Options for Issuing Emissions Allowances in a Pennsylvania Carbon Pricing Policy

A carbon cap is a method of carbon pricing that sets a limit on total carbon emissions and requires emitters to turn in a permit, called an allowance, for each ton of carbon dioxide they emit. Emissions allowances under a cap can be sold through an auction or distributed directly to emitters or other entities and can be traded in a secondary market, which leads to the identification of a carbon price based on the scarcity of allowances. This ensures that those entities that can reduce emissions in the least expensive manner will do so, saving the cost of an allowance.An electricity sector carbon cap in Pennsylvania would require generators to turn in allowances for the carbon emitted in the process of electricity generation. Such a program brings with it several policy options—whether to allow trading of allowances (“linking”) with the Regional Greenhouse Gas Initiative (RGGI) carbon market, what to do with the revenue from the sale of allowances (allowance value), and what companion policies to implement.In a previous report and issue brief we concluded that with a Pennsylvania electricity sector carbon cap:Emissions reductions would be achieved at low cost.Low allowance prices would accelerate emissions reductions if Pennsylvania adopted features of the RGGI design.Renewable energy policy would achieve emissions reductions at greater cost but would also create clean energy infrastructure that would contribute to emissions reductions in the long run.A trade-ready program design in Pennsylvania would link seamlessly with RGGI.Emissions leakage would be moderate.Here, using RFF’s Haiku electricity sector model, we expand on our previous work by focusing in more detail on a Pennsylvania carbon cap that is linked with RGGI. Linking the state program with RGGI can lower total costs, insulate the allowance markets from shocks due to local events, and amplify the climate policy signal of Pennsylvania’s decision to cap emissions on the national stage.In this analysis, we study the distribution of allowance value between the general fund (No AA), electricity consumers (Cons), and electricity producers (Prod) as well as the interaction of carbon pricing with Pennsylvania’s Alternative Energy Portfolio Standard (AEPS) which is designed to support the development of clean energy. All results are for 2026.We present six main findings:Policy RepresentationsAllocation to consumers (Cons) is represented as allowance value split between support for energy efficiency and consumer electricity rate relief.Allocation to producers (Prod) is represented as updating output-based allocation (OBA), in which electricity producers receive free allowances in proportion to their share of generation. This use of funds acts as a production incentive that mitigates “leakage” and is distinct from grandfathering.We include policy scenarios that allocate to various subsets of producers: allocation to all producers (OBA All), allocation to all producers except coal and existing renewables (OBA All Except), and allocation to nonemitting producers (OBA Non-Emitting).The AEPS is represented as a requirement that 8% of Pennsylvania’s electricity demand be covered by wind and solar by 2021. We consider scenarios where the AEPS is eliminated and where it is expanded to require 15% from wind and solar by 2026. We assume Renewable Energy Credits are tradeable within the PJM region.1. All cap policy scenarios lead to significant emissions reductions in Pennsylvania and the US.Emissions in Pennsylvania fall from 118 million tons of carbon dioxide in the 2026 baseline to 83–90 million tons in the scenarios examined. National electricity sector emissions fall from 1,710 million tons in the 2026 baseline to 1,677–1,684 million tons, a reduction of 1.5–1.9%.2. The change in electricity prices would be unobservable.Across all capped scenarios, electricity prices never change more than +/- 0.5% relative to BAU. Total electricity expenditures in Pennsylvania increase the most when allowance value is allocated to general funds (0.4%) and decrease the most when allowance value is allocated to consumers through energy efficiency investments and rate relief (-1.8%) generation compared. Total electricity expenditures in Pennsylvania increase the most when allowance value is allocated to general funds (0.4%) and decrease the most when allowance value is allocated to consumers through energy efficiency investments and rate relief (-1.8%) (Figure 1).