Last week, 5 Northeastern states along with Washington, DC announced their intention to explore a market-based program similar to the Regional Greenhouse Gas Initiative (or RGGI) to reduce emissions from transportation.
This is a great idea and I hope that Massachusetts joins these states in creating a strong regional program to cover transportation.
Why is this a great idea?
The short answer is that creating a market-based program like the Regional Greenhouse Gas Initiative in the transportation sector would help create a cleaner, more efficient transportation system for the region. In the process, we can create jobs, save consumers and businesses money, and drive economic growth.
According to the report issued by the Georgetown Transportation and Climate Initiative, when combined with existing state and federal policies, a market-based system could help reduce emissions by 40%, save consumers up to $72 billion and create over 90,000 jobs in the region by 2030.
The long answer requires a bit of background on the RGGI program and some of the core challenges facing the region in transportation and climate policy.
What is RGGI?
RGGI is a regional program created by a network of states in the Northeast and Mid-Atlantic region. The core of the RGGI program is a requirement that big utilities that emit large quantities of global warming emissions purchase allowances sold at regional auctions. The requirement to purchase these allowances holds utilities accountable for their emissions and creates an economic incentive to reduce pollution as much as possible. Moreover, by limiting the total number of allowances available, RGGI guarantees overall regional emission reductions.
At the same time, the sale of allowances at these regional auctions raises money, which is then invested in projects that reduce consumer costs. In Massachusetts, the RGGI program is one of the primary funding sources for our efficiency programs that have helped make Massachusetts the most energy-efficient state in the nation.
The “triple win” that defines the success of the RGGI program is that by investing in efficiency and low-carbon technologies, RGGI saves consumers money, reduces pollution and improves economic performance.
The Transportation Challenge
The biggest limitation to the RGGI program right now is that it only applies to electricity. While generating clean electricity is important, electricity is responsible for only 20 percent of total emissions in Massachusetts. Our largest source of pollution is transportation.
Solving the climate challenge in transportation requires significant new reforms and investments. We need more public transportation. We need to invest in new technologies, such as electric vehicles and low-carbon fuels. We need to be doing more to encourage active transportation by creating communities where walking and biking are real choices for people. And we need to make housing more affordable in areas with convenient access to public transportation.
At the same time, responding to the climate crisis also requires us to make our transportation system more resilient to climate change. From the billions in damage to the New York and New Jersey transportation system in Hurricane Sandy to the devastating storms in Massachusetts last year, it’s clear that more intense storms and floods are going to create challenges for our transportation systems. Protecting our transportation system from climate change will require billions in new infrastructure investments.
Unfortunately, the actual agencies responsible for making the needed reforms and investments are broke, and since the primary source of transportation funding is the gas tax, everything we do to reduce gasoline consumption is making the transportation agencies more broke.
What would Transportation RGGI look like?
The good news in the TCI report is that the RGGI “triple win” of reduced consumer costs, reduced pollution and increased economic growth can be replicated in the transportation sector.
The TCI report evaluates a model in which states would use some kind of pricing mechanism to raise funds to invest in sustainable regional transportation. While the report leaves open the possibility of different kinds of pricing strategies, the most straightforward approach would be to expand the existing requirement that electric utilities purchase allowances to transportation fuel distributors.
These auction sales would raise money that could then be used on projects that help reduce emissions and consumer costs and create a more resilient transportation sector. The report suggests that auction proceeds could be invested in improving public transportation in the region, investing in new technologies, promoting active transportation, and expanding housing opportunities close to transportation, while also looking at new transportation systems technologies to increase efficiency and reduce congestion.
The result for residents of the region would be cleaner air, less time spent in traffic, less money spent at the pump and a stronger and more resilient regional economy.
I hope that our elected leaders take advantage of this great opportunity to build a stronger transportation system for the state.
Daniel Gatti is Executive Director of Massachusetts League of Environmental Voters (MLEV) and a consultant to the Massachusetts Campaign for a Clean Energy Future, which advocates for smart carbon pricing policies in MA. You can follow me on twitter @danielsgatti or @massenvirovoter. And while you’re at it like us on facebook too.
I’ve always thought about RGGI-transp it in the context of including fuel tax within RGGI. It’s high level simplicity is appealing:
1. Increase the allowance totals from ~91 million tons to something appropriately larger
2. Require the purchasing of allowances for motor fuels at the distribution level. Essentially, every time a tanker truck delivers fuel to a gas station, the allowances have to be allocated.
3. Reduce or eliminate the existing cents-per-gallon gas tax so that the new combination of tax+RGGI (or just RGGI) works out to be the right amount of revenue.
The elegance is that as folks transition from gasoline to electric vehicles, you’re capturing that otherwise lost revenue. It’s not 1:1, but it can be made close by “tuning” the number of allowances so that the clearing price for an allowance corresponds with the desired gas tax “in cents per gallon” at the aggregate level. Furthermore, the incentive for owners remains the same: high mpg vehicles result in less tax paid; fewer miles result in less tax paid; lower intensity driving (don’t race to the next stop light) result in less tax paid.
Now, the tough parts. Currently, RGGI money goes right back to the states, and the state legislatures spend it as they see fit. In MA, the lege spends the money on smart and reasonable energy expenditures. In MA, the money’s gone for energy efficiency (EE), low income EE, municipal programs, and a little bit of clean tech. When it was in RGGI, NJ spent nearly all the money by moving it to the general fund. NY did some of that a few years ago. NH essentially gives the money directly back to electric ratepayers. But remember, RGGI electric money was new money. Gas tax money is existing, and goes to existing places. Thing the legislature would spend it on transportation EE? Of course not — it’s going to roads and bridges, as it does now. If you want RGGI transportation revenue to go to mass transit, EV infrastructure, or other carbon-reducing programs, its got to be new money. Additionally, the electricity wholesale market is complex, and people don’t think much about how individual decisions effect their light bill. Gasoline is different though. Prices are in numerals three feet high. Our citizens just recently voted to remove the newly-implemented adjust-for-inflation tax plan. Finally, some administrative mechanisms will be necessary to ensure that RGGI can still be used for Clean Power Plan compliance, because if the response to RGGI including transportation was a dramatic decrease in allowances needed for transportation, then the electric sector wouldn’t get the reductions mandated by the CPP.
So, yeah, lets do RGGI transportation. We can easily include it in the existing system. A few tweaks, some cooperation on spending the transportation side of the revenue, maybe get some new revenue to spend on ways for the citizens to consume less fossil fuel when transporting, yadda yadda. Who knows — maybe Governor Baker’s MBA brand of Republicanism can work with the idea.
Not shocked to see MA not on the list given that Christie and LePage aren’t on it either. Not that our legislature is that great, but is it something that they could have a say on, or is it just a governor’s office issue?
That’s a great question. There’s no question that the Governor already has the authority to implement new market-based programs under our Global Warming Solutions Act if he chooses to do so. There’s a push in the legislature led by Senator Marc Pacheco, one of the authors of the GWSA, to require the administration to support market-based programs like RGGI. So there is some opportunity for the legislature to provide some of the push for this.
I tend to go more for the “Thou shalt not…” approach. If we want to reduce emissions, why not just mandate a reduction of emissions and be done with it?
What we have now — a gas tax and CAFE standards — does not mandate emissions reductions. The gas tax means that individuals pay to emit, but the individuals and the group can emit as much as it likes. The CAFE standards mean that individuals emit less per mile, but individuals and the group are free to drive as many miles as they wish.
RGGI is a limit on total carbon emissions in the electric sector. The entire sector is permitted to emit 91 million tons each year, decreasing by 2.5% annually 2014-2020. The allowances are auctioned off, so that those who get the most economic value out of emissions are the ones who emit. The revenue is used to fund in-state carbon reduction schemes like energy efficiency and renewable energy generation.
The transition to RGGI for transportation is exactly what your second sentence proposes.
Yep. And one of the many things that I cut out of the original post here to keep it to a manageable length is that creating a comprehensive cap on emissions is particularly difficult in the transportation sector. Electricity has it’s own challenges, but there are 7,000 power plants of various sizes in the United States, while there are around 300 million cars and trucks. So while you can theoretically manage a direct command and control approach in the electrical sector (e.g. telling each power plant individually how much they need to reduce), transportation is several orders of magnitude more complicated.
Motor vehicle transportation is easier than electricity. We already have the bureaucratic infrastructure to track fuel purchases, because we already tax gasoline and diesel and we’ve already implemented RGGI for electric.
Marrying the two is easy. You don’t require that the owner of the engine obtain the allowances (like we do in electric) and you don’t require that the gas station obtain the allowances (they’re small businessmen typically). Instead you require that the wholesale supplier obtain the allowances. When the owner calls in for a 6,000 gallon delivery of gasoline, the price of the allowances is included in that price. I don’t know much about gasoline middlemen, but it seems to me that about half of all gasoline sold is from a major brand (Exxon et al) and about half off-brand. Either way, there’s fewer than 150 refineries in the United States… it can’t be that hard to find a point high in the supply chain.
The number of cars is as irrelevant as the number of electric meters. Go high on the chain and there aren’t nearly as many operators or transactions.
… to your suggestion, I’m at a loss to determine how de-coupling the allowances from the actual point of emissions can be termed a ‘greenhouse gas initiative’ It sounds like a simple ‘raise the price of fuel initiative.’ This, as I say, isn’t a bad idea overall, it’s just not particularly targeted at emissions, is it? The higher up the supply chain you go the broader, more diffuse the targeting becomes. And where is the cap applied? Which, it seems to me, is required for the credits to have any… well… creditable value…
Such a scheme doesn’t address the spectrum of decisions available to potential emitters: to purchase a low or zero emissions vehicle versus a vehicle purchased for fuel efficiency only (which has much less straightforward relationship to emissions and which is the likelier outcome under a generalized rise in prices) and which clearly doesn’t make distinctions at all for a vehicle purchased without any consideration of emissions… which is not what a particular targeted program is supposed to do… Of the spectrum of choices a *GGI for transportation would parcel out credits for the low to zero emissions vehicles such that the owners of the fuel efficient emitters might be required to at least consider… and certainly a necessity for actual polluters…
It’s laser targeted at emissions. CO2 emissions per gallon of gasoline are nearly constant. An automobile’s fuel economy (mpg) determines its emissions per mile, but a Prius and a Porsche emit the same amount of CO2 per gallon of gasoline consumed.
The cap works just like RGGI electric does now. There are 91 million allowances (for 1 ton CO2 each). Generators bid at auction for the allowances. The MWh generated by your generating plant doesn’t matter — the CO2 matters. If you emit 200,000 tons, you’d better have 200,000 allowances. Similarly, every gallon of gasoline contains ~22.38 pounds of CO2 (once combusted in an engine). A 6,000 gallon tanker truck delivery would require 134,280 allowances be purchased. The idea is not to have the gasoline retail customer or even the gas station owner buy the allowances, but rather to have the wholesaler buy the allowances at auction and retire them upon delivery.
> to purchase a low or zero emissions vehicle versus a vehicle purchased for fuel efficiency only (which has much less straightforward relationship to emissions and which is the likelier outcome under a generalized rise in prices)
Slow down there. The various low emission vehicle standards have nothing to do with CO2. Those standards have to do with emissions of carbon monoxide (CO), oxides of nitrogen (NOx), particulate matter (PM), formaldehyde (HCHO), and non-methane organic gases (NMOG) or non-methane hydrocarbons (NMHC). LEV (and ULEV, ZLEV, etc.) are in no way related to a RGGI transportation scheme.
… Artificially increasing the cost of fuel isn’t laser targeting anything.
Market based solutions — and you know this — are based upon changing the context in which individual decisions are made. Your scheme offers exactly no place to weigh the trade off of emissions versus cost: the wholesaler and the middleman are selling in reaction to demand over which they have very little control. Artificially raising the price of gas (again, not a bad idea in and of itself) casts a blanket over a variety of individual decisions and defracts the consequences of each individual decision, forming a poor incentive to make other decisions in place: exactly the opposite of laser targeting.
You don’t tell people how to reduce their emissions, you simply raise the price of emission generating activities and let people sort it out. It doesn’t require any analysis of the emissions reduction from driving an electric vehicle to set the proper subsidy. It doesn’t allow someone who almost never drives to be oversubsidized on an efficient vehicle that will reduce emissions by less than expected. People who drive a lot will be encouraged to buy more fuel-efficient vehicles because the cost will affect them more. The cost of having a high emissions vehicle will be directly related to the actual amount of emissions that each vehicle produces, based on actual usage instead of some theoretical formula. If you don’t maintain your car properly and that increases its fuel consumption, you will be charged for the extra emissions. If you buy a plug-in hybrid and never plug it in, you will be charged for the extra emissions.
There is no other way to target emissions more effectively than having the allowances included in the price of gas. And the administrative burden is lower if the allowances are included earlier in the process, when there are fewer distributors involved.
That’s actually very imprecise.
In this proposed scheme that is termed ‘cap and trade’, where is the cap?
What incentives do the wholesalers have to trade their allowances? And with whom?
What market signals are there to tell the actual emitters that the price of fuel has been raised precisely by action of their emitting?
If the actual emitter can rationally believe that the price of fuel is raised for reasons other than emissions what incentives exist to curb emitting?
What we’ve got here is failure to communicate.
Of course it does. CO2 emissions are a direct function of gallons of gasoline consumed. The customer can pay 10% less by consuming 10% less. That means either drive fewer miles, drive a higher mpg auto, properly inflate the tires and take the golf clubs out of the trunk, whatever.
The laser targeting is CO2 emissions. Every ton of CO2 emissions comes with an extra cost.
RGGI is a cap and trade system. That’s the whole game. Currently, its 91 million tons per year for the electric sector. That’s it. That’s the cap. The sum total per year is 91 million tons emitted.* Extended to transportation, it would be 91 + X million tons. Emitters — elec generators and gasoline wholesalers — bid at auction to acquire the allowances. The total emissions within the two sectors is capped to 91+X million tons. Anyone who can generate electricity or move autos around for less emissions has an economic incentive to do so, and the marketplace will reward that behavior.
In general, wholesalers won’t trade, just as elec generators won’t trade. They’ll buy the allowances at auction, and nullify the allowances upon emitting CO2. They could trade with (sell to) other emitters if they found themselves long on allowances and short on cash. They could trade with (buy from) other emitters if they found that sales were up near years end and they needed a few more for compliance, whereas another emitter had a few more than necessary.
The market signal is the price of gasoline. It doesn’t matter if the customer knows about the allowance price or not. The customer knows that if he or she consumes less gas, he or she will spend less money. It’s that simple. And, it turns out, customers do respond. When gas came down from ~4/gallon to ~$2/gallon, the fleetwide average mpg of new vehicles fell downward. AAA is always pointing out that the expected miles driven for Christmas or Labor Day or July 4th will be higher or lower than some other year because the price of gas is higher or lower.
To spend less money. That’s the only incentive at play here. Allowances make the price of gasoline at the pump higher, to reflect the cost of polluting. Because prices are higher, some people will consume less — either by making individual driving decisions differently (car pool, combine errands, etc) or by making auto ownership decisions differently (buy a higher mpg vehicle).
* That’s actually an average. Because allowances can be used for future years, some years its more, some less. But, since the beginning of the program, the total emissions are guaranteed to be less than or equal to the total allowances auctioned.
… is true.
A consumption tax, which is essentially what your scheme is, will reduce emissions. I do not argue that the scheme would not reduce emissions. This is the gap in your understanding: I argue that without sending specific signals for price changes based upon emissions you will not optimize emission reduction NOR will you concretize it. Sloppy and possibly temporary. Hardly ‘laser’ in it, at all… Note bene: I never said we shouldn’t do it and will point out that I specifically stated I don’t oppose the idea.
The range of acceptable decisions, their ranking and their staying power, available under a consumption tax are different from the range of acceptable decisions, their ranking and their staying power, available under a scheme that specifically targets individual emitters. Blanket price increases might lead to a unordered/unranked choice between a guzzler, a ‘clean’ diesel, something fuel efficient or a low- or zero- emissions vehicle.. or simply driving existing vehicles for less for a short time until low prices are restored (for some value of ‘low price’ that is relative…) If the decision maker is shielded from the reasons for the price change then they will either not optimize their emissions reductions or return to the profligacy of their emitting ways when underlying price fluctuations might obviate the increase. This is precisely and exactly because the price hike is not targeted at emissions.
Consider if we had implemented your scheme three years ago and permitted allowances such that (for example) gasoline is a blanket 30 cents more than it is now… Well, we went from gasoline in 2012 that was nearing $4 dollars a gallon to gasoline, today, that is around $2 a gallon. So, implementing your scheme we would have gone from gasoline at, say, $4.20 to gas that is $2.30. If price is all that matters, more will be consumed at a lower price and thus we can assume emissions would have risen… and, comparing the hypothetical tax with actuality the difference in purported and real emissions is likely epsilon.
Under a scheme that truly and specifically targets emissions the zero-emissions vehicle or behavior become the more attractive choice and are likely prioritized over any emitter at all in an ordered spectrum: zero-, low-, fuel-efficient/alternate, diesel, guzzler, etc… Deliberately and distinctly ‘rewarding’ less emissions and ‘punishing’ more emissions and, importantly, continuing to ‘reward’ and/or ‘punish’ as the price fluctuates contains an incentive to continue to avoid profligate emissions rather than to return to more emissions as price of consumption goes lower and lower. That would be the effect of a system directly targeted at emissions. So reductions are optimized and remain in place. In the interval described above, with gas going from nearly $4 gallon to $2, a decision specifically ‘rewarding’ low emissions and ‘punishing’ higher emissions we could have made the curve, essentially, monotonic which is the ideal… even as consumption pricing fluctuates.
I’m not saying we shouldn’t follow your scheme. If it’s the best we can get, then let’s do it. I’m just saying not to describe it as something it isn’t. And I don’t understand the gyrations and gymnastics necessary to ‘prove’ it is what it isn’t.
Cheese and crackers! I’m not describe RGGI! I know what RGGI is. I’m trying to point out that YOUR scheme to grant allowances to gasoline wholesalers which you purport to be RGGI-like is not, in fact, at all like RGGI. Sheesh.
Under your scheme to grant allowances to wholesalers (or purchases) there is no cap: no point at which either the continued consumption is not allowed or the cost to do so become prohibitive.
I disagree with the former and completely agree with the latter. I believe that using economic signals is the best way to optimize on a good that isn’t (a) expensive and necessary for public health (think: shelter, medicine). Pricing carbon emissions will result in folks making changes that reduce emissions in the least cost approach, subject to the messiness of irrationality and imprecise measurements. I just don’t see a more direct, more fair way.
I do agree that it won’t concretize the savings. But then, what policy can, given that policies can be fairly easily changed? Remember, to the extent that the policy results in a higher mpg vehicle purchase, that concretizes the change for roughly 7 years. To the extent that the policy encourages a shorter work-home round trip, that could concretize the change for years as well. To the extent that folks start carpooling or riding the T or taking Amtrak for Thanksgiving or otherwise because of the price of gas, those changes will likely roll back as soon as price goes down, to be sure.
I completely disagree. Let’s consider two parallel worlds. In world 1, we don’t care about CO2. We instead want to reduce gasoline consumption because we don’t have much domestic supply and we don’t want the balance of trade deficit. In world 2, we just don’t like CO2. In the two cases, we want to reduce consumption of gasoline, but for totally different reasons. So what? Increasing the price of gasoline has the desired effect in both cases, and to the consumer, it simply doesn’t matter what the reason is. A higher price of gasoline results in less consumption of gasoline because the price elasticity is strictly between -1 and 0. It’s an amoral rationale.
A ha! We’re drilling down. It’s absolutely true that demand for gasoline is higher at $2.30 than at $4.20. And, it’s likely that demand for electricity is indifferent to a gas price at two bucks or four bucks. So, when price of gasoline goes down, demand goes up… but the emissions cap doesn’t. What happens? Three things:
(1) The allowance price goes up, which means that the price of gasoline doesn’t actually go all the way down to $2.30. It goes down to $2.30 plus the increased price of RGGI allowances. This means that, when the market clears, consumption will be more than at $4.20 but less than at $2.30.
(2) The (same) allowance price goes up, which means that the price of carbon-based-electricity also goes up. This means that consumption of carbon-based-electricity will go down, through some combination of (a) renewables becoming more economic and pushing fossil-fuled electricity off market, and (b) price of electricity going up, resulting in a decrease in the consumption of electricity overall.
(3) The revenue from RGGI goes up, because demand for CO2 went up. This means more money to be spent on whatever the legislature desires, be it EE and RE (what’s done now in the context of a RGGI-electric-only scheme) or increased funding for transit and bridges and bike lanes or just money in the general fund.
The only think that is unchanged is the total amount of CO2 emitted, because of the cap. Even though the price of gasoline falls due to market forces not related to CO2, the total emissions of gasoline + electric would remain the same!
But emissions allowances do exactly that. Higher price of gasoline rewards lower emissions, and continues to do so. It’s true that as overall emissions go down, the RGGI allowance price goes down. But it’s also true that the cap can be ratcheted downward as emissions fall. In fact, in 2014 RGGI reduced its cap from 145 million tons to 91 million tons, and now the cap automatically is reduced by 2.5 percent per year (until 2020). So your concern that as emissions are reduced the policy loosens up is a good one, but know that we can (and historically have) tightened up the cap to deal with it.
How isn’t it? The scheme I describe is to increase the RGGI allowances and then require gasoline wholesalers to buy allowances commensurate to the CO2 emissions of the gasoline they sell. It is exactly RGGI.
Sure there is. The cap would be 91 + X, as I described above. The X is the initial incremental allocation for gasoline. The wholesalers would buy allowances from the same market the elec generators do. There’s a cap. The market will clear at the price where consumption is 91 + X. No more emissions are allowed. You can’t deliver gasoline without the allowances, just like today you can’t generate electricity without the allowances.
Don’t get me wrong, this is very creative and I applaud it.
I have to comment, however, on the irony that the only institution we seem to be able to mobilize for this sort of backdoor industrial policy is the investor-owned transmission-and-distribution utilities. Which are sort of parodies of themselves.
RGGI applies to generators, not T&D utilities. Companies like Eversource don’t buy allowances because they don’t own electric generators. While some utilities in the RGGI territory do own generators (PSNH), most generators are not owned by utilities. Furthermore, some emitting generators are owned by utilities that are not investor owned (e.g. NYPA).