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MARKETS: Tax on electricity key to Northeast initiative, economists find (03/13/2008) Debra Kahn, ClimateWire reporter A tax on electricity consumption would go a long way toward making the Northeast Regional Greenhouse Gas Initiative (RGGI) more environmentally sound, according to a recent analysis by Boston University economists. Without such a tax, as much as 50 percent of the emissions reductions RGGI is supposed to achieve starting next year could "leak" out to unconstrained markets or resources, the report says. Preventing emissions from increasing outside cap-and-trade systems is a key issue as regional markets take shape in a national vacuum. Without some sort of mechanism to prevent it, electricity that is generated will "leak out" from carbon-constrained markets to those without emissions controls, negating some of the intended emissions reductions. States importing more coal-fired juice from Pennsylvania? Leakage can also occur when decreased energy demand in emissions-reducing regions lowers the cost of fossil fuels in other jurisdictions, thereby increasing demand for the unrestricted fuels. Tinkering with taxes on electricity consumed within RGGI states has the potential to entirely neutralize leakages, the paper found. A tariff of 2 percent to 7 percent on consumption would not only reduce demand, it would increase supply within RGGI, as generators would have more incentive to produce expensive, low-carbon electricity. Since Pennsylvania is in the same electricity market as several of the RGGI states, including New Jersey and Maryland, leakage is particularly likely, according to co-author Ian Sue Wing. "If there are no tariffs -- or similar measures to limit import demand -- what we are likely to see is New Jersey and Maryland doing less [generation] of their own and importing from Pennsylvania," he said. Pennsylvania has 76 billion tons of coal remaining, according to the Pennsylvania Geological Survey, and electricity generation is the only growing market for it. The resulting increase in more carbon-intensive emissions could mean a net increase in emissions among the three states, Sue Wing said. Including Pennsylvania in RGGI, on the other hand, even at business-as-usual emissions levels, would boost RGGI's environmental benefits considerably. Fixing the leak Sue Wing said bringing Pennsylvania into RGGI might entail setting a not-too-stringent initial cap for it that will pay off in the precedent it sets. "If there are states to be brought into the fold, this is the way we might have to do it," he said. "What we have in the U.S. is a development that exactly mirrors the 1997 process" of the Kyoto Protocol, in which a stricter initial goal was sacrificed in the interest of getting nations on board for the long term. "The big issue with RGGI is Pennsylvania," Harvard economist Rob Stavins concurred. Other leakage estimates vary widely. The American Council for an Energy Efficient Economy has put potential leakage at 60 percent to 90 percent of RGGI's expected emissions reductions. It has suggested increasing the percentage of auction revenues devoted to energy efficiency, which could reduce leakage to less than 15 percent. A RGGI internal report last March did not project a specific leakage figure but suggested fixing the issue by setting energy efficiency standards for utilities and improving building codes. Patrick Hogan of the Pew Center for Global Climate Change said the 50 percent figure seemed high. Hogan recently co-wrote a paper on how states can encourage coal-fired power plants to control their emissions. RGGI officials think there will be about 18 percent to 22 percent leakage, he said. "My impression from talking to the RGGI officials is that they're aware there will be some leakage, and it could be a problem, but it's probably not going to be devastatingly significant," Hogan said. Click here to view the paper on RGGI leakage.