Emissions Trading in RGGI: What Does it Mean for China?


China launched seven pilot emissions trading systems (ETS) in 2013, as testing grounds for a national ETS. With the Joint Presidential Statement on Climate Change, China confirmed its plan to launch a national ETS in 2017, and work has already begun to develop the necessary legislation.

RAP led a team of international experts in assessing the Guangdong and Shanghai ETS pilots. Many of our recommendations are still relevant as China develops a national ETS. In particular, the Regional Greenhouse Gas Initiative (RGGI), a regional cap-and-trade program in the Northeastern U.S., has several unique features that China’s government might consider as it develops a national emissions trading system. On September 10th and 11th, RAP senior associate David Farnsworth shared insights with participants at the Duke Kunshan University’s China-US Climate Change Action and Cooperation workshop.

RGGI, which began in January 2009, regulates carbon emissions from power plants greater than 25 MW in nine states. Similar to other cap-and-trade programs, there is an overall emissions cap, each regulated generator must surrender sufficient allowances to cover its own emissions, and allowances can be traded, thus giving generators flexibility to achieve the lowest-cost emissions reductions. However, RGGI also has some more innovative provisions, including:

Cap-and-Invest: RGGI’s biggest departure from earlier cap-and-trade designs was the decision to allocate nearly all emission allowances through auctions and to invest the auction revenues in end-use energy efficiency, renewable energy resources, and other consumer benefit programs. Today, more than half of the auction revenue is dedicated to energy efficiency programs that reduce emissions, save consumers money, and deliver other economic benefits across the region. From 2008 to 2014, RGGI states’ energy efficiency program budgets grew from $575 million to $1.7 billion—an increase of 203 percent.

Coordination with other energy and environmental policies: The ultimate goal of RGGI is to encourage a cleaner power mix. To get emissions reductions at the lowest cost requires coordination of different strategies, including more efficient generation dispatch, burning less fossil fuel, investing in more renewable energy, improving end-use efficiency, and integrating energy and environmental policies. (See our recent review of low-carbon power sector regulations in Europe, the U.S., and Brazil for more details).

Program review: RGGI held its first program review in 2012, as planned in its original 2005 Memorandum of Understanding (MOU). In response to the review, the nine-state CO2 cap was reduced from 165 million tons to 91 million tons in 2014 to capture the program’s savings and reflect the sector’s current level of emissions. The cap is slated to further decline 2.5 percent each year from 2015 to 2020. This tightening of the cap was a major achievement, based on an open and transparent process that included participation of a wide range of stakeholders, including generators.

Regional cooperation: RGGI is not one program that serves nine states, but instead is nine different programs that, due to mechanisms that China certainly can adapt, allow it to look like and work as one program. RGGI’s MOU and Model Rule allow states to operate independent programs in tandem, and to count emissions and sell the rights to emit as a region. They also enable joint state action with the help of common platforms like an allowance tracking system, a central auction, and a market monitor.