The nine states in the northeast Regional Greenhouse Gas Initiative took an important step this month that will significantly reduce greenhouse gas emissions and increase funding for energy efficiency and clean energy without unduly burdening businesses or consumers. That step was to adjust their cap-and-trade program by tightening the emissions cap and increasing compliance flexibility for businesses.

In 2009, RGGI became the nation’s first mandatory, market-based program to reduce emissions of carbon dioxide (CO₂). California’s cap-and-trade program is now the second. Over the past two years, RGGI conducted a comprehensive program review culminating in an updated Model Rule, the program’s first major overhaul since its launch.

The new cap takes into account the region’s actual emissions, which have fallen over 40 percent below initial projections. After resetting to current emissions levels, the new cap would decline by 2.5 percent each year from 2015 to 2020, significantly surpassing the states’ current goal of reducing CO₂ emissions from the power sector 10 percent between 2009 and 2018.

Analysis by ICF International indicates that under the updated program, greenhouse gas emissions from the power sector would decline by about 15 percent from current levels by 2020. The average electricity bill for residents in these states would increase less than 1 percent in that time, while the program would generate $2.2 billion for investments in energy efficiency.

Since the program’s inception, RGGI has served as a role model, but its designers have also been conscious of the importance of learning from others. The updated compliance flexibility is responsive to business concerns and also draws on design innovations in California’s new program, which itself had borrowed heavily from RGGI in its design.

The updated Model Rule includes provisions to expand RGGI’s offset program, most notably by adding a forestry protocol modeled after California’s. It also creates a cost containment reserve (CCR) of carbon dioxide allowances, an idea also borrowed from California. The CCR would provide a fixed additional supply of allowances that would only be made available if allowance prices exceed predefined price levels. The CCR provisions would also simplify existing compliance flexibility measures.

With this step, RGGI continues its critically important leadership, demonstrating market-based policies are an effective and efficient means of reducing greenhouse gas emissions.