On December 20, 2005, seven Northeastern states 3 executed a Regional Greenhouse Gas Initiative (RGGI) Memorandum of Understanding to “do their fair share in addressing their contribution to this collective problem [of climate change]” by creating a regional CO2 cap-and-trade program. The ultimate goal of RGGI is to reduce the participating states’ overall emissions of CO2 from fossil-fuel-fired electric generating units to ten percent below 1990 levels by 2018. The MOU was amended August 8, 2006, and a multi-state model implementing rule was finalized January 5, 2007. The participating states intend to implement the model rule by December 31, 2008, with the first cap-and-trade compliance period to enter into force January 1, 2009. A key provision of the cap-and-trade program is the creation of limited CO2 reduction credits from projects outside the RGGI states, which could then be sold the RGGI-covered sources to cover their emission reduction obligations

Key Provisions

RGGI applies only to fossil-fuel-fired electric generating units (EGUs) ≥25MW. RGGI establishes a regional CO2 emissions cap based on 1990 emissions of CO2, which is divided into state-level caps, which are then allocated by CO2 allowances among the various EGUs in the state, with a 25% “holdback” of CO2 allowances for consumer benefit and strategic energy purposes. Each CO2 allowance is equivalent to one short ton (i.e., 2,000 pounds) of carbon dioxide.4 Beginning January 1, 2009, each EGU must secure sufficient CO2 allowances at the end of each compliance period to cover its emissions of CO2 during that period. The compliance period is three calendar years (subject to an extension to four years, depending on CO2 allowance market conditions).

The regional and state caps are reduced by 2.5% per year commencing in 2015, so that by 2018, the regional and state caps are ten percent below their original levels. The RGGI states are required by 2009 to describe the declining CO2 allowance allocations to EGUs through 2018. In a “Safety Valve Trigger Event,” the three-year compliance period may be extended by one year if the price of CO2 allowances exceeds $10 per allowance (2005$) dollars, adjusted annually by CPI plus two percent.

EGUs may secure “offset allowances” to cover their emissions of CO2 from qualifying CO2- equivalent projects implemented after December 20, 2005, in non-RGGI states with either their own cap-and-trade program, or a memorandum of understanding with the RGGI states providing for the oversight of offset credit generation. Currently, only the following offset-generating projects qualify for consideration: (1) landfill methane capture and destruction; (2) reduction in emissions of sulfur hexafluoride; (3) sequestration of carbon dioxide due to afforestation; and (4) avoided methane emissions from agricultural manure management operations. Qualification details for each project type are set forth in Section 10 of the model rule. Additional project types may be approved by the RGGI states in the future.

Unless the price of CO2 allowances exceeds $7 per allowance (2005$) on a 12-month rolling average, an EGU may cover only 3.3% of its emissions with offset allowances. If the CO2 allowance price exceeds the $7 threshold (an Offset Trigger Event), then an EGU may cover 5% of its emissions with offset allowances. In the case of a Safety Valve Trigger Event (i.e., CO2 allowances cost more than an inflation-adjusted $10 per allowance), then the EGU may cover 10% of its emissions with offset allowances, and may use allowances and credits from international trading programs as well (e.g., Kyoto Protocol and the European Trading System). EGUs may secure Early Reduction Credits by improving CO2 emission rates or permanently reducing EGU utilization.