Viewpoints: Cap and trade has lessons for California

It's not often that we Northeasterners get to brag about setting a trend that Californians are following. But when it comes to creating a cap-and-trade system for greenhouse gas emissions, we are the nation's first. And as California works to implement a carbon market of its own, Californians can learn from the Northeast's experience.

The Regional Greenhouse Gas Initiative, or RGGI (pronounced "Reggie"), is a cap-and-trade program for the six New England states, New York, Maryland, Delaware, and until recently, New Jersey. RGGI requires power plant owners to buy allowances at auction for the carbon dioxide they emit. If they pollute less, they need fewer allowances, and utilities can sell allowances they no longer need.

The design of the carbon market California is building is different, but the same basic principle applies: market forces will drive companies to find sensible ways to cut emissions.

Of course, people want to know if cap-and-trade programs kill jobs and hurt business – especially at a time when every penny counts. And my firm was commissioned to study that very question: What has RGGI meant in terms of cold, hard dollars? How has it affected the economies of its member states?

To find out, we gathered real data. We looked at what RGGI meant for power plant owners, and how it affected customers' electricity rates and annual energy bills. Then, we tracked what happened to the money collected by the states at the RGGI auctions where allowances were sold, to see how it flowed back into the economy.

Here is what our study found: The Northeastern states have more money in their pockets because of RGGI.

Our analysis showed that electricity bills initially went up – by less than 1 percent – but that the total economic benefits from the investments of the auction proceeds more than made up for it. Each state spent its share of the proceeds differently, with some of the money going to energy efficiency, some going to community-based renewable energy projects, and some going to low-income energy bill assistance, education and job-training programs. Some RGGI money was even used to bridge state budget gaps.

Taken as a whole – and largely thanks to energy efficiency measures paid for by RGGI auction proceeds – RGGI ends up saving the average residential consumer $25 per year. The average commercial customer saves about $18, and the average industrial consumer about $2,500.

Overall, RGGI generates $1.6 billion in net economic benefits to the Northeast and Mid-Atlantic region. It saves electric customers some $1.3 billion. And since RGGI has reduced demand for energy, the 10 states will keep $765 million in the local economy they would have otherwise sent to other states and nations to pay for fossil fuels.

One group does stand to lose out. Power plant owners face long-term declines in revenues, because RGGI investments in energy efficiency are driving down demand for electricity. The winners are the industries, businesses and the families of New England that pay less for electricity. For them, RGGI's implementation has brought an unexpected economic bonus – modest, given the size of RGGI's territory, but real, and in these hard times, especially welcome.

RGGI is a pioneering effort that has boosted the economy of every state that has participated. Recently, I traveled to California to share that news with lawmakers, regulators and business leaders. It's good to know that states like California are watching and learning – from both our mistakes and our challenges.

We look forward to the Golden State setting some cap-and-trade trends of its own and building on the economic success of the Northeast.

• Read more articles by Paul Hibbard

Order Reprint