Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover

The Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in the U.S. to control CO(2) emissions from the electric sector. The approach adopted by RGGI is a regional cap-and-trade program, which sets a maximal annual amount of regional CO(2) emissions that can be emitted from the electric sector. However, incoherence of the geographic scope of the regional electricity market is expected to produce two undesirable consequences: CO(2) leakage and NO(x) and SO(2) emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO(2) leakage is associated with higher allowance prices, it is negatively related to CO(2) prices if measured in percentage terms. On the other hand, SO(2) and NO(x) emissions spillover increase in commensurate with CO(2) allowance prices. Demand elasticity attenuates the effect of emissions trading on leakage and emissions spillover. This highlights the difficulties of designing a regional or local climate policy. Published by Elsevier B.V.