Today, the Regional Greenhouse Gas Initiative (RGGI) announced proposed changes to the carbon cap-and-trade program designed to achieve greater reductions and better cost containment. The proposal, which borrows from key elements of the California carbon cap-and-trade program, was part of RGGI’s program review and comes five years after the start of the greenhouse gas emissions reduction program.

RGGI is a regional program to reduce greenhouse gas emissions from large stationary sources and encompasses nine Northeastern and Mid-Atlantic states.

Changes were outlined in RGGI’s Program Review Recommendations Summary and a Model Rule that can be used by the states to amend their CO2 Budget Trading Programs. The proposal includes:

• A reduction in the 2014 CO2 emissions cap from 165 million to 91 million tons. This represents an initial shave of 45%. The cap would continue to decline by 2.5% each year from 2015 to 2020.
• Additional CO2 budget adjustments taking into account the private supply of banked allowances. RGGI proposes lowering the emissions budget over the next seven-year period of the program to account for the amount of banked allowances in excess of CO2 emissions during the first control period. A second adjustment will be made after the size of the 2012 and 2013 bank is determined.
• Further reductions in allowance supply from not reoffering allowances that were unsold in RGGI auctions in 2012 or will not be sold at auctions in 2013.
• Compliance entities must hold allowances equal to 50% of their obligation in each of the first two years of the three-year compliance program. This is in addition to showing compliance at the end of the three-year period.
• Creation of a cost containment reserve of allowances. This mechanism is similar to the reserve used in the California cap-and-trade program. A fixed supply of allowances are available for sale to compliance entities if the price exceeds the following levels:

o   $4.00 in 2014

o   $6.00 in 2015

o   $8.00 in 2016

o   $10.00 in 2017

o   Reserve prices escalates 2.5% each year thereafter

Although the official RGGI announcement was made this morning, reports of the Model Rule changes circulated the market yesterday afternoon, and RGGI allowances traded up on light volume to end the day at $2.80. Trading continues to be active this morning in the $2.50 range.

If you have any questions regarding the proposed RGGI program changes or to transact in the market, please contact our US Emissions and US Carbon teams at +1 914.323.0255.