By Grant Bosse
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:
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.
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
By Charles M. Arlinghaus
In each of the last four months, state revenues have fallen further and further behind the amount needed for the state budget. Revenues will end the year at least $91 million behind the budget – and even higher if business taxes also deteriorate. The two year budget shortfall will be between $205 and $258 million.
State tax revenues continue to come in well below the amount budgeted and have created the worst revenue shortfall since the deep recession of 20 years ago. Through the first eight months of the fiscal year, revenues are on a pace to end the year $91 million short of the budgeted amount. If the current economic slowdown also impacts business tax revenues as seems likely, the hole could get significantly worse.
The Deepening Hole
Non-business taxes are remarkably predictable. Each year the total through a given month is a consistent percentage of the final revenue within a very small range. For example, the five month total has been an average of 38.5% of the final total within a two point range. Therefore, each month we can look at the total and make a projection for where we will end the year. At the end of November, we were able to project that this category was on a pace to end the year $48.5 million short of the budgeted estimate.
That amount served as the basis for a state estimate of a revenue shortfall. In January of this year, state department heads testified before the legislature that we would end 2008 about $43 million behind revenue projections. The second year would build on that and end up another $104 – $157 million behind, depending on the economic situation, for a total range of $147 – $200 million.
It is worth noting that this estimate by state officials was considered too high by the Democratic majority on the House Ways and Means committee and too low by the Republicans on the same committee. As something of a middle ground, it is a useful starting point for determining the impact of the revenue deterioration of the last few months.
Their estimate of a $200 million budget shortfall is based on a revenue shortfall of $43 million in the fiscal year that ends in June. According to their estimates, business taxes (more volatile) would be even with the budget but other taxes would be $43 million behind.
On the basis of those estimates, the governor proposed cutting $50 million from the budget immediately and waiting to do anything else.
Based on current revenue trends, the estimate of $200 million shortfall is optimistic. Over the last three months, state tax revenues have continued to deteriorate making the goal of holding revenue losses to $43 million in the first year of the budget almost impossible.
In the broad category of non-business tax revenues, total receipts for the year are budgeted to be $1,213.2, fifty-six percent of the total budgeted revenue.In November, the shortfall could be projected at $48 million but in each succeeding month the situation has deteriorated.
|Ave % of total||38.5%||46.3%||55.8%||62.1%|
Revenues keep falling further behind. Through November, revenues average 38.5% of their final total and were on track to be $48.5 million behind budget. Using precisely the same methodology, the expected annual total has deteriorated. After the first eight months of the fiscal year, non-business tax revenues are now on a pace to be $91 million behind. The shortfall comes not from one source but from almost every major tax in the state.
Of the seven largest revenue sources other than the business tax for the first eight months, only the communication services tax is performing as budgeted. The Meals & Rooms Tax, Tobacco Tax, Interest & Dividends Tax, Real Estate Transfer Tax as well as liquor sales and lottery revenue are all coming in below budget.
Impact on the Biennial Budget
In January, the state department heads estimated a two-year shortfall of $200 million if the economy worsened. Most observers would agree that the current problems with the economy, whether we call them a recession or not, are likely to continue for some time before recovery.
That $200 million was predicated on a shortfall in the current fiscal year of only $43 million. A shortfall of $91 million would increase the first-year estimated shortfall by another $48 million. In addition, it would affect the base from which the second year will grow. Therefore the $200 million estimate would increase to $296 million.
Because business taxes are historically volatile, they are very hard to predict. As part of their estimated $43 million total shortfall for the first year of the two-year budget, state officials projected that business taxes would come in neither higher nor lower than the budgeted amount.
However, through eight months, business taxes are still $17.2 million ahead of budget. Many observers think that number may exaggerate business tax strength partly because of the audit revenues included in the total. For example, February business tax revenue was $5.8 million ahead of budget but included $7.0 million in audit revenues. Nonetheless, if we project business taxes forward without making any adjustment for audits, business taxes would end the fiscal year $25.3 million over budget.
However, business tax revenues for March and April are 35.5% of the final total, a disproportionately high amount. Even with just the March quarterly filings, we will have a much better idea if the current numbers are affected by audit or represent business strength in a weak economy.
It seems likely that the current economic situation will affect the net business filing and that business taxes will show some weakness. Expecting business taxes to come in on budget seems optimistic even with apparently strong audit revenues.
- Insurance taxes represent about 5% of the total budget, about $99.5 million. Beginning this year, 90% of those taxes are collected in a lump sum in March. Rising health care premiums should ensure that insurance taxes don’t produce any shortfall. Unexpectedly high premium increases cause other problems but create the hope that premium may be slightly above budget.
- Medicaid Enhancement Revenues are about 95% collected and are one million dollars ahead of budget.
The Size of the Budget Hole
Using the estimates of state officials as a starting point, we can create a new estimate of the budget hole based on the deterioration of state revenues. The estimate varies considerably based on whether business taxes come in a little ahead of budget projections or a little behind.
If the current business trend is not based on audit revenues and New Hampshire businesses are less affected by the economy, the $25.3 million extra business tax revenue would offset some of the $91 million shortfall in other categories. Coupled with slightly higher Medicaid enhancement revenue and slightly higher insurance revenue, this best case scenario would produce a shortfall of $63 million instead of the $43 million state officials project. Using their estimates for 2009 would produce a revenue shortfall for the budget in a range of $187 – 240 million.
On the other hand, if business tax revenues are down in March and April because of an economic slowdown, perhaps $10 million would have to be added to the $91 million deficit in other revenue. This more realistic scenario would mean a shortfall of $101 million in the first year of the budget instead of $43 million and a total budget shortfall of $205 – 258 million. If business taxes do start to fall, the result will almost certainly be at the higher end of the range.
These numbers are based on published reports. There was not an official report produced by the government. The estimates included shortfalls only in the Tobacco tax, Interest & Dividends Tax, Real Estate Transfer Tax, and liquor and lottery revenues. Medicaid Enhancement revenues as well as board and care were projected to increase for a total shortfall of $42.6 million for 2008. The 2009 estimates included shortfalls also in the Meals & Rooms Tax and combined business taxes. The estimates for 2009 ranged from an additional $104.3 million if there was a mild economic slowdown to $157.3 if we were in recession. An additional $1.8 million shortfall for 2009 affects the highway fund and is not part of this analysis.
 This category includes revenues other than business taxes and Medicaid enhancement revenue. Because insurance taxes are now collected largely in one lump sum, they are also removed from the analysis. For a more detailed explanation see “State Revenues on Track for $75 million Shortfall,” at www.jbartlett.org.