A Regional Solution to a Global Problem: A Case Study of Carbon Leakage and Emissions Spillover

Abstract

Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in U.S. to control CO2 emissions from 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 electric sector. However, incoherence of the geographic scope of the regional electricity market and the RGGI is expected to produce two undesirable consequences: CO2 leakage and emissions spillovers. CO2 leakage under the current context is defined as the displacement of CO2 emissions
from the capped region to uncapped region due to emissions trading. CO2 leakage could undermine the eficiency of emissions trading, or even produce undesirable consequence at which regional pollutants emissions become greater than the amount prior to the implementation of RGGI. Emissions spillover is defined as the increases in pollution emissions other than CO2 due to CO2 regulation. If emissions rates among pollutants are positively corrected, emissions spillover is expected to occur.