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Virginia lawmakers agreed to join a regional carbon market. Here’s what happens next.
Coal fired units at Dominion Energy’s Chesterfield Power Station would close by 2024 under the Clean Economy Act that passed the General Assembly in 2020. (Ryan M. Kelly/ For the Virginia Mercury)
A year after Republican resistance stalled Virginia’s effort to cap carbon emissions from large producers of the greenhouse gas at the forefront of climate change, the wheels are again in motion: Virginia is joining the Regional Greenhouse Gas Initiative.
Joining the cap-and-invest program was one of Democrats’ top legislative priorities for the 2020 General Assembly session. Thanks to their majorities in both the House of Delegates and the Senate, they achieved their goal on mostly, but not quite, party-line votes. Gov. Ralph Northam has also supported the state’s participation, although several technical amendments he’s proposed related to fund administration still have to be approved by the reconvened General Assembly next week.
“By joining RGGI, Virginia will take part in a proven, market-based program for reducing carbon pollution in a manner that protects consumers,” Northam said in a statement Sunday. “I am proposing important refinements and I look forward to signing it into law soon.”
Clearing these political hurdles, though, is only the beginning of the administration’s work. Virginia will become a full participant in RGGI starting Jan. 1. Here’s what will happen between now and then.
The caboose budget will be finalized, allowing the state to devote resources to joining RGGI
In 2019, Republicans blocked Virginia from joining RGGI by adding language to the budget that forbid the Department of Environmental Quality from spending any money “to support membership or participation in the Regional Greenhouse Gas Initiative until such time as the General Assembly has approved such membership.”
The General Assembly has now approved such participation — but that approval doesn’t go into effect until July 1, while the budget passed in 2019, with its prohibition on RGGI spending, remains in force.
That doesn’t mean the state’s hands are tied until July, however. The solution lies in the “caboose” budget, a bill that amends the last biennial budget and applies to spending through June 30, the last day of the fiscal year. The 2020 caboose budget, as might be expected, strips out the RGGI spending provision.
Last weekend, Northam returned the caboose bill to the General Assembly with 37 proposed amendments designed to help Virginia respond to the COVID-19 pandemic. None of the amendments are related to RGGI, but legislators will have to agree on a final version of the caboose budget when they reconvene April 22 before the administration can take any further action to join the initiative.
“We are anxiously awaiting the date and time where that becomes effective, because that will be sort of the starting gun for us,” said DEQ Deputy Director Chris Bast.
The state’s existing carbon regulation will be rewritten
Virginia already has a regulation on its books to govern how the state could operate in a carbon market. But because the General Assembly has to approve all state expenditures and revenues, and the “carbon rule” was written before any such approval had been given, regulators had to devise a way for the state to participate in the RGGI market without spending or making any money.
What they came up with was an elaborate workaround called a consignment auction. Under this plan the state would have distributed carbon allowances to emitters based on their historical emissions, and the emitters would then have been required to sell those allowances into the market while buying back what they needed.
It was “a very complicated regime that we had concocted. But it worked, or it would have worked,” said Virginia Department of Environmental Quality Air Director Mike Dowd.
Now there’s no need for that system. The legislation that cleared the General Assembly this session authorizes the state to take a simpler approach of directly auctioning off carbon allowances to emitters and then depositing the revenues of that auction in specific funds for energy efficiency, flood preparedness and other measures.
“We’ll be doing what every other state in RGGI does,” said Dowd.
With the existing carbon rule now out of date, DEQ will be charged with revising it to match the new law. To ease and speed up that process, the General Assembly has also allowed the agency to bypass the typical procedural requirements for changing regulations outlined in the Administrative Process Act.
Virginia will sign a contract with RGGI, Inc. and appoint two members to its Board of Directors
Once the budget restrictions are lifted, Virginia will be free to enter into talks with RGGI, Inc., the nonprofit organization that coordinates the states’ participation in the program. Although RGGI, Inc. has no regulatory authority of its own — its role is administrative and technical — it is the hub through which Virginia will finalize the details of how it will participate in the regional carbon market.
Some of the outstanding issues to be resolved, said Dowd, include Virginia’s contribution to the overall program’s annual administrative costs, the process of transferring allowances and confirmation that the state’s system will work smoothly with the regional one.
Why RGGI states are called “participants,” not “members”
Although this reporter and others have frequently referred to the 10 New England and Mid-Atlantic states that are part of RGGI as “members” of the program, the states staunchly insist they are “participants,” a distinction intended to keep them from running afoul of the Compact Clause of the U.S. Constitution.
This Article I clause declares that “No State shall, without the Consent of Congress, … enter into any Agreement or Compact with another State.”
That might seem to be an insurmountable barrier to the kind of agreement RGGI is built on. But, as the Harvard Law Review observed, “no court has ever invalidated an interstate agreement for lack of [congressional] consent,” and “the Supreme Court has long maintained that not every arrangement that might be considered an ‘agreement or compact’ in the modern meaning of the terms requires congressional consent.”
Despite legal challenges to RGGI from the electric industry and other parties, no ruling to date has struck down the effort. Many scholars and policymakers have accepted that the initiative does not violate the Compact Clause based on three key points. First, RGGI, Inc. has no regulatory or enforcement authority. Second, every state that participates in RGGI does so by adopting its own independent legislation, albeit legislation based on a consistent Model Rule. And third, any state is free to exit or enter RGGI as it sees fit, as the case of New Jersey — which voted to withdraw from RGGI in 2011 and then, in 2019, to rejoin it — illustrates.
As DEQ Air Director Mike Dowd put it, RGGI “is in large measure a gentleman’s agreement among the participating states.”
“These are the details that we haven’t been able to talk about with RGGI for the last year,” he said.
Northam will also appoint two people to the RGGI, Inc. Board of Directors, which usually includes each state’s environmental agency head and the leader of its energy regulatory body.
“RGGI’s a consensus organization. It’s not the type of organization that operates by a majority-rule vote,” said Bast. Joining the board, he said, will ensure Virginia has a seat at the table in future decisions, including those related to Pennsylvania’s pending linkage with the market.
Carbon emitters will prepare for auctions and compliance obligations
All fossil fuel plants with a capacity of 25 or more megawatts will be required to buy carbon allowances to cover their emissions once Virginia begins fully participating in the market Jan. 1 — a cost the legislature will allow utilities to pass directly onto their customers, with no extra returns for investors.
In February, Dominion estimated RGGI compliance would raise the average customer’s monthly bill by $1.22 over the next five years, while the State Corporation Commission estimated monthly bills will increase between $2 and $2.50.
These facilities will also need to ready themselves for regular compliance reporting to ensure they are purchasing enough allowances and monitoring their emissions appropriately.
Because RGGI auctions are held quarterly and the first won’t occur until March 2021, there might appear to be a lag between the program’s requirements and the first chance emitters have to meet them. Compliance with RGGI limits, however, is assessed on a three-year basis (although emitters do have to meet certain targets during that time).
This design gives facilities some flexibility: as long as they can prove they hit their targets and held the necessary number of allowances over that period, they will be in the clear.
Between the quarterly auctions, businesses can also buy and sell allowances on RGGI’s secondary market. Some Virginia emitters, officials believe, may already be storing them up for Jan. 1.
State modeling will be updated
State models developed during the crafting of the original carbon regulation will be updated to match what Bast called the “new reality” in Virginia, one shaped by Northam’s goal of weaning the state’s electric grid off fossil fuels by midcentury, the shift from a compliance auction system to a direct one, and passage of the Virginia Clean Economy Act, which sets hard targets for utilities to develop renewable resources and encourage energy efficiency.
All of those factors will change estimates of what RGGI compliance will cost Virginians, as well as what revenues it will produce.
“The emissions cap and the clean energy standard in the Clean Economy Act really do work hand in hand,” said Bast. “The sum is greater than its parts.”
Other modeling will likely occur on the regional level, as the RGGI states assess how the participation of a large emitter like Virginia will affect the broader market.
RGGI Director of Program Administration Anna Ngai said in an email this March that the other states “recognize the benefits of a broader market with more participants, as larger markets increase economic efficiency and cost-effectiveness.”
While the list of hoops for the state to jump through before Jan. 1 may be long, Dowd said he had few doubts the process would be completed in time.
“There are no problems that we see on the horizon that would in any way hinder our full participation starting next year,” he said.
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