[Add your own pictures here] An Emissions Containment Reserve for RGGI: How Might It Work?

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1 [Add your own pictures here] An Emissions Containment Reserve for RGGI: How Might It Work?

2 Moderator Franz Litz Collaborative for RGGI Progress Acadia Center Calpine Corporation Exelon Corporation National Grid Natural Resources Defense Council 2

3 Webinar Agenda 10:00 Welcome and Introduction Franz Litz, for the Collaborative for RGGI Progress 10:05 What is an Emissions Containment Reserve and How Might it Work for RGGI? Presenter: Dallas Burtraw, Resources for the Future 10:35 Respondents: What are the Opportunities and Dan McGraw, ICIS Jackson Morris, NRDC Derek Furstenwerth, Calpine Corporation Chris Hoagland, Maryland Department of Environment 11:00 Questions and Responses from the Audience 11:20 A Preview of Analytical Work to Examine ECR Bill Shobe, University of Virginia 11:30 Adjourn 3

4 Speaker Dallas Burtraw Resources for the Future 4

5 An Emissions Containment Reserve for RGGI: How Might It Work? Dallas Burtraw Resources for the Future

6 Why Cost and Emissions Containment? Prices in a market-based program are uncertain. In RGGI: One finds volatility of natural gas prices and electricity demand. Uncertain operation of existing nuclear fleet. Program investments in energy efficiency help reduce emissions. Federal and state programs provide incentives for development of renewables. The possibility for a slack emissions cap going forward is real. Intuition and economic research indicate that investors and consumers benefit from avoiding sudden extreme outcomes. If cost or emissions containment measures are triggered the program continues to function between program reviews while sending a signal to planners to evaluate the program design.

7 Cost Containment in RGGI Cost containment is two-sided. On the low side, a reserve price in the auction provides a price floor. The reserve price is the minimum acceptable bid. If market prices (and buyer willingness to pay) is below the reserve price, then some portion of allowances will not be sold or enter the market. Tighter supply will support the price. Just like ebay! In 2017 the reserve price is $2.15 and escalates at 2.5% per year. On the high side, a cost containment reserve provides additional allowances at a ceiling price. The CCR ceiling prices: $4 in 2014, $6 in 2015, $8 in 2016, and $10 in Each year after 2017, the CCR trigger price escalates by 2.5%. That ceiling price serves like a reserve price on the additional allowances. Up to 10 million additional allowances per year are available. If these allowances were exhausted then prices would continue to rise. To date the CCR has added 15 million allowances to the market.

8 Experience with Allowance Prices Million tons CO 2 8

9 Illustrative Supply & Uncertain Demand Currently 12 Price ($/ton) 10 Intended Cap $ CCR (10 mty) Supply Schedule DVery High D High 4 D Expected 2 $2.15 D Low 0 Allowances Sold in Auction

10 Perspectives on the Price Floor The price floor has played a crucial role in RGGI. Prices may have fallen to zero without the floor and the program architecture may not have survived. The price floor guarantees a minimum return on innovation and early action, which emissions trading intends to encourage. Roughly a billion dollars were raised when prices were at the floor, funding program related measures and preserving expectations about future carbon limits.

11 What is the Emissions Containment Reserve? The ECR would introduce a soft price step or steps above the hard price floor. If the auction price falls below a given step, a quantity ( lot ) of allowances would not enter the market. By supporting the price and potentially reducing allowances in the market, the ECR would potentially reduce the size of the privately held allowance bank. But it would not undermine the incentive or logic of banking.

12 Why would RGGI consider this new feature? Some states and constituencies (firms, schools, cities) are taking additional actions. Under a regional cap this leads to the waterbed effect. Prices fall, and emissions go up somewhere else. Indeed, price trends are again headed down.

13 Why not adjust the existing features? Reducing the intended cap could reduce emissions o This change may be necessary anyway. But this action is an administrative decision that comes after the auction during program review. o It may difficult for investors to predict and for RGGI to negotiate and execute. Increasing the hard auction price floor could reduce emissions o This change may be a good idea anyway. The average of the last four auction clearing prices is $4.47. (Down from $7.50 in auction 30.) The current price floor ($2.15) could ratchet up and protect prior actions. o Some stakeholders are concerned that the auction price floor would end up setting the price. In either case, extracurricular efforts by states and constituencies still might not overcome the waterbed effect.

14 What would the ECR look like? One or multiple steps would adjust supply in response to prices, just like in other markets. Under the ECR, when prices are low, the trading program would acquire more emissions reductions. The ECR price levels would remain subject to programmatic review. Between reviews, the ECR would provide a rule-based approach that would help companies plan.

15 A Supply Schedule without the ECR 12 $/ton Intended Cap CCR The waterbed effect: Prices fall. Regional emissions don t change. D Expected 4 2 P min 0 D Low Allowances Sold in Auction

16 A Supply Schedule with the ECR $/ton 12 Intended Cap CCR The ECR avoids build up of a large bank. Savings are shared with the environmental goal. Multiple steps would lessen chance any one price level is the outcome. D Expected The outcome looks more like other markets. 2 P min D Low 0

17 How might ECR price levels be set? An easy way to implement the ECR would be as a reserve price (minimum price) associated with various lots of allowances. A discussion about price levels could be informed by modeling (e.g. low gas prices, etc.) An example: 1 million tons would not be sold at bids below $10 1 million tons would not be sold at bids below $9 1 million tons would not be sold at bids below $8 etc.

18 What would happen to unsold allowances? Decision is similar to current hard price floor o o Presumably retire the allowances from circulation Possibly add to the cost containment reserve?

19 Summary An ECR would be a supply control mechanism, not a price control mechanism. Additional efforts by states and constituencies would be recognized. It would not prevent prices from dropping below the ECR s price step(s). The correct cap balances costs and benefits of emissions reductions. If reductions cost significantly less than we anticipated, then we got that balance point wrong. The ECR would yield additional investments in the region, air quality benefits, and GHG reductions at costs that are lower than were expected.

20 Respondents Dan McGraw Senior Strategist, ICIS Jackson Morris Director, Eastern Energy, Natural Resources Defense Council Derek Furstenwerth Senior Director, Environmental Services, Calpine Corporation Chris Hoagland Economist, Maryland Department of the Environment 20

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23 Speaker William Shobe University of Virginia 23

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29 THANK YOU