How Did RGGI Do It? Political Economy and Emissions Auctions

Among the major emissions trading schemes in operation around the world, the Regional Greenhouse Gas Initiative (RGGI) stands alone: this CO2 cap-and-trade program among nine northeastern states is the only such scheme to rely primarily on auctions to distribute emissions allowances. The standard practice—distributing allowances for free on the basis of historical emissions—elicits begrudging but politically crucial support from some regulated emitters. Like carbon taxation, allowance auctioning has long been considered economically superior to its alternatives but politically infeasible. How did the RGGI states manage to defy conventional wisdom and institute a program so reliant on auctions? Existing analyses of RGGI's origins credit entrepreneurial state-level bureaucrats with converting a promising theory into policy reality. These analyses, however, are incomplete and cannot explain why RGGI-state legislatures overwhelmingly supported auctioning in spite of concentrated industry opposition. This Article suggests that the politics of auctioning in RGGI cannot be understood apart from recent fundamental changes in the structure of electricity regulation. In the Northeast, restructuring has entailed the creation of competitive regional wholesale electricity markets and the breakup of electric utilities. Together, these changes have remade the political economy of energy policy. The newly transformed utility sector now includes industry players who do not oppose auctioning. State legislators, fearing RGGI-induced wholesale rate increases, have embraced auctions as a source of revenue to offset adverse rate effects. The story of RGGI thus demonstrates that received political wisdom can be upset by policy developments in adjacent fields and reminds us of the political contingencies that undergird even the most carefully crafted regulatory interventions.