The Impact of Cap and Trade on Consumer Energy Prices: An Empirical Study of the Regional Greenhouse Gas Initiative

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Hallow, Thomas
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University of the South , Environment and Sustainability Department , Sewanee Senior Honors Theses 2024 , Cap and trade , Economics , Sustainability , Energy , Emissions , Incomplete Regulation , Electricity
Greenhouse gas emissions continue to cause climate change, and in the US, 25% of greenhouse gas emissions come from the energy sector. In order to combat this, regulatory authorities implement a variety of policies. One such policy is the Regional Greenhouse Gas Initiative (RGGI), which uses a cap and trade system to reduce emissions and was implemented in 2009. However, for the policy to be truly successful, the burden should not be placed on consumers. This study tests two hypotheses: (1) consumer energy prices have been reduced as a result of the policy, and (2) that there is significant evidence of leakage in the region, which challenged the validity of the results of the first model. In this study, I use a difference in differences model in order to determine the average treatment effect on the treatment group. The results suggest that prices have decreased in the RGGI region by between 6% and 15%. However, the results also suggest that imports of energy from unregulated states in the region increased by about 15%, which points to evidence that firms were able to circumvent the cap and trade policy. In other words the price benefits are most likely a result of firms evading the policy and not from the benefits associated with reducing emissions, such as an increase in renewable energy. The results of this study highlight the issues surrounding regulation of power plants rather than firms and how incomplete regulation can result in inefficient outcomes. Moreover, it reveals an important gap in the study of Environmental Economics. In order for future cap and trade programs to be successful, regulators will need to prevent leakage.