Carbon Pricing Alarmists Disproven by the Reality of RGGI

A little over a year ago we reported on the success of the the Regional Greenhouse Gas Initiative (RGGI), which is a carbon cap and trade system implemented by ten northeastern states in the USA (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont; New Jersey has since dropped out) which set the goal of reducing their carbon dioxide (CO2) emissions from the power sector by 10% by 2018.

Through the first two years of the system, the ten states had generated $789 million through the auctioning and direct sale of CO2 emissions allowances.  Each state developed its own plan for investing those funds, but overall, 52% was used for energy efficiency programs, 14% for energy bill payment assistance, including assistance to low-income ratepayers, and 11% to accelerate deployment of renewable energy technologies.  New York, New Hampshire, and New Jersey also diverted some of the funds to reduce their state budget deficits.

A year later, we have another RGGI update.  The states have far exceeded their emissions reduction target, with a 23% overall reduction in 2009-2011 power plant CO2 emissions as compared to the 2006-2008 average, already achieving more than twice the emissions reduction goal, six years ahead of schedule.  Low natural gas prices have helped the power plants transition away from coal combustion, thus helping them surpass the RGGI targets.  RGGI states have also cut emissions at a rate approximately 20% faster than non-RGGI states.

But at What Cost?

However, when I attended Christopher Monckton's presentation to California policymakers in my hometown, I was assured that carbon cap and trade systems would absolutely cripple the economy.  Monckton told the audience that California's cap and trade system (whch to be fair, is more ambitious than RGGI) would cost the state hundreds of billions of dollars and drive businesses and jobs out of California.

The Koch-funded Americans for Prosperity similarly claimed that RGGI would lead to "higher taxes, lost jobs, and less freedom" in addition to a doubling of electric rates.

This is in fact the standard contrarian argument against carbon pricing systems - that they will cripple the economy, drive up electric rates, and scare businesses away.  If this argument is true, then more than three years after RGGI implementation, surely we should have seen these effects in play, with plummeting gross state product (GSP - the state equivalent of gross domestic product) and skyrocketing unemployment and electricity prices in the RGGI states.  So, how does the contrarian argument stack up against reality?

RGGI State Economies Fare Better than the National Average

One tricky aspect in evaluating the economic impact of the RGGI system is that it was implemented right at the start of the current major economic recession, in 2008-2009.  Thus GSP has fallen and unemployment has indeed risen in the RGGI states, but it has also risen all across the United States.  The easiest way to try and take the effects of the economic recession into account is to compare the average GSP and unemployment changes in the RGGI states vs. the average changes nationwide.

Table 1 examines unemployment data, Table 2 examines GSP, and Table 3 examines electricity rates for the RGGI states vs. the national average.

Table 1: January 2008 and December 2011 unemployment statistics.  Data from U.S Department of Commerce Bureau of Economic Analysis

Table 2:  Average percent annual GSP growth from 1997 to 2007 (pre-RGGI and recession) and 2008-2011 (post-RGGI and recession).  Data from U.S. Bureau of Labor Statistics and available for plotting at Google Public Data.

Table 3: Electricity rates (total price), average for 2005-2007 (pre RGGI) and 2008-2011 (post-RGGI).  Data from the U.S. Energy Information Administration.

As Tables 1 and 2 show, the RGGI states on average have weathered and begun recovering from the economic recession better and faster than the national average in terms of both GSP and unemployment.  In fact, the only RGGI state to fare worse than the national average in terms of unemployment is Rhode Island, and only Rhode Island, Maine, and Maryland have experienced larger GSP declines than the national average over the past three years.  67% of RGGI states have beat the national average in terms of GSP, and 89% have done better in terms of employment.

Table 3 shows that while there is a fairly wide variation between the various RGGI states, on average their electricity rates have not risen faster than the national average over the past three years.  In fact, the rates in only three of the nine RGGI states rose faster than the national average over this period.

There certainly has not been the predicted plummeting GSP or skyrocketing electricity prices or businesses and jobs fleeing the states participating in this carbon pricing system.  This real-world example shows that claims that carbon pricing systems will cripple the economy are unfounded alarmism.  In reality they are an economically effective way of reducing greenhouse gas emissions.

Posted by dana1981 on Tuesday, 12 June, 2012

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