In a move that will have a significant impact on Pennsylvania's power producers, Governor Tom Wolf signed an executive order on October 3rd directing the state's Department of Environmental Protection (PADEP) to create regulations that will allow the state to join the Regional Greenhouse Gas Initiative (RGGI). Pennsylvania will be the eleventh state to join RGGI, which is the United States' first mandatory cap-and-trade program for carbon dioxide emissions. Pennsylvania's entrance into RGGI will expand the regulatory scope of the program, given the state's status as a major producer of coal and natural gas and one of biggest sources of greenhouse gas (GHG) emissions among U.S. states.

RGGI sets a regional, annual cap on carbon dioxide emissions from the energy sector in its participating states. RGGI then allocates allowances to power producers in these states via quarterly auctions. Fossil fuel-fired electric power generators with a capacity of 25 megawatts or greater are required to possess allowances equivalent to the amount of carbon dioxide emissions that they emit over a three-year control period (i.e., one allowance per one short ton). Regulated sources may purchase these allowances at quarterly auctions or acquire them through secondary markets such as over-the-counter trades and exchanges. States that participate in RGGI use revenue from the sale of allowances to invest in clean energy and energy efficiency efforts.

Wolf's executive order directs the PADEP to set up a cap-and-trade program for the state's power producers that can be integrated with the cap-and-trade programs of other RGGI member states. The states currently participating in RGGI are Connecticut, Delaware, Maine, Maryland, Massachusetts, New York, New Hampshire, Rhode Island, Vermont, and New Jersey (which recently rejoined in July and will become a member on January 1, 2020). Virginia was expected by many to join RGGI last year, but its state legislature included a provision in the state's 2020 budget prohibiting state dollars from being spent on RGGI.

Pennsylvania generates more than half of its electricity from coal and natural gas, and the state's power sector accounts for about one-third of its GHG emissions. Many states are also ramping up climate-related initiatives in the wake of federal inaction, including efforts to regulate GHG emissions. Pennsylvania's entrance into RGGI could signal to other major fossil fuel-producing states that participation in such a program is viable.

Pennsylvania's participation in the program will result in additional obligations for many of the state's power producers, who will be required to purchase allowances within the marketplace. While the timeline of Pennsylvania's entrance into the program is still uncertain, Wolf's order gives PADEP until July 2020 to develop proposed regulations that comply with RGGI.

In transactions involving power producers that will be considered regulated sources under RGGI or other emissions trading programs, buyers should consider incorporating provisions in transaction documents that require sellers to transfer sufficient emissions allowances along with such assets. Sellers, likewise, should be prepared for buyers to (i) diligence assets' compliance and costs relating to RGGI or other emissions trading programs and (ii) request transfer of related emissions allowances or equivalent costs.