Seven RGG Initiatives
By John Wadsworth, Class of 2007

Seven northeastern states have begun implementing a program to control and reduce the emission of greenhouse gases. The ratifying states are Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont. Massachusetts and Rhode Island were involved in the development of the Initiative, but indicated that the potential increase in electric prices did not warrant participation at this time. Legislation has recently been filed to require Massachusetts to comply with RGGI, despite the governor’s objections. Maryland has also indicated that it may join. The Initiative is designed to allow for a fairly seamless addition of these and other states in the future.

This Regional Greenhouse Gas Initiative ("RGGI" or the "Initiative") is similar in many aspects to the schemes developed pursuant to the Kyoto Protocol, and it is expected that RGGI will be the model for other regional, and possibly national, responses to greenhouse gas concerns. RGGI is designed to be a first step, impacting limited sources of carbon dioxide emissions, with the hope that the experience gained from this limited program will allow for further expansions going forward.

RGGI will initially apply only to electric generating power plants larger than 25 megawatts, excluding biomass facilities (such as wood waste, waste-to-energy, and other such facilities). The RGGI participating states agreed to a level of carbon dioxide emissions that will be allowed in each state, which level is initially set at a level roughly equal to the actual average tons of carbon dioxide emitted from these plants during 2000 through 2004.

While it does not seem that any reduction in emissions is being mandated during the first years of this Initiative, remember that the baseline period represented a downturn in the economy and electricity usage was lower, and natural gas prices were low which increased use of that fuel leading to reduced CO2 emissions.

Allowances to emit CO2

Each allowance grants the right to emit a ton of carbon dioxide. Each participating state will be assigned these emission allowances, and the state will then allocate to each effected power plant 75% of that plant's average yearly emissions.

The mechanism for a state's assigning emission allowances to a facility is to be determined on a state by state basis, and could be allocated free of charge, or auctioned, or distributed by using some other mechanism.

The remaining 25% of a state's emission allowances are to be allocated for public benefit purposes, which means that these allowances will be distributed in a way that is to support energy conservation, fund the RGGI Initiative itself, foster renewable energy, mitigate ratepayer impacts, and similar objectives. Most likely, these allowances will be auctioned and the proceeds utilized to fund various types of these activities.

Power plants subject to these requirements will need to demonstrate that, two months after the end of each applicable three year compliance period, they have been allocated or have acquired sufficient carbon allowances to match their carbon emissions. In other words, a power plant will presumably have been issued credits covering 75% of its emissions, and would have to accomplish some combination of either: (a) reducing emissions so that it does not need additional allowances; or (b) buying additional allowances from either the state (out of its 25% allocation), from our other plant that does not need all of its credits, or from third parties who otherwise have acquired these emission credits. In addition, parties can "create" new carbon allowances (called "offsets") by undertaking verified and accredited projects that reduce the release of carbon dioxide into the atmosphere. There are limits to the number of these "offset" allowances which can be utilized by a power plant to meet its emissions cap, so as to avoid the creation of too many allowances.

A word about offsets

Offsets are not renewable energy projects. Offsets are projects which, in and of themselves, cause the amount of carbon dioxide being released into the atmosphere to be reduced. At the moment, these include only a few specific projects, such as capturing landfill gas that otherwise would be emitted into the atmosphere, eliminating leaks in natural gas distribution systems and propane systems, and certain forest plantings. Renewable energy projects do not create carbon offsets because they do not directly result in a reduction of carbon that would be emitted into the atmosphere.

The goal of the offset program is to create allowances that can be freely traded regardless of the source—each state's allowances should be tradable in any other state, and allowances created through the offset program will be freely tradable across states that are signatories to RGGI and with all other carbon allowances. Offset allowances can also be created from projects in non-RGGI states; however, such allowances may have reduced value.

General Terms
The general terms of RGGI are currently reflected in a Memorandum of Understanding executed by the various state governors. A RGGI Planning Group has developed model regulations which are available for public comment through May 22, 2006. Once the model regulations are adopted in the summer of 2006, each state must then undertake the process to adopt these rules individually. Obviously, it is critical that there be sufficient uniformity between the states such that allowances, and especially offsets which will be certified and created in each individual state, will be freely tradable in every other state.

RGGI to take effect in 2009
RGGI will take effect in 2009. The level of carbon emission allocations for each of the states will be at a stable level through 2015. Between 2015 and 2020, a 10% reduction in emissions will be imposed. Finally, there are various trigger mechanisms in the Initiative that are designed to relax restrictions on the use of allowances created from offset projects if the prices of emission allowances exceed certain levels (and thereby result in too great an increase in electric prices).

Comparison to Kyoto
In many ways, this scheme is similar to the Kyoto Protocol. However, under Kyoto, for industrialized countries, the initial emissions are capped at 1990 levels, and so there will be an immediate reduction required. Also, the emission limits apply to many more industrial facilities in addition to power plants. Each country has allocated its assigned emission allowances to various industries in various percentages, reflecting the country's desire to cushion certain industries from potential price effects. Kyoto also has several mechanisms for creating new carbon credits through projects that reduce carbon emissions in developing countries. Russia and the Ukraine -- have many excess Kyoto allowances that could be traded because their carbon outputs in the early 1990s were significantly greater than they are today as a result of their greatly reduced industrial output.

A market in EU allowances
A market in the trading of government-issued allowances (EU allowances) is already in place, with the price in the range of 20-30 Euros, which is quite a bit higher than was initially anticipated. Although many projects that will qualify for the production of carbon credits have been approved, there is still substantial backlog in the approval process. The executive board created under UNFCCC (the governing framework for the Kyoto Protocol) is working hard to address this issue. The upside is that once a project methodology has been approved, it is publicly available and can be utilized by the general public to develop more projects based on the same methodology.

Summary
The Regional Greenhouse Gas Initiative is a bold and pioneering step on the part of American entities in the absence of federal leadership. In its present form, it only impacts power generation facilities. However, the states involved intend this to be a starting point for regulation of all significant sources of carbon dioxide emissions.

In addition, it is no secret that it is hoped that RGGI will become a very broad based program to fill a perceived vacuum regarding global warming on the federal level—and to be a program that could transition easily into a nationwide regulatory scheme if there are policy shifts at the federal level.

Companies are well advised to become informed and involved in the early stages of this program, both to ensure that specific concerns are addressed in the details of the regulations that are being developed, and to be able to intelligently anticipate the program’s consequences on the company’s long-range plans.

Details that are made a part of this regional program could well shape what ends up in any federal program that is enacted. John W. Wadsworth, Esq. is a member of Brown Rudnick’s Climate & Energy Group. He specializes in matters involving renewable energy project development and finance, emissions reduction schemes, alternative energy sources and environmental permitting.