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 CO₂ 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 CO₂ 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: CO₂ leakage and NO_x and SO₂ emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO₂ leakage is associated with higher allowance prices, it is negatively related to CO₂ prices if measured in percentage terms. On the other hand, SO₂ and NO_x emissions spillover increase in commensurate with CO₂ 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.