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The encyclopedia · Strategy & Leadership · Strategic decision · 2008–2012

RGGI auctioned carbon permits from day one, and emissions fell 48%.

The first US cap-and-trade to auction almost all allowances used quarterly regional auctions and reinvested proceeds; power-sector CO2 fell 48% by 2016–2018.

RGGI, Inc.

the move

When ten northeastern U.S. states agreed in 2005 to cap power-sector carbon dioxide, the first design question was how to distribute the allowances. Free allocation hands the scarcity value to incumbent emitters; RGGI instead chose to auction almost all of them at quarterly regional auctions, with the proceeds going back to the states.

The cap covers fossil-fuel plants above 25 megawatts, which must hold an allowance for every ton of CO2 they emit. Because nearly all allowances are auctioned, the program produced a real price signal from day one, and the states reinvested the proceeds in energy efficiency, renewables, and consumer bill programs.

The results were measured: average emissions from RGGI generation sources fell 48 percent between 2006–2008 and 2016–2018, and the states saw a net economic benefit of $4.7 billion over 2009–2017. Econometric work found RGGI itself was the dominant factor in the decline, ahead of the recession and cheaper gas.

why it works

  • Auctioning from day one priced the cap without relying on free-allowance trading.
  • Reinvested proceeds funded the efficiency programs that cut demand further.
  • Quarterly auctions gave compliance entities a predictable, transparent market.
  • The measured 48 percent decline made auction-based cap-and-trade credible to other states.
the payoffAuction the permits and reinvest the proceedsneat

what transfers

When you create a tradable right, auction it: the auction reveals a price, the state captures the scarcity value, and earmarked proceeds build the constituency that defends the cap.

what came after

RGGI expanded to more states over time, and its auction-plus-reinvestment model became the template for carbon markets in California and beyond. The program's own accounting shows proceeds invested in energy efficiency and bill assistance, and studies continue to attribute a large share of the region's power-sector emissions decline to the auction mechanism itself.

references

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