Episode 9: Without National Climate Action, How Can US States Put a Price on Carbon? [Full Transcript]
A look into RGGI, TCI, and Washington's Climate Commitment Act
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Casey: In the final days before the 2021 UN Climate Change Conference, COP26, and in the days after, the U.S. failed to pass the Build Back Better Act. At best, the Act is likely to pass as a shadow of its former self, and at worst, none of the key pieces may get through Congress. So where does that leave the U.S. on national climate policy? Well, one answer is that it leaves it with sub-national action. There is plenty that states and regions can do to enact bold climate policy independent of federal action.
Today, we’ll talk about three examples: two regional cap-and-trade programs on the East Coast: the Regional Greenhouse Gas Initiative and the Transportation and Climate Initiative. And one on the west coast: Washington State’s …Climate Commitment Act.
[music]
Casey: Welcome to Pricing Nature, a podcast from the Yale Center for Business and the Environment, the Yale Carbon Charge, the Yale Tobin Center for Economic Policy, and the Carbon Pricing Leadership Coalition.
I’m Casey Pickett, Director of Yale’s Planetary Solutions Project and Carbon Charge.
Naomi: I’m Naomi Shimberg, a junior in Yale College. I’ve worked on regional carbon pricing initiatives in the Rhode Island Department of Environmental Management.
Maria: And I’m Maria Jiang, a Master’s student at the Yale School of the Environment and Yale School of Management. My first desk job was at the Regional Greenhouse Gas Initiative.
[music out]
Casey: So, why is it worth paying attention to climate action at the state and regional level? Here’s Rob Klee, former Commissioner of Connecticut’s Department of Energy and Environmental Protection and lecturer at the Yale School of the Environment. He describes states as a laboratory for policy development:
Rob Klee [2:34]: When you start thinking about states, cities, regions, linking arms and working together to solve these problems, they actually start getting that sort of size and a heft to them that could really make a difference…We're talking about the local action where I still think there are functioning democracies and functioning parties and functioning two party systems.
When you get all those smaller actors, all rowing in the same direction. Can you do a few things: One—can you develop innovation? Can you be what is quintessentially called the laboratory of the states? The places where you can experiment in new polices, laws, programs, incentive structures, collaborations between government and the private sector. Can you have that kind of energetic, exciting sort of ecosystem of innovation happening at the local level?
Casey: Now, this episode goes into lots of policy specifics. But that’s part of why you listen, right? By the end of this episode, you’ll know how three different state and regional carbon pricing and policies passed (or why they didn’t), how they work, and most importantly, what we can learn from them as we think about future climate policy across the United States.
Maria, Naomi, can you walk us through the three programs we’ll talk about today?
Maria: Definitely! One of the latest bills to include carbon pricing was passed in Washington State in May of 2020. It’s called the Climate Commitment Act [slow], and it sets up an economy-wide cap-and-trade program. It takes a lot of lessons from California’s cap-and-trade system, which we discussed in episode 6 of last season.
Naomi: And then there’s the first ever U.S. carbon cap-and-trade program, the Regional Greenhouse Gas Initiative, RGGI, or Reggie for short. RGGI is a power sector cap-and-trade program in the Northeast. It requires electric power plants to buy allowances to emit carbon.
Casey: Ok, so we’ve got Washington's cap-and-trade program, the Northeast’s Regional Greenhouse Gas Initiative, or RGGI, and…
Naomi: …And for the past few years, Rhode Island, Connecticut, Massachusetts, and D.C. had been creating another regional program, the Transportation and Climate Initiative, or TCI. TCI would have been a cap-and-trade program in the transportation sector.
Casey: We heard you say, “would have been” so what happened there, Naomi?
Naomi: Well, there’s…a lot to say.
Casey: Okay, on that note, sounds like it’s time for…
ACT I: How do these programs get off the ground…or….how do they fail to launch?
Casey: I think it makes sense to start on the East Coast, with the Transportation and Climate Initiative, or TCI. Understanding what went wrong with TCI can help us see what Washington’s Climate Commitment Act and RGGI might have gotten right.
TCI’s end seemed so sudden. I remember listening to the radio in November and hearing the, admittedly very brief, mention of the failure of TCI and just sitting there in my driveway wondering ‘what went wrong?’ Last spring we were literally rubbing our hands together in anticipation of the episode we would do on TCI.
Naomi: No we were, I remember I was like *rubbing hands together* ‘woo TCI episode!’
Casey: Thank you. I wouldn’t want anyone to assume we would say literally when we meant figuratively. More importantly, the states involved in TCI were depending on this program to meet their emissions reductions goals…and now...poof?...no more program?
Naomi: It’s…really disappointing. My home state—Rhode Island—just passed its first ever law to legally mandate emissions reductions. And transportation is responsible for about 40 percent of greenhouse gas emissions in Rhode Island. So every time I’d hear a state policymaker talk about how Rhode Island was going to meet its goals, they would mention the Transportation and Climate Initiative.
Maria: We had that experience when we spoke with Commissioner Katie Dykes, of Connecticut’s Department of Energy and Environmental Protection. Before TCI fell apart, Commissioner Dykes said the same thing as you, Naomi—that TCI was crucial to meeting emissions reductions goals in Connecticut:
Commissioner Dykes: [7:12] Here in Connecticut, the transportation sector, and by that, I mean vehicle traffic, is responsible for the largest share of greenhouse gas emissions from our economy - about 38%. So we have a requirement in state statute to reduce greenhouse gas emissions by 45% by 2030.
So we can't reach those goals unless we take a huge bite out of transportation emissions. That's where the Transportation and Climate Initiative comes in.
Casey: So, to make sure I’m getting this right, the transportation sector is the largest source of emissions for these states. Cutting transportation emissions is crucial for these states to meet their climate goals. And the policymakers we spoke with said that TCI was the single most important tool for doing so.
Naomi: Exactly.
Casey: Ok. Important program. How long had it been in the works and what caused it to crumble last year?
Naomi: Well, policymakers across the East Coast started talking about a regional program to reduce transportation emissions back in 2010. But the program really got started in 2018, when ten states and D.C. announced their intent to design a cap-and-trade program.
Casey: Ten states? I thought you said it was Rhode Island, Connecticut, Massachusetts, and D.C. Can I not count?
Naomi: I don’t know Casey, I don’t know what they teach you in business school…
Casey: I certainly hope you’re not casting aspersions on the Yale School of Management, from which august institution I received my degree.
Naomi: And Maria!
Maria: I haven’t received mine yet…
Casey: And in which august institutions Maria is currently pursuing hers…
Naomi: No, let it be known, Casey Pickett can count. Back in 2018, it was ten. There was a much larger coalition of states thinking about a regional cap-and-trade program on the transportation sector. There’s real power in regional initiatives—it’s much easier for states to go in together than alone.
Casey: And how did they envision the program working?
Naomi: So, the plan was to make gasoline and diesel suppliers purchase permits for the greenhouse gasses they would emit in the future to encourage a reduction in transportation emissions each year. The total number of available permits—that is, the cap—would have declined over time, guaranteeing emissions reductions. And each state would have invested the proceeds in projects to further reduce emissions.
Casey: OK, so under TCI, companies that supply gas stations would’ve had to buy permits for the carbon their fuels produce. The money from permit sales would have gone to climate action projects in each participating state. And then the total number of permits would have declined over the years, and the companies would have been able to buy and sell permits to make emissions reduction cheaper.
Naomi: Yes. And states were initially interested in TCI because it built on the success of RGGI, the Regional Greenhouse Gas Initiative. Under RGGI, rather than fuel suppliers, it’s power plants that have to purchase emissions allowances. Here’s Commissioner Dykes:
Commissioner Dykes: [8:45] The program borrows from the successful aspects of the Regional Greenhouse Gas Initiative, and applies that model that has worked so successfully for power plants, to transportation fuels. So simply put, it puts a cap on the amount of pollution, carbon pollution, from gasoline and diesel that's consumed here in Connecticut. It starts off basically about where emissions are today and then over a decade long period, the cap gradually declines.
Naomi: The problem is, though the two programs can be compared, the political conditions in the power sector and the transportation sector are totally different.
Casey: How so?
Naomi: Well, under RGGI, any increased costs for utilities result in larger electricity bills for consumers. But under TCI, increased costs to fuel suppliers would lead to increased gas prices. Gas prices are a lot more visible to consumers than electricity bills. Pretty much everyone we spoke with about the Transportation and Climate Initiative said this made the program a whole lot more of a… political hot potato. Here’s Iliana Paul, a Senior Policy Analyst at NYU Center for Policy Integrity.
Iliana Paul [31:33] I think people are enough divorced from electricity that changes in price don't really affect us, which can be good or bad depending on sort of like the policy of others you're interested in, but with something like transportation, people can just have a more visceral reaction and political will, sometimes, in some ways, is really reliant on public opinion.
Naomi: And Rob Klee:
Rob Klee: [21:13] RGGI again is a requirement of the generators of power that sort of goes into the mix of things that ultimately ends up in electric bill, that you'd never really see that connection between that requirement, that the generator far away needed to buy a ton of carbon credits. The price gets sort of blended into your generation side of your electric bill, which most people are not seeing or understanding. Transportation has that fear, at least that it's going to show up at the pump. It's going to show up when you are the individual putting gas into your individual car. That is where the sort of fear-mongering can happen that, Hey, that's going to raise gas prices.
Casey: Gas prices might be the most salient price we see…There aren’t any other prices advertised with signs lining every highway.
Naomi: And Commissioner Dykes was definitely aware of this…and outlined the importance of designing the program to be cautious about its impact on gas prices:
Commissioner Dykes: [15:32] That's not something we take lightly. This is affecting how people get to work, how people get to the grocery store, to their medical appointments. So, you know, as we designed the program, we're very sensitive to how to design in such a way to get meaningful reductions in greenhouse gas emissions, drive meaningful investment in clean transportation, and to do so in a way that is sensitive to the cost that retail customer people might be paying at the pump.
Naomi: This is a long way of answering your question, Casey: How did we go from ten states to just Rhode Island, Massachusetts, Connecticut, and D.C.? Part of the answer is the impact on gas prices. Even though TCI was only predicted to increase gas prices between 5 to 17 cents per gallon, state governors were hesitant to raise the price of gas.
Casey: Right, that’s like the most unpopular thing you can do as a politician. I mean, take the current state of gas prices. Can you imagine a politician proposing to increase the price of gas right now?
Naomi: I know, it would be crazy! But even before gas prices skyrocketed, many states left the coalition because the program would have raised gas prices, even if just a little bit. The governors of Vermont and New Hampshire said they couldn’t support proposals that would make things more expensive for their constituents.
Casey: Yeah, in hindsight, the collapse of political will around the Transportation and Climate Initiative seems inevitable. Why didn't leaders see this coming? When we spoke with David Roberts in episode 6 last season, he made the case that economy-wide carbon pricing was doomed by its impact on gas prices. He suggested implementing carbon pricing sector by sector to get around that problem and avoid the transportation sector–you do the power sector, then the steel industry, then cement…. Now I'm wondering, how did we hear the sectoral part but not the gas price part? Why do sectoral carbon pricing ON TRANSPORTATION next; THE MOST POLITICALLY DIFFICULT SECTOR?
Naomi: [sigh] Yeah. [rhetorically] Because it’s the sector with the most emissions? Because TCI could have created $3.6 billion in public health benefits? Because the predicted change in gas prices would have been well within the range of normal gas price fluctuations? These are all reasons, but I’m not sure I answered your question.
Casey: Yeah. It's not an individual resident's fault that they need a car to get to work, school, and the grocery store. They have a right to be worried about a policy that might raise gas prices, even a little bit.
Naomi: Right. Now that’s where TCI’s investments come in. The program’s proceeds would have been invested in public transportation and incentives for electric vehicles that make us less reliant on gas. But as Rob Klee says, that’s a pretty tough sell.
Rob Klee: [25:51] That's again, a harder sort of sale to say, don't worry about the price at the pump because we're going to come right back to you with all of these other sort of benefits. There can be a time lag or a time disrupt there.
Casey: Now, I feel like I’m being really hard on this program that has the right idea in mind, and into which a great deal of care was put. But, I do find it to be a head-scratcher, right? If I’m living paycheck to paycheck, and I drive a lot so I’m looking at, say $10 a week in higher gas prices, you’re going to offer me better bus service in a few years, and a rebate on a $20,000 electric car, that comes next April? I hate to say this, but I can see why leaders worried voters wouldn’t go for it.
[music]
Casey: So, impact on gas prices aside, were there other concerns with TCI?
Naomi: Well, another important concern I’d point to is around environmental justice—the reality is that people of color have to live with a lot more pollution in their lives than white people, and this increased exposure to pollution leads to serious health problems.
Casey: Right.
Naomi: So, despite this pollution burden, community organizations and Environmental Justice groups were not invited to the table when the program was being designed. Then in addition to this more procedural issue, there were also concerns that TCI didn’t address the root causes of pollution impacts or transportation inequity.
Casey: For example?
Naomi: For example, it’s not designed to address discriminatory zoning.
Casey: Yeah, that’s unfair to people who've dealt with power plants and highways being located right in their neighborhoods.
Naomi: Right, and with a cap-and-trade program like this, communities with the most pollution weren’t guaranteed emissions reductions— Whereas with direct regulation, we could guarantee less pollution in specific areas. And this was actually why New Jersey Governor Phil Murphy said he was withdrawing from TCI.
Casey: So really it was because of concerns over raising the price of gas and environmental justice that caused Delaware, Maryland, New Jersey, Pennsylvania, Vermont, and Virginia to leave TCI?
Naomi: Exactly. I’d say it faced opposition from the right and the left.
Casey: Ok, so that’s why the first six states left. Now bring us to the present. [pause] How did we go from three remaining states plus D.C.…to zero?
Naomi: Well, the short answer is rising gasoline prices. Last fall, gas prices in the Northeast reached a seven-year high. But I think the long answer goes back to this issue of equity. I’d argue that the program failed because advocates weren’t able to build a strong coalition across the left.
In Connecticut, for example, TCI wasn’t even brought for a vote in the legislature because of concerns it was a regressive tax, which means costing a larger proportion of spending for people with lower incomes. Here’s Rob Klee:
Rob Klee: [15:29] The transportation climate initiative was instantly labeled as a tax and it became this sort of political hot button where a very progressive state with ambitious climate goals where climate change is recognized as an existential threat. We get that here in Connecticut, and yet Connecticut was unable to get the Transportation Climate Initiative, even raised, even brought in front of the legislature for a vote, out of fears that it was a potentially regressive tax that was going to impact low and moderate income communities more than others, even though those are the communities that are currently suffering the most from our existing transportation system….Labeled a tax and it doesn't even come up for a vote.
Casey: Are those concerns well founded? Was it regressive?
Naomi: Well, Rob Klee says no. He believes that TCI was designed correctly, and that it would not be regressive. And frankly, from all that I’ve read, TCI being “regressive” was never listed among environmental justice groups’ concerns. That’s actually the language you saw from conservative groups.
The primary concerns from environmental justice groups were the issues we just talked about: lack of meaningful public outreach early in the process and failure to guarantee emissions reductions in communities with the most pollution burden.
Casey: How did states try to respond to those concerns?
Naomi: Well, in September of 2020, TCI organizers held a webinar on how the program would ensure environmental justice. And they outlined several strategies: First, they required a 35% minimum investment in overburdened communities; They set up a “equity advisory boards” to help guide state agencies on how to best spend program proceeds; They required an annual report which would describe equity achievements in the past year; And they set up a commitment to create complementary policies that “amplified the impact of TCI on environmental justice.”
So it sounds like a lot, and it’s all good, but for many advocates, this was far from adequate.
Casey: Why is that?
Naomi: Well, again, there was concern with process. The Climate Justice Alliance, a national alliance of environmental justice groups, published a press release saying they were only notified about the webinar one day in advance and that they were only given 3 minutes during the last section of the webinar to ask questions.
Casey: Huh, yikes.
Naomi: And, according to the Climate Justice Alliance, the 35% required minimum for revenue investment did not address “place-based pollution.” That is, pollution in specific areas. Many thought TCI was a band-aid and not a fix.
Casey: Wow. So it’s the same tension we saw in California and with all cap-and-trade programs. TCI was trying to address both a local problem (air quality) and a global problem (climate change) with a single mechanism. Even though TCI would have reduced total transportation emissions, it can’t guarantee emissions reductions in certain areas. And that was a real problem for EJ groups.
Naomi: Right. And also like we saw in California, these environmental justice groups hold significant political power. For example, Sierra Club, what you might call a “big green” group, was originally in support of TCI. But in December of 2020 they released a statement that they would not be supporting the final version of TCI, “in solidarity” with their environmental justice partners.
Casey: You know, that could be one silver lining to all this. Environmental justice groups hold more power than they used to, and that’s a really good thing. We should only want programs that make sense to the communities who have been affected most by pollution. But are we willing to say that if it costs us the ability to reduce global emissions? When it’s a trade off, it’s a really tough trade.
[music]
Naomi: Ok, so to finally answer your question: How did we go from three states plus D.C.…to zero?
Let’s reorient ourselves in the timeline. It’s fall of 2021, gas prices are rising and the Biden administration has just passed a 1 trillion dollar infrastructure package that will fund many of the same projects that TCI would have funded.
Casey: Okay, I’m reoriented.
Naomi: Connecticut Governor Ned Lamont withdraws from TCI, citing both of these reasons: high gas prices and the influx of federal dollars. And then Massachusetts withdraws the next day—they always said they’d only join if it was a regional program, and without Connecticut it would have only been Massachusetts, Rhode Island, and D.C. And then of course Rhode Island pulls out that same week—why would they stay in if they were virtually alone?
Casey: Hm, yeah.
Naomi: But as I was saying, I think the deeper cause—beyond gas prices and an increase in federal funding—the deeper cause was this failure to build a strong coalition across the left. Given all of the opposition on the Right, this program would have only worked if the Left held together.
Casey: This is a familiar pattern. To get anything big done in climate policy, you need to form a working coalition. If you want your policy to last, your best option is probably to form a moderate coalition, across parties, so it’s able to withstand future political swings. But if that doesn't work, you’ve got to form a really strong coalition across a whole party. Without a big, solid coalition, you just can’t withstand the pressure from the opposition.
[long music]
Casey: With the importance of coalition-building in mind, let’s shift to Washington State. This was the third attempt at statewide carbon pricing in six years. Naomi, how did the Climate Commitment Act get off the ground?
Naomi: Well, there are a lot of really interesting comparisons between what went wrong for TCI and what went right for Washington.
Casey: Interesting, what do you mean?
Naomi: So, in Washington, different groups had tried to pass carbon pricing bills In 2016 and then again in 2018. Each time, they tried to build a moderate coalition. But in 2020, they took a different approach. They built a strong coalition on the left.
Casey: And how did they do that?
Naomi: To answer that question, we spoke with Paula Sardinas, founder of Washington State’s Build Back Black Alliance, which was key to the passage of the Climate Commitment Act. She began by talking about why carbon pricing bills around the country fail to pass.
Paula: [14:08] Around the table of the conversation were just a bunch of old white guys. There weren't a lot of women. There weren't a lot of people of color, even though from all of the stuff that you see with the EPA and all of the studies, we bore the greatest disproportionate impact. And so when you look across the United States, it was one of the main reasons why you weren't passing these policies…Well, you hadn't invited the grassroots to the table. So we started doing in Washington as we had begun having those conversations, building grassroots movements. Every type of affinity group, every group, we were talking about environmental justice as a civil rights issue.
Naomi: Instead of explaining the technicalities of carbon pricing, Paula focused on having conversations about the outcomes of the policy with the people it would directly impact.
Paula: [12:47] We started having meaningful conversations. What does it mean when you're a parent, when a child can't participate in a physical activity, because they don't have air capacity in their lungs? And we started having these conversations and we said, this all is a part of what we would call environmental justice. And I said, and what we've got to do is we've got to make justice, the heart of the policy. And then we've got to bring all of these communities together in a way that's collaborative.
Casey: Okay, so Paula had these conversations to bring the community together…
Naomi: And it was really effective. 20 tribal governments in Washington signed on in support of the bill. And, in addition to Paula’s Build Back Black Alliance, the Washington Black Lives Matter Alliance also signed on.
Paula: [15:24] And I’ll tell you how it capped off in Washington. When Mr. Floyd died when Brianna died, it became the tipping point in the country. People were, they were fed up, they were protesting in Washington. We knew there was going to be a huge onslaught of civil rights, but we were already working on police accountability. There was going to be a ton of stuff. And I had this brilliant idea. I said, they're going to bring 60 or 70 police accountability bills. The legislature is bracing for that. I knew that they had these monumental environmental justice bills that had absolutely no chance of passing. It's like nobody wanted to hear about carbon pricing in a year where they were trying to prevent choke holds and Seattle had autonomous zones and the city was burned down! And so I said, but it really isn't climate change. It really is environmental justice.
Naomi: Instead of trying to pass the Climate Commitment Act as a standalone carbon pricing bill, Paula and her coalition worked to pass it as one of three bills that year, alongside the HEAL Act, which is a sweeping environmental justice bill, and a bill establishing a clean fuel standard.
Casey: Tell us more about the HEAL Act, focused on environmental justice, and the clean fuel standard.
Naomi: So HEAL stands for Healthy Environment for All. And that’s really what it is. It defines ‘environmental justice’ in state law, outlines how state agencies should consider environmental justice in their work, and establishes a permanent environmental justice council to work with these agencies.
Casey: Got it.
Naomi: And then the clean fuel standard gradually reduces the carbon content of fuel in the state. Passing it was a huge victory against Big Oil—it’s one of their least favorite policies.
Casey: I see. And you were saying the Build Back Black Alliance worked to pass the HEAL Act and the Clean Fuel Standard as part of a larger package including the Climate Commitment Act.
Naomi: Yes. And it worked. All three bills passed.
Paula: [17:02] We're going to pass them as a package, as part of our civil rights package, as part of our, of our commitment to overburdened communities. And I remember, folks were saying, my God, that is never going to work. And I said, what the hell have you got to lose? The bill is dead anyway. We had missed all the cutoff dates. I was like, you know, the great thing is if I'm right, I'm a genius, but if I'm wrong, your bill's already dead. You know, you don't even have the votes. I mean, like it's not even on life support. But if we're right, then we become the blueprint for all of the other states that are trying to pass sweeping climate change policy.
And what we're saying to you, it's civil rights, stupid. It's a civil rights issue. And whether someone is killed by the police or not, civil rights has been an issue forever in this country. And that's what we did in Washington. We took climate change and made it climate justice and made it environmental justice. And we said, thank you, lovely old white men. We'll take it from here.
It is a civil rights issue. It belongs to these young, you know, genZ-ers like Naomi. And they would like to have a damn planet, go sit down and they'll carry the ball. This is the civil rights issue. Like it was voting rights for me. It was Roe v. Wade for my mother. They have come to me, my daughter who's 20 years old and said, listen, old lady. It's the earth for me…you know?
[long music]
Casey: Getting cap-and-trade off the ground in Washington was all about coalition building on the left— environmental justice advocates, community organizations, indigenous leaders, big green groups, and policymakers working together to create legislation. Maria, Was it the same for RGGI, the Regional Greenhouse Gas Initiative?
Maria: Yes, it was about coalition building, but in a bipartisan way. RGGI started in the early 2000s when New York’s Republican Governor, George Pataki, invited other governors to join New York in a regional cap-and-trade program covering power plants. Overall, 10 northeast states agreed to join the program by 2007.
Casey: But at that time, carbon pricing bills weren’t passing at the federal level. Remember, from Season 1, in the early 2000s, multiple bipartisan carbon pricing bills were introduced in congress, but they always failed.
Maria: Right—but because carbon pricing wasn’t successful nationally, governors felt like they had to take action. Here’s Martin Suuberg, Commissioner of the Massachusetts Department of Environmental Protection and chair of RGGI’s board of directors, on the role of bipartisanship:
Martin Suuberg: [time] One of the nice things about RGGI is you know, it has been and continues to be a bipartisan effort. From its beginning, people understood that this was, a thoughtful and effective way of addressing a highly significant issue…
Maria: Another reason for RGGI’s success was the deregulation of electricity markets.
Casey: What does that mean Maria?
Maria: A deregulated market is when the part of a utility that generates electricity is separated from the part of the utility that’s selling the electricity. And around 2005, electricity markets in the Northeast were deregulating—separating the electricity generators from the retailers.
Casey: What did that mean for RGGI’s success?
Maria: Well, we’ve mentioned in the past that one barrier to passing carbon pricing is industry pushback. Companies don’t want to be charged a carbon price and take on additional costs. But in this case, some utility companies—those that were selling the electricity, not generating it— would no longer bear the upfront cost of a carbon price. Only the electricity generators would bear that upfront cost. Therefore, there was actually some industry support.
Casey: Separating electricity generators from retailers meant the retailers would largely be unaffected by the carbon price, which freed their hands to support it.
It sounds like there were three big factors that led to RGGI’s adoption in the mid-2000s: first, there was a bipartisan coalition of support; second, there was momentum for regional action in response to the absence of national climate action; and third, deregulation of the electricity sector enabled electricity retailers to avoid the costs of the carbon price, which led some of them to support the program.
Maria: You got it, Casey.
Casey: Ok, so we’ve answered: how do you pass a state or regional carbon pricing program… Now I want to know…when state or regional carbon pricing programs do pass, how do they actually work? What do they look like in practice? To understand what we can learn from these policies, we need to understand some of the key mechanisms they use. This takes us to..
ACT II: Policy Design
Casey: Now, Paula Sardinas just told us to avoid going into policy details and to focus on what policies can do to make people’s lives better. With reservations, for this audience, we’re going to temporarily ignore that advice because we want to draw lessons that we can apply to future state, regional, and national climate policies. And to do that, we need to get into the details— How do these policies work? Do they effectively reduce emissions? And what’s their effect on the economy?
[banter about getting into the details]
Casey: Let’s start with RGGI. Maria, you talked about how RGGI covers electric power plants in several Northeast states… What else can you tell us about how RGGI is set up? Inquiring minds want to know.
Maria: Well, for the inquiring minds… Here’s Commissioner Suuberg again, from RGGI’s board:
Martin Suuberg [2:20]: “The Regional Greenhouse Gas Initiative is a cooperative effort of 11 states to cap and reduce power sector carbon dioxide emissions. It is composed of individual carbon dioxide budget trading programs in each participating state. Each state’s budget trading program limits emissions of carbon dioxide from electric power plants, issues allowances, and establishes participation in these allowance auctions. RGGI is the first market-based cap-and-invest regional initiative in the US.”
Casey: Martin Suuberg explains that RGGI is classic cap-and-trade: each power producer buys the number of allowances they need to cover the emissions they create as they generate power. And over time, the number of allowances in the market decreases to reduce the amount of emissions.
Maria: We should note that earlier cap-and-trade programs in the U.S., such as the cap-and-trade program to reduce sulfur dioxide, had not auctioned off allowances - they gave them away for free.
Casey: So it was a big deal that RGGI was able to hold auctions and collect revenue. But then, once they collect that revenue, what do they do with it? - How does RGGI allocate the revenues that they collect - especially with multiple states involved?
Maria: Well, revenue allocation is probably one of the areas of carbon pricing with the biggest potential to impact people’s lives. Earlier we talked about the possibility for carbon pricing to be regressive…
Casey: …meaning, lower-income households would pay a large share of their income for gasoline and for energy to heat their homes…Progressive policies do the opposite: people of higher income pay a greater share of that income for energy.
Maria: Exactly. The potentially regressive nature of carbon pricing is a major source of concern for both parties about why carbon pricing could be infeasible and unfair. But one of the ways to offset the potential regressive effects of carbon pricing is by distributing the revenue in ways that help people with lower incomes.
Casey: So what does RGGI revenue go toward?
Maria: There are a few things—and again, each state can decide how its revenues are spent. In Massachusetts, for example, it goes towards energy efficiency, ratepayer relief, and demand-response.
Casey: Can you define some terms? I know energy efficiency is using less energy to do the same task–so the revenue could be used to fund better insulation in buildings and more LED lighting, for example… can you say more about ratepayer relief and demand response?
Maria: Haha, yes. Ratepayer relief offsets increased energy prices for households that carbon pricing might impact the most.
Casey: How does it do that?
Maria: It’s a bit like a carbon dividend, as we’ve looked at in the past -- but instead of cash, the government pays off some of your energy bill.
Casey: For households with lower incomes. Got it. And demand response?
Maria: So demand-response evens out electricity usage so that there are fewer instances where energy demand spikes – when demand spikes, energy supply has to ramp up quickly, too, and typically power plants that turn on during times of peak demand are more costly, which translates to higher utility rates for customers., and sometimes, these “peaking” power plants are also more polluting.
Casey: Okay, so demand response measures end up lowering costs and pollution overall from electricity production.
Maria: Exactly.
So to sum up, revenue distribution reduces the impact of rising energy prices for everyone, and can even provide benefits for moderate- and low-income households.
Are there any other ways revenue is used, Maria?
Maria: Yes, definitely -- so far we’ve talked about using revenue distribution to offset the impacts of the carbon pricing policy. But we also need to think about the impacts of climate change itself. As climate change gets worse, states are thinking about how to deal with the effects of a changing climate -- rising sea levels, intensifying storms, heat waves…
Casey: I see. So are RGGI states thinking about investing revenue in programs that help us adapt to climate change, like storm barriers and places for people to cool off during heat waves, for example?
Maria: They are - in fact, Virginia - the newest state to join RGGI - dedicates 45% of its RGGI revenue towards a Community Flood Preparedness Fund, which has made funds available to both local governments and tribes to build resilience measures in case of flooding.
But this wasn’t always the case—Martin Suuberg said states are just beginning to think about using revenue for adaptation investments.
Casey: As effects of climate change worsen, I wonder if we’ll see more states shift RGGI auction revenue toward adaptation and resilience.
Maria: I’m curious too…
[music interlude]
Maria: There’s one more thing that’s interesting to mention about RGGI’s design. We haven’t talked much today about the differences between carbon taxes and cap-and-trade systems, but one important distinction is that a carbon tax has a fixed price, while a cap-and-trade price moves with the market. And that volatility has the potential to create problems. So in 2014, RGGI started using a “Cost Containment Reserve,” which is a sort of safety net of extra allowances that go onto the market in case the carbon price gets too high.
Casey: Interesting, now why is that important?
Commissioner Dykes [16:39] Think of it as the guardrails on the market. So that if for some reason we might see prices for allowances creeping up higher than what we anticipated, the cost containment reserve would automatically inject additional allowances into the market to help moderate some of those price impacts.
Cause we know how important it is… as we have this transition over a number of years to make sure that customers aren't harmed along the way.
Casey: Commissioner Dykes is taking us back to the importance of equity—as we know, carbon prices can be passed on to customers in ways that affect low-income households more than others. A cost containment reserve helps create a price ceiling in a cap-and-trade market, so that customers don’t experience significant price shocks - which can wreak havoc on a home budget and can be unpopular, politically.
Maria: Yeah, I think of it kind of like what happens when we have a supply chain shortage, like we’ve had a lot of over the last two years. And on bikes, example… like when COVID hit, lots of people wanted bikes, which increased their prices a lot. If we just had more bikes stowed away somewhere…
Casey: Like in a secret strategic bicycle reserve?
Maria: Yeah, exactly, like in a secret strategic bike reserve that the government was holding. And that they could’ve been released into the market. Then bikes wouldn’t have been so expensive for everyone. The cost containment reserve is basically like this extra bike stockpile somewhere.
Naomi: This is Naomi, just popping in for a quick sidenote: the U.S. government actually does stockpile 1.4 billion pounds of cheese for this… very reason.
Casey: To make sure bikes don’t get more expensive?
Naomi: I think so, yeah.
Maria: So, speaking of containment reserves… The cost containment reserve in RGGI acts as a price ceiling, not letting the price get too high - And starting this year, RGGI also created the Emissions Containment Reserve, which allows participating states to withhold allowances if prices fall below a certain number. This is a price floor, which makes sure the carbon price doesn’t dip below a certain point because again, we want to make sure prices are high enough to put pressure on companies to decarbonize.
Casey: RGGI has a price ceiling and a price floor… it’s like partway to a nice comfy price-house.
Maria: Actually…this is called a price collar…but I’ll let you keep going with this price house thing.
[music] *our house*
Casey: Alright, let’s recap what we just learned about RGGI - It’s the nation’s first carbon cap-and-trade program, and it successfully set a precedent of auctioning off carbon credits to collect revenue. This revenue is used to offset energy price increases and to invest in emissions reductions strategies, such as energy efficiency and demand response.
Over time, RGGI’s emissions cap has been adjusted downward to account for changes in the region’s emissions profile and to account for banked credits. The program has also instituted reserve mechanisms to create a price floor and ceiling for its carbon price.
[pause]
After RGGI was created in 2009, California began its cap-and-trade program in 2013. Then - for a long time, nothing big really passed in terms of a new state or regional carbon pricing programs in the U.S.
Maria: That was true, until Washington state passed its bill in 2020, which was a big deal in national carbon pricing news.
Casey: Yeah, after two former tries, it was really exciting when they finally brought the bill over the finish line. Now that we’ve heard about RGGI, how does the Washington program compare?
Maria: Hmm, I think we can draw four comparisons between Washington and RGGI: (1) what sectors they cover, (2) how the price is set, (3) how they retain industries, and (4) how revenue is invested.
Casey: OK, number one, what sectors do they cover?
Maria: Washington state’s program is an economy-wide program, like California’s. This means it not only covers the electric power sector, like RGGI or the transportation sector, like TCI would have, but anyone who emits greater than 25,000 tons of equivalent carbon dioxide emissions every year.
Casey: Got it. Washington state’s program is economy-wide, while RGGI focuses on the power sector. So… next in our comparison: How does Washington’s Climate Commitment Act set the price of carbon?
Maria: Even though prices are set by the market, there are also price limits. Just like the cost containment reserve and emissions containment reserve from RGGI, Washington’s program will have guardrails to make sure there’s a price ceiling and a price floor. Having predictable prices can help businesses and policymakers make better decisions, so they’re not caught off guard by certain economic shocks.
Casey: Okay, Washington has guardrails on the price just like RGGI. How about the third area of comparison: How does Washington’s policy retain industries?
Maria: This is the issue of leakage. With a carbon price, how does a state keep companies or industries from moving their production elsewhere?
Casey: Right, if I have a company and I’m maximizing profits, I might want to move to a place where I don’t have to pay for my carbon emissions. But, is that a valid concern? In our first episode EDF’s Suzanne Brooks referred to research showing companies don’t actually seem to move much as a result of carbon prices. How has that played out with RGGI and in Washington?
Maria: Well, with RGGI, regulators have been monitoring this issue and haven’t found any major problems so far. And then in Washington, they’ve added an additional precaution for certain industries, they’re calling these industries “Emissions-Intensive Trade-Exposed Industries”
Casey: Just because it rolls off the tongue so easily? Is that why they’re calling it that?
Maria: Exactly, as always. And these industries, that they’ve labeled “Emissions-intensive Trade Exposed Industries,” will receive ‘free’ allowances until 2035, after which they’ll have a declining cap on free credits they get.
Casey: I see - so from an economic perspective, they’re trying to encourage especially at-risk industries to stay in the region; and from a climate perspective, not to move to a jurisdiction without emissions regulations.
Alright, so, finally, how does Washington’s new policy invest revenue?
Maria: Revenue from Washington’s program will go towards climate investments such as transit electrification and climate adaptation. For example, $250 million will go towards supporting the relocation of tribal communities facing rising sea levels.
[music]
[pause]
Casey: Maria, so far, all U.S. carbon pricing programs have been cap-and-trade programs as opposed to carbon taxes. Washington, California, RGGI, and the proposed TCI, all cap-and-trade. It seems that elected leaders in these states tend to be more comfortable with cap and trade than carbon taxes. But it remains a choice. And an important one. (For more discussion on the pros and cons of each approach, check out episodes 1 and 5 from season 1.)
Maria: Right, and if policymakers end up choosing cap-and-trade, there are a whole bunch of other policy design decisions they need to make. Whether to use an auction to generate revenue, and how and where that revenue gets distributed.
Casey: They have to decide what sectors to cover…
Maria: Then… what price limits are appropriate, and how to prevent leakage… that’s a lot of decisions.
Casey: It is a lot of decisions -
Maria: But, good policy requires a lot of thought. And just as Rob Klee said - I think states are serving as laboratories for national climate action. If we can figure this out on a smaller scale - maybe we have a shot at something nationally.
[transition music]
Casey: We’ve discussed how these policies are passed and how they work. Now let’s get into how carbon pricing policies complement other climate policies at the state level. That brings us to—
ACT III: Carbon pricing: main course or side dish?
Casey: Last season, we asked if carbon pricing should be the main course or the side dish in the meal of climate policy. Remember that Naomi?
Naomi: Oh yes, I unfortunately remember that painfully extended metaphor.
Casey: Well, buckle up, because…I’m going to use my executive powers to painfully extend it even longer.
Naomi: Okay. Oh boy.
Casey: It’s a really important metaphor! We have to think about how carbon pricing should function within larger policy systems. [rhetorically] Should it be the main policy we focus attention on designing and getting passed? Or is it best as a complement to other policies? Or, if you prefer because I know you love this, what’s the lasagna and what’s the garlic bread?
Naomi: All I know is I want both lasagna and garlic bread Casey…
Casey: I was trying to come up with dishes that could plausibly be vegetarian without saying vegetarian… I didn’t want to say steak, right? Low carbon meal…
[short music]
Naomi: These are important questions. Where is the heavy lifting on emissions reductions going to come from? Carbon pricing? Or building codes and vehicle fuel standards and solar power incentives?
Casey: Many of the people we spoke with for Season 1 had different opinions on this question. Kiera O’Brian, founder of Young Conservatives for Carbon Dividends, thought that carbon pricing should be the only policy mechanism, the sole dish:
Kiera O’Brien: “I specifically, as a Republican, support this policy singularly. I believe that pricing carbon is the most effective way to utilize the market to decrease emissions. Free market principles only work when the prices are fair and correct… And so a price on carbon is the best way to avoid subsidies or other extraneous interventions.”
Casey: On the other hand, to Rhode Island Senator Sheldon Whitehouse, carbon pricing should be the main course, with plenty of other policies on the side.
Sheldon Whitehouse: So I think a carbon price is going to be the, you might say the center pole of the tent. There might be a lot of other poles that hold it all up and add value and make it stronger. But I do think that without a carbon price, the idea of being able to pull off staying at 1.5 degrees just doesn't seem credible.
Casey: And then energy journalist David Roberts thought that carbon pricing should be a side dish, a “useful adjunct” to other regulatory policies.
David Roberts: It is the regulations and the industrial policies behind the scenes that are doing most of the work of reducing emissions and basically cap and trade is mopping up the residual and that's fine. They work together pretty well.
Casey: So, I’m curious: [slow] with each of the state-level carbon pricing policies we’ve talked about today—are they main courses or side dishes in each state’s policy milieu?
Naomi: [deadpan] Casey did you just say “milieu”?
Casey: Yeah, you know, it’s just one of those words I’ve always wanted to say on air. [emphatically] Milieu.
Naomi: Ah, okay, I see now. This is actually why you brought back this metaphor.
Casey: Oh stop…would I?
[seriously] OK, Naomi, will you stop with the jokes and tangents? Bringing it back. Focus. How do each of these cap-and-trade programs fit into states’ climate plans?
[short music]
Maria: Let’s start with RGGI and TCI. Even though TCI didn’t pass, there were tons of conversations about how it was going to fit into states’ larger climate strategies.
Casey: If RGGI is the mechanism for reducing emissions in the power sector, and TCI was, at least supposed to be, the mechanism for reducing emissions in the transportation sector, I’d say they are main courses, no?
Naomi: Yeah, I would say yes. That’s at least the messaging from state regulators, like Commissioner Dykes. But other people who worked on TCI said it should be more of a side dish, especially those from progressive organizations. We spoke with Nicole Wong, who at the time was a campaign manager at Green for All, a group working at the intersection of environmental, racial, and economic justice. She thought TCI should be implemented alongside many other programs, such as requirements around air quality monitoring or programs promoting electric vehicles.
Nicole Wong: So ultimately there's going to need to be a much broader suite of policies, to actually get at these disparities and in this case, racial disparities around pollution exposure. These policies shouldn't be seen as quote-unquote, “complementary to TCI.” They are important, in their own right. They are standalone policies that have been worked on for many years.
Casey: It’s a strong point.
Naomi: Yeah, I completely agree. You know, it’s interesting to think back on the language used in TCI. That fourth environmental justice pillar? “A commitment to create complementary policies that amplify the impact of TCI on environmental justice.”
Maria: Interesting. And this tone shift: from environmental justice policies being “complementary” to cap-and-trade, to cap-and-trade and environmental justice policies being implemented together, each important in their own right, was really important in Washington.
Casey: Yeah, so now…can we actually go ahead and compare the Transportation and Climate Initiative on the east coast to Washington? I’m curious: In terms of our main course/side dish conversation: Maria, Naomi, how would you categorize Washington’s Climate Commitment Act?
Maria: I’d argue it was more a side dish. It was part of a larger package of policies, alongside a clean fuel standard and the HEAL act, the environmental justice bill. Precisely because it passed in this package is why it worked.
Naomi: Interesting, though I think I might disagree. To me, the Climate Commitment Act feels very much like the main course—the center pole of the climate policy tent that Senator Whitehouse was describing.
Casey: Hmmm, and why’s that?
Naomi: Well, Paula Sardinas says that the HEAL Act is the “feel good” piece, since it’s not actually doing anything to reduce emissions. Now, that doesn’t mean that the HEAL Act is merely “complementary,” it means it’s important for different reasons. But the cap-and-trade program really is the powerhouse of this package of policies. The feel good piece just isn’t enough.
Paula Sardinas: [42:24] If you just do the HEAL ACT, philosophically, it feels really good, but it doesn't work because you're not capping the greenhouse emissions. I still have trucks going up and down, I-5 polluting… You're telling me that you're healing me, but I'm still breathing in dirty air. So I said, this is why we need low carbon fuel standards. And this is why I need to decarb all of the buildings… I said that's why we did all of the bills as a sweeping package, because just an individual piece didn't work. And I was willing to say, you give me all of it or you give me none of it, because if you just give me a piece of it, it doesn't work. And I don't trust it. If I come back in 2022, you'll give me the other pieces because I do believe incrementalism doesn't work and they just want the philosophical feel good piece. That's not enough.
[music]
Casey: Seems like what we learned from these programs is we should be somewhere in between Senator Whitehouse and David Roberts. Carbon pricing can be the revenue-generating engine of a climate policy, and it can apply broad downward pressure on emissions. But we need other policies implemented alongside carbon pricing. We need to reduce emissions in different sectors (like with green building standards and targeted policies for Electric Vehicles) and we need to address environmental justice, for example, through local air quality improvements and safe drinking water. As Paula Sardinas says, climate is a civil rights issue. Let’s not forget it.
Conclusion
Casey: At the beginning of this episode, Rob Klee talked about states as a laboratory for policy development. Let’s take that approach now. What would it look like if we took all of the lessons from today and built a national carbon pricing system?
Naomi: Well, I think first you learn from Paula Sardinas and Washington. You build a strong coalition. And you do so by starting within the community.
Paula Sardinas: [50:00] And so if we were to do this in a way that was thoughtful and meaningful from how we did the policy and involved the community, and it was grassroots led, and then we show how we can implement it and how we develop it, then we can become a model. You involve the community. You use community to implement it, and then you keep the dollars invested in your own state.
Maria: And then I think you take a lesson from the success of RGGI and the downfall of TCI… it’s a lot easier to price carbon in the power sector.
Naomi: Then I think you learn from RGGI and Washington. You implement guardrails so the price of emitting isn’t too high or too low. Then you designate revenue for both mitigation and adaptation.
[brief music]
Naomi: Even though we can think about states as a laboratory for national policy, that’s certainly not their only purpose. We need strong state-level climate policy. It’s the only way we’ll meet our emissions reduction goals.
Casey: So while we can learn a lot from states for national policy, we should also be thinking about how we can learn from states to pass climate policy in other states.
Maria: Right. And the three initiatives we focused on today, RGGI, TCI, and Washington, are just a few examples. Last year, Oregon Governor Kate Brown bypassed the legislature to create a statewide cap-and-trade program.
Naomi: And we can’t just be thinking about how to implement climate policy in countries or states, right? We need good policy at all levels of government and governance: in cities, institutions, and corporations.
Casey: Exactly. As Rob Klee said, to make the necessary changes climate change calls for, we need entities of all kinds to link arms and work together to solve these problems. So…stay tuned for next episode, where we’ll explore how institutions and corporations use internal carbon pricing to be more resilient.
[music]
Casey: This episode was written by Naomi Shimberg and Maria Jiang, with help from Jacob Miller, Casey Pickett, and Cami Ramey. Sound engineering by Jacob Miller. Original music by Katie Sawicki. Thank you to all of our guests and to David Mendoza, Kevin Tempest, and Jonah Kurman-Faber for their guidance. You can find more info about each of our experts on our website, pricingnature.substack.com. Finally, special thanks to the Carbon Pricing Leadership Coalition and the Tobin Center for Economic Policy for their partnership, and to Ryan McEvoy, Stuart DeCew and Heather Fitzgerald for making this episode possible.