Association for Public Policy Analysis & Management

Subglobal and subnational policies aimed at reducing greenhouse gases are often thought to be less effective than more geographically comprehensive policies as production, and thus emissions, of trade exposed industries may move from the regulated to the unregulated regions. This so-called leakage may negate all emission reductions from the regulated regions and, even worse, may lead to an overall increase in emissions if the unregulated regions has equally or more emissions intensive production. However, if the unregulated regions have less emissions intensive production, the regional regulation may prompt more switching to the relatively cleaner producers than would otherwise occur, creating a type of beneficial leakage. 

The EPA has proposed the Clean Power Plan to reduce greenhouse gas emissions from electricity generation.  While states are required to implement policies to reduce emissions, they have substantial flexibility in what policies they choose.  One of the states’ options is to enact cap-and-trade programs unilaterally or to join multi-state cap-and-trade programs.  In this light, analyzing the Regional Greenhouse Gas Initiative (RGGI), a CO₂ cap-and-trade program for the electricity sector in select Northeastern U.S. states, can support evidence-based policymaking for EPA and states seeking to comply with the Clean Power Plan. 

We use detailed electricity generation and transmission data to show that that some of the apparent RGGI emissions reductions have actually leaked to neighboring states.  In particular, generation from RGGI-region coal plants has been replaced by generation from NGCC plants in non-capped Pennsylvania and Ohio.  This is in addition to the increase in NGCC generation driven by reduced natural gas prices.  

Our core analyses rely on a difference-in-difference treatment effects approach to identification while non-parametrically controlling for coal and natural gas prices.  These estimates show that during the RGGI program, generation as a share of generation capacity (capacity factor) increased by 12 percentage points for NGCC plants in Pennsylvania and 6 percentage points for NGCC plants in Ohio, while capacity factors for RGGI-region coal plants decreased by 10 percentage points.  While point estimates vary, these results are qualitatively robust to a range of specifications.  Supplementary analyses confirm that electricity transmission from Pennsylvania and Ohio increased relative to transmission to other non-capped regions, buttressing the conclusion that the increased Pennsylvania and Ohio NGCC generation represents leakage from RGGI. 

Electricity generation in the non-capped jurisdictions is less emissions intensive than in the RGGI region, resulting in a net decrease in aggregate emissions. Back-of-the-envelope calculations suggest that one-quarter to one-third of apparent emissions reductions actually leaked but that this served to reduce total combined emissions by an additional three to five percent. 

This work contributes to both the cap-and-trade design and leakage literatures, showing ex poste econometric evidence of policy leakage.  These results, particularly when combined with prior work, suggest that carbon policies are especially prone to leakage when there is substantial electricity grid connectivity across policy boundaries.   States should consider the potential for leakage via the electricity transmission grid when designing their Clean Power Plan compliance approaches.