The Regional Greenhouse Gas Initiative: Emission Leakage and the Effectiveness of Interstate Border Adjustments

We use theoretical and numerical general equilibrium models to analyze the Regional Greenhouse Gas Emission Initiative (RGGI), a cap-and-trade scheme to limit carbon dioxide emissions from electricity generators across ten states in the northeast U.S. Although RGGI’s economic impacts are small, they induce substantial increases in power exports from unconstrained states which result in emission leakage rates of more than 50%. Harmonized taxes of 2-7% on electricity sales in participating states can neutralize leakage and increase aggregate abatement without significant adverse income effects. These results suggest that setting electricity tariffs in conjunction with the emission cap might improve RGGI’s environmental performance.