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Pennsylvania Began Participation in RGGI on July 1. What Happens Next?

(This piece has been updated on July 11, 2022 to reflect recent action at the Commonwealth Court)

On July 8, 2022 the Commonwealth Court granted a petition by opponents of Pennsylvania’s carbon budget and trade program (often known as the “Regional Greenhouse Gas Initiative (RGGI) Rule”) to temporarily halt the implementation and enforcement of the program while it addresses the specific issues that the opponents raised.  

In addition to continuing to defend its rule before the Commonwealth Court, Pennsylvania’s Department of Environmental Protection (DEP) has appealed the preliminary injunction to the State Supreme Court.  As of this writing, we have no indication how long the appeal process will take.  It’s also unclear how this will impact the RGGI program but we explore a bit about RGGI and discuss a few possibilities here. 

Background: PA’s Participation in RGGI

To comply with the RGGI rules, polluting electric generators need to obtain one RGGI allowance for each ton of carbon dioxide they emit each year. Normally these will be purchased at quarterly auctions with the proceeds going to the RGGI state that created the allowance.

Companies aren’t limited to buying allowances at auctions. There is also a secondary market as well where participants can buy and sell allowances amongst themselves at any time. 

The RGGI program also gives companies added flexibility on when to purchase allowances. Compliance is measured over a series of three-year control periods. By the midnight March 1st compliance deadline following the end of each third year, a company must have turned in one allowance for each ton of carbon dioxide they emitted in each of the proceeding three years.

The first two years in each cycle are known as “interim control periods.” For those years, a company only needs to obtain allowances for 50 percent of their emissions for that year by the compliance deadline. For example, if a company emits 1,000 tons of CO2 per year, they need to turn in 500 allowances after the first year, another 500 allowances after the second year, and then the remaining 2,000 allowances by the end of the third year.

Because Pennsylvania wasn’t participating in RGGI until after the start of 2022, companies only need to count their emissions between July 1 and December 31 toward their compliance obligation this year.  Since 2022 is the second interim control period of RGGI’s fifth three-year (2021 – 2023) control period, companies will need to obtain allowances for 50 percent of those emission by midnight of March 1, 2023.

Companies have two opportunities to do so. The non-profit organization, RGGI Inc., that manages the auctions is expected to hold allowance auctions on September 7th and December 7th. Between these two auctions, Pennsylvania is expected to make a little over 40 million allowances available for sale alongside the allowances from other participating states. (Because this is a regional program, companies can buy allowances from any participating state.)

Effects of Ongoing Legal Challenges

One issue unique to Pennsylvania is that there are two separate ongoing legal challenges. The first case was brought by Republican legislators who are opposed to RGGI but couldn’t secure enough votes in the General Assembly to block the program. The second case was brought by some of the companies that are opposed to RGGI, alongside trade organizations like the PA Coal Alliance and other opponents. In both cases they asked the Commonwealth Court for a preliminary injunction—basically, an order from the court that tells the DEP to freeze the implementation of the rule in some way while the court decides the case on the merits. 

To get a preliminary injunction, the requester must convince a court that some “immediate and irreparable” harm will occur to them unless it is granted and that the party requesting the injunction is likely to prevail on the merits when all is said and done. The industry claimed they will suffer this kind of harm—even though the compliance deadline isn’t until next year.  The Commonwealth Court sided with the industry on this point and discounted the harm to public health and welfare in terms of air quality, climate change, and other environmental impact. 

While we disagree with this decision, we are now faced with assessing the damage that even a temporary injunction might cause.  That is going to depend on a number of factors.

How long? 

How long such an injunction would last is a difficult question and that will depend, at least in part, on how the case proceeds. It could only last a matter of days or weeks if the Supreme Court acts quickly and sides with the DEP on its appeal. If, on the other hand, an injunction remains in effect until the courts decide the lawsuits on the merits (including appeals), it could take from months to the better part of a year to ultimately resolve.

What about the current quarter, since Pennsylvania already became a participating state in RGGI?

If there is a very short injunction, it wouldn’t necessarily prevent Pennsylvania participating in the September auction and, almost certainly, wouldn’t impact the December auction. If that happens, you might wonder how the injunction impacts the various companies’ compliance obligations. Does the pollution they emitted during the injunction still “count”, or are they allowed to pollute for free? Here, the answer is going to depend on the gritty details of what the court decides. Companies need to track their CO2 emissions anyway, so continuing to do so is hardly a burden and there is plenty of time to resolve any questions before the compliance deadline, but every day that pollution doesn’t count towards the allowance requirement puts more money in the pockets of polluters.

Assuming the pollution emitted during an injunction still counts, it would still be better to resolve the case in time for PA to participate in the September auction. The cloud of indecisions could easily impact the behavior of potential buyers and, ultimately, depress the “clearing price” of the auction, meaning the end of day dollar amount that the RGGI allowances are worth. If the allowances sell for less, that directly translates into smaller proceeds that Pennsylvania can invest in reducing air pollution, we as Pennsylvanians who want clean air have a strong interest in avoiding that scenario. 

Holding the December auction is likely more critical. If we lose the opportunity to sell allowances in 2022 we could, possibly, roll them forward into 2023 auctions, but the next one won’t be until after the March 1st compliance deadline. It’s hard to say how that situation would be resolved, but polluters will almost assuredly try and avoid their compliance obligation entirely.

What's Next?

As we said in the beginning, there is no way yet to know what the exact outcome will be until we see the judge’s order and reasoning, which we expect soon. Whichever way the court holds, it’s clear that there could be huge impacts to the Clean Air Fund. PennFuture will be watching and stands ready to update you on whatever will come next.

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