time, companies are incentivized to lower their emissions. Companies that cut their pollution faster can sell their extra allowances to other companies or "bank" them for future use.

However, critics of the cap and trade system that the promise of the system is idealistic and in reality, the design of cap and trade systems across the world have done little to make a dent into global greenhouse gas emissions.

What is Carbon Taxing?

A carbon tax directly establishes a price on greenhouse gas emissions—so companies are charged a dollar amount for every ton of emissions they produce. Unlike cap-and-trade systems, carbon taxes allows for stable carbon prices, so energy producers and entrepreneurs can make investment decisions without worrying about fluctuating regulatory costs. Carbon taxes also allows for a continuing price signal in situations of economic downturns.

In the United States, there are no carbon tax systems however there are a few cap-and-trade systems operating regionally. The most popular being California's and the Regional Greenhouse Gas Initiative that includes 9 northeastern states. For our project, we decided to do a deep dive into RGGI's cap and trade system.

RGGI:

The Regional Greenhouse Gas Initiative was created in 2005 and held its first auction of CO2 emissions allowances in 2008. It is the first mandatory cap-and-trade program in the US to limit greenhouse gas emissions for the power sector. The participating states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. By 2020, the cap-and-trade program is expected to help the states reduce annual power-sector CO2 emissions 45 below 2005 levels. The states have set a goal of reducing emissions an additional 30 percent by 2030.

Under RGGI, power plants with a capacity greater than 25 megawatts to obtain an allowance for each ton of CO2 emitted annually. Auctions for allowances occur quarterly and the program has raised more than $3 billion for the Northeastern states participating.

Purpose:

The purpose of our project is to analyze the effectiveness of the RGGI cap-and-trade model for reducing greenhouse gas emissions over the past 10 years the program has been running. Cap-and-trade, in theory, is an ideal solution for reducing carbon emissions with both environmental and economic incentives however, the design of the system itself defines its effectiveness.

Goals:

Simulate the existing RGGI model
Redesign the RGGI model
Compare results
Propose modifications moving forward