Does Cap and Trade Work? Assessing the Impact of the Regional Greenhouse Gas Initiative

Abstract

There is substantial evidence of an association between greenhouse gas emissions and the warming of the global climate. A warming planet has implications for human health, agriculture, and economic growth. Several policy strategies may help to reduce greenhouse gas emissions. One potential solution is a cap and trade system, which is a market-based instrument that sets an upper limit on emissions and allocates to participating firms a certain number of permits to pollute, which they can trade with other firms. The Regional Greenhouse Gas Initiative (RGGI), agreed to among participating states in the northeastern United States in 2005 and implemented in 2009, was the first mandatory cap and trade program in the United States designed to mitigate greenhouse gas emissions, specifically within the electricity sector. This paper attempts to determine whether RGGI has been effective in reducing greenhouse gas emissions from affected power plants. I use annual power-plant-level emissions data from the EPA’s eGRID database to estimate a difference in differences model that compares changes in carbon dioxide emissions between plants in participating states and plants in non-participating states from 1996 to 2016. I find some suggestive evidence that emissions declined at a faster rate among plants in RGGI states than among plants in non-RGGI states, although my results are not conclusive.