The RGGI Raid: How Cap-and-Trade Revenues Went to Fix State Budgets

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A few weeks ago, ten Northeastern states held an unusual sort of auction. What the states were selling was credits for carbon emissions. The buyers were electric utilities, who purchased the credits either to allow themselves to send carbon dioxide out the smokestacks of their own power plants, or to re-sell those credits to other utilities. The auction, a quarterly feature of North America's only working cap-and-trade regime for greenhouse gases, raised $80.5 million. It was the latest installment of a windfall that the ten states have largely committed to promoting energy efficiency.

Lately, however, a few of the cash-strapped states have had other designs on the money. The same day as the most recent auction (June 9), New Hampshire lawmakers voted to take all of the state's expected $3.1 million share of the proceeds and use it to help plug a $295 million budget hole. That move came after New York and New Jersey had staged even bigger raids on cap-and-trade funds. New York transferred $90 million out of a fund of auction proceeds and into its general fund. And New Jersey is poised to use $65 million from carbon-credit sales to help balance its budget, pending a vote of the Legislature expected today.

The money grabs are creating concern among environmentalists. When the states were putting together the Regional Greenhouse Gas Initiative, or RGGI, back in 2005, each agreed to a memorandum of understanding that at least 25 percent of the auction proceeds would go toward reducing energy usage. Some states went much further than that. New Jersey's Global Warming Response Act said 80 percent of the money should go toward energy-related causes.

"RGGI is a pretty simple concept," says Matt Elliott, the Global Warming and Clean Energy Advocate for Environment New Jersey . "We cap pollution, we charge polluters to pollute, and we put the money back into programs that conserve energy." Elliot says the RGGI raids not only violate the states' original agreement with each other, but also upend the idea that cap-and-trade was supposed to save ratepayers money on their energy bills in the long run. "It means cap-and-trade will cost money now instead of saving money," Elliot says.

As Congress debates cap-and-trade legislation of its own, the RGGI raids would seem to confirm the fears of critics. "Cap and trade is the tax that dare not speak its name," a Wall Street Journal editorial said last year, arguing that utilities would pass the costs of carbon credits through to consumers. Now, with three states stashing extra auction proceeds in their general funds, there's evidence to support the view that cap-and-trade regimes amount to just another tax.

The Senate's cap-and-trade bill outlineshow the money left over from auctioning carbon credits is supposed to be spent. More than half of it would go to energy-related causes, while 13.5 percent would be held for reducing the federal deficit. But if states are finding loopholes to redirect RGGI money during a budget crisis, Congress might be tempted to do the same thing. Kenneth Green, a resident scholar at the American Enterprise Institute in Washington D.C., is not surprised to see the three states raiding the money. "There's no such thing as a dedicated tax when the government has the money in its hands," he says. "Congress makes the law and they also make the budget, so just because they say the money has to go somewhere doesn't mean they'll put it there."

Ten different programs

RGGI uses the same market-based approach that fought off the acid rain problem in the 1990s. Emitters of carbon dioxide — which RGGI limits to power plants — must keep their emissions under an overall cap.  Individual polluters can exceed the cap, but only by purchasing allowances, either at auction or from each other. The plan dates back to 2003, when then-New York Governor George Pataki called on fellow Northeastern governors to develop a strategy responding to global warming. In 2005, a RGGI working group proposed to keep emissions flat from 2009 to 2015 and then begin cutting the cap by 2.5 percent each following year. By 2018, emissions are expected to be reduced by 10 percent from the program's start date.

RGGI held its first auction of carbon allowances in September 2008. Ten states now participate — they include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. In total, the auctions have raised $663 million for these states.

Although RGGI is a collaborative effort, Dave Farnsworth, a senior associate with the Vermont-based Regulatory Assistance Project, says it's important to think of RGGI as ten different programs in ten different states. That's one reason why the states have reached very different conclusions about whether or not to dip into their RGGI funds.

In Rhode Island, for example, Governor Donald Carcieri determined that state law would prevent using the auction funds to fill a budget hole. In Maryland last year, Governor Martin O'Malley suggested pouring most of the state's $90 million RGGI trust fund into the budget. That didn't happen, but this year, lawmakers did decide to divert RGGI money from energy-efficiency programs toward helping low-income residents with their power bills.

In New York last December, Governor David Paterson proposed and the Legislature approved putting half of the state's available RGGI money toward the general fund, even though state regulations called for it to be spent on energy efficiency. In New York, budget agreements between the governor and the Legislature trump any other spending plans that might have been in place, so in this case, balancing the budget became the bigger priority.

New Jersey's global warming law directs where the RGGI money is supposed to go. The catch there is that the funds are not constitutionally dedicated, which allows the governor and lawmakers to use them for budget purposes. Making the money constitutionally dedicated, which would be the next step in protecting RGGI money, requires a two-thirds vote by the Legislature and the approval of state voters.

In New Hampshire, the RGGI money was legally dedicated to energy efficiency. That's why the state Legislature had to vote for it to be spent toward the budget. Joanne Morin, director of the New Hampshire Governor's Office of Energy and Planning, says the action was taken as a last resort and hopefully won't have to happen again.

Farnsworth, too, says he suspects that the states will go back to spending the money on energy efficiency programs once their deficit problems aren't as severe as they are now. He argues that RGGI has been a success — carbon dioxide emissions from power plants in the ten states are below the cap they set. "RGGI is the best model of cap and trade that you'll see in the world," Farnsworth says. "If the goal is reductions, RGGI has it beat."


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