Frequently Asked Questions about New Hampshire’s New Carbon Cap

By Grant Bosse

January 2009

What’s RGGI?

The Regional Greenhouse Gas Initiative is an agreement among ten Northeastern and Mid-Atlantic states to limit carbon dioxide emissions through a mandatory cap-and-trade scheme applying to fossil-fueled power plants.  It is administered through a non-profit corporation, RGGI Inc., which contracts with private companies to administer and monitor quarterly auctions.

Which states are participating?

Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

Who is covered in New Hampshire?

RGGI applies to electric power plants generating more than 25 megawatts that are fueled by coal, oil, or natural gas.  In New Hampshire, five power plants meet these requirements:

PSNH Plants

Newington Station in Newington, Oil

Merrimack Station in Bow,Coal

Schiller Station in Portsmouth, Coal*

*One of the three units at Schiller Station has been converted to run on biomass, and is not regulated under RGGI.

AES Plants

Granite Ridge in Londonderry, Natural Gas

Newington Energy in Newington, Natural Gas

How does cap-and-trade work?

For the next three years, RGGI will cap total CO2 from covered sources at 188 million tons per year.  That total will drop by 2.5% in each proceeding three-year period until it is 10% lower than current levels.  In March 2012, each of the five power producers in New Hampshire will have to produce carbon allowances for every ton of CO2 they’ve released from 2009 to 2011.  These allowances may be purchased at quarterly auctions, or on the secondary market.  Each allowance permits a ton of CO2 in any of the ten states, and at any time during the three-year compliance period.  Power producers will be covered under RGGI beginning January 1, 2009, but will not have to show compliance with the restrictions until March 2012.

Why only coal, oil, and natural gas?

RGGI is designed to reduce carbon dioxide emissions.  Nuclear power does not produce CO2.  Biofuels such as wood do produce CO2 but as considered carbon-neutral under the law, since trees being grown the replace the biomass fuel theoretically absorb as much CO2 as the burning fuel produces.

What about other greenhouse gasses?

No other greenhouse gasses are covered under RGGI.

How would a federal cap-and-trade law affect RGGI?

Congress has considered several alternative cap-and-trade proposals for years.  Most include provisions for state and regional greenhouse gas regulations.  Any federal law would likely protect RGGI and other regional agreements from federal pre-emption, and count the established baseline of carbon emissions as the relevant federal baseline, rather than asking states to cut emissions from an already reduced baseline.

How do we know how much CO2 each plant produces?

Each of these power plants is already regulated under the federal acid rain program, which requires constant measurements of smokestack emissions.  Since CO2 output is already being measured, electric power generation is considered the low-hanging fruit for CO2 reduction.  Other sources such as transportation and agriculture would require extensive measuring and monitoring systems to be developed before a cap-and-trade program could be implemented.

What percentage of New Hampshire emissions come from these power plants?

It’s difficult to determine, since other CO2 sources such as cars, livestock, and even people are much more difficult to measure.  Policy-makers estimate that electric power generation accounts for one-third of CO2 emissions nationally.

How are New Hampshire’s annual CO2 emissions calculated?

For most states, RGGI calculates the three-year average emissions from 2000 to 2002.  Since two natural gas power plants went on line in New Hampshire in 2002, this figure would be artificially low.  New Hampshire uses the two-year average of 2003 to 2004, which comes out to 8.62 million tons of CO2 annually.  New Hampshire has 8.62 million carbon allowances to distribute, of which 5.95 million will be auctioned off each year.

Why isn’t New Hampshire selling off all of its CO2 allowances?

PSNH is New Hampshire’s largest electricity provider, and its largest CO2 source under RGGI.  Prior to RGGI, PSNH was subject to regulation under the state Clean Power Act.  As part of the transition from the Clean Power Act to RGGI, PSNH will be allocated 2.5 million allowances each year at no cost for three years, and 1.5 million allowances annually for the following three years.

New Hampshire lawmakers set aside two percent of the state’s allowances for other purposes.  One percent has been reserved for residential homeowners who install renewable electricity to request state allowances to be retired.  If unclaimed, these allowances will be added back to a future auction.

Additionally, if power companies are forced to exceed the allowances they’ve purchased in order to meet peak demand during a power emergency, they may receive additional allowances at no cost.  One percent of the state’s total has been reserved for this purpose, and would go back into a future auction if not needed.

How much revenue will New Hampshire receive, and where does it go?

Based on current market prices, New Hampshire would receive approximately $18 million each year, those this could vary widely.  All auction proceeds will be deposited into the state’s Greenhouse Gas Emissions Reduction Fund, which is administered by the Public Utilities Commission.  State law requires that the fund support energy efficiency, conservation, and demand response programs, and that at least 10 percent be used to assist low income residential customers to reduce total energy use.  The Legislature has already set aside $1.2 million in anticipated auction revenues towards the state’s weatherization program.  The PUC has sole authority to determine how the rest of the Fund will be spent, barring further Legislative directives.

Can auction revenues be used to balance the state budget or for other spending priorities?

Under current law, the Greenhouse Gas Emissions Reduction Fund can not be used for other programs, or to balance the General Fund.  However, like all dedicated revenue streams in New Hampshire, these revenues may be redirected at any time through legislation.

What is carbon capture and sequestration?

Rather than emitting CO2 through their smokestacks, power plants could capture the escaping gas, preventing it from increasing atmospheric CO2 levels.  While technically possible, this technology is not yet commercially viable, and long-term storage of tons of lighter than air gas is challenging.  One possibility is to use the underground space in depleted oil and natural gas deposits to sequester CO2 permanently.  Carbon capture and sequestration would be allowed under RGGI, since the cap-and-trade regulations would not apply to CO2 that is never released into the atmosphere.  Such an approach is unlikely to take off until the cost of capturing and storing a ton of CO2 is less than the cost of a carbon allowance.

What are carbon offsets?

Carbon offsets are an alternative way to comply with carbon caps.  Rather than reduce their own carbon emissions, the source may choose to support programs that offset them.  The most common is afforestation, planting trees that absorb CO2 as they grow.  Under RGGI, power producers may offsets for up to 3.3% of their CO2 emissions.  There are currently five project categories approved for offsets:

Landfill methane capture and destruction

Reduction in emissions of sulfur hexafluoride (SF6) in the electric power sector

Sequestration of carbon due to afforestation;

Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector

Avoided methane emissions from agricultural manure management operations

How will this affect electric rates?

The cost of carbon allowances will become part of the cost of producing electricity in the Northeast, and will ultimately be borne by ratepayers.  How much is will cost depends not only on the price that producers pay for these allowances, but also on the fuels used.  Coal is the most carbon-intensive fuel source, producing 2,000 pounds of CO2 per megawatt of power.  Natural gas produces 800 pounds of CO2 per megawatt, and oil is somewhere in between depending on the type of oil used.  At $3.00 per allowance, this would add $3.00 per megawatt of electricity made by burning coal, and about $1.20 per megawatt from natural gas, or $.003 per kilowatt hour for coal and $.0012 per kilowatt hour for natural gas.

Power producers may avoid the cost of carbon allowances by reducing their carbon emissions, either through upgrading their fossil-fuel facilities, switching to more expensive but carbon-neutral fuel sources, or purchasing offsets as a means of alternative compliance.  These costs would also be passed on to ratepayers, but would not produce revenue for the ten RGGI states.

What happens if a power plant exceeds its carbon allowances?

Power producers who do not provide sufficient allowances to meet their emissions would face a three to one deduction penalty at the beginning of the next compliance period. For instance, if PSNH released 1,000 tons more CO2 than it purchased for 2009-2011, it would be forced to purchase 3,000 additional credits for 2012-2014.  Since this would be an expensive penalty, New Hampshire Emissions Reductions Trading Program Manager Joe Fontaine expects nearly 100% compliance.  It will almost certainly be cheaper for utilities to purchase additional allowances on the open market than to pay the penalties.

Who is buying carbon allowances?

The identities of auction winners are not being made public.  RGGI has contracts with Potomac Economics to monitor its quarterly auctions.  On October 16, 2008, Potomac issued its report on the September 28, 2008 auction, which included 59 entities submitting bids ranging from $1.86 to $12.00.  80% of the bidders were “compliance entities”, which are power producers covered under RGGI.  20% were “non-compliance entities” not covered under RGGI, but who may now sell their allowances in the secondary market.

Where are carbon allowances traded?

Once purchased through the quarterly auctions, RGGI allowances are traded on the Chicago Carbon Futures Exchange (CCFE), and futures contracts for RGGI allowances are available on the New York Mercantile Exchange (NYMEX).  At the close of trading on December 18, 2008, RGGI was trading at $3.27 on the CCFE, and $3.30 on NYMEX.

Grant Bosse is an investigative reporter with The Josiah Bartlett Center for Public Policy