The U.S. Midterm Election's Impact on the Regional Greenhouse Gas Initiative

The results of the upcoming United States midterm elections on November 8th may pose significant implications for the future of U.S. carbon markets. Republican candidates have questioned the efficacy of a carbon market, claiming the higher operational costs for utilities will be transferred down to higher costs for end consumers. Leveraging economic concerns, political opposition to US carbon markets has gained momentum in the midterm elections, leaving the gubernatorial elections with the ability to shape the future of the role carbon markets will play in the country’s climate change mitigation strategies. The U.S. has two compliance carbon markets, the Regional Greenhouse Gas Initiative (RGGI) and the Western Climate Initiative (WCI) with revenues of USD 4.7 billion and USD 22.76 billion, respectively, according to ICAP. Despite the heighted political opposition to RGGI that has been given a platform during midterm elections, the early projections indicate no substantial threat to a multi-state withdrawal from the market and legislative barriers mitigate any substantial short-term disruptions to allowance prices.

Several RGGI member states see crucial gubernatorial election ahead

Pennsylvania’s admission into RGGI has been a highly contentious and divisive matter among Republicans and Democrats alike. Current Pennsylvania governor, Tom Wolf (D), pushed the state’s entrance into the carbon market, emphasizing the importance to incentivize decarbonization among the state's high CO2-emitting entities in combating the climate crisis. As Governor Wolf’s last term in office is coming to an end, Josh Shapiro (D) and Douglas Mastriano (R) held campaigns to become the state’s next governor. Sharing his base’s concern for rising utility prices, Republican candidate Douglas Mastriano, has stated that, if elected, he will withdraw Pennsylvania from RGGI. Despite greater security for Pennsylvania’s continued participation in RGGI under Democrat Josh Shapiro, the attorney general has also expressed his skepticism and ambiguity towards the efficacy of RGGI. Although Shapiro is the projected winner, with a near 13% lead over Mastriano, the state’s future relationship with RGGI remains uncertain.

In New Hampshire, Republican candidate Chris Sununu (R) is the projected winner for a second term as governor, with a 15% lead over Tom Sherman (D). Governor Sununu has shared his willingness to consider leaving RGGI in the past if it was in conjunction with the withdrawal of several other RGGI states. As the gubernatorial election results in neighboring New England RGGI states point towards continued support and participation in RGGI, Sununu’s reelection merits minimal concern for the state’s withdrawal from the carbon market.

The table above summarizes data from RGGI on each state’s adjusted CO2 allowance cap and its respective contribution to the total regional cap. Pennsylvania’s 2022 entry to RGGI and its ongoing legal disputes over its participation in the carbon market have made the state refrain from participation in current auctions. The state’s Department of Environmental Protection, however, share that electricity production accounted for 75.09 million metric tons of CO2 equivalent in 2019. The figure, nevertheless, highlights the disequilibrium in states’ role in the region’s carbon emissions. Electing officials opposed to participation in RGGI, in states like Virginia, whose emissions account for a sizable portion of the region’s cap, will, therefore, connote millions of tons of CO2 that will become unregulated.

Governor Glenn Youngkin (R) of Virginia started his four-year term in January of this year. The absence of a Virginia gubernatorial election means that Governor Youngkin’s plan to withdraw the state from RGGI by December 2023 will proceed. The Virginia governor substantiates his decision highlighting the importance of reducing potential down streaming of utility costs for its residents. There is, however, opposition to withdrawal, highlighting the hundreds of millions of dollars in proceeds the state has accumulated from the market that has been used for lowering the cost of energy bills and climate-induced flood prevention. Furthermore, there has been debate over the legal parameters of Governor Youngkin’s plan to contradict state legislation outlining Virginia’s participation in the carbon market. Despite oppositional groups, the strong political and public support for exiting RGGI in the state put Virginia’s participation in the carbon market in jeopardy.

Implications

Pennsylvania’s vast natural gas and coal production means that removing carbon allowances on its electricity producers will lead to a deepened dependence on the fossil fuel industry. Without sufficient decarbonization incentives, the state will prolong its dependence on carbon-intensive energies. The economic incentive for decarbonization that is associated with RGGI drives electricity providers to enact cleaner operations in a timeframe conducive to achieving long-term climate targets while concurrently fostering economic growth. In the past year, RGGI allowance auction prices have gone up 44.62% from a September 2021 clearing price of USD 9.30 to a September 2022 clearing price of USD 13.45. The rapidly growing price of carbon allowances, coupled with an ineffective rate of decarbonization that would amount from leaving RGGI, will make the prospect of rejoining the carbon market extremely difficult for Pennsylvania should the political tides turn in the future.

States’ withdrawal from RGGI will culminate in major economic losses for state budgets. Virginia, for example, has accrued $452,218,091.37 in its auction proceeds since March of 2021 according to the RGGI database. These proceeds have been used not only to incentivize more affordable, cleaner energy consumption, but to create more equitable and climate resilient communities. An in-depth overview of how RGGI states' proceeds are allocated can be found here. Fewer participating jurisdictions in RGGI will weaken the the carbon market's role in U.S. decarbonization efforts and leave states missing out on millions in proceeds to reduce vulnerability to climate-induced catastrophes.

If current predictions on the outcome of the gubernatorial elections in RGGI member states come into fruition, the risk of a Pennsylvania-Virginia withdrawal from RGGI are minimal. Carbon prices, consequently, will not see dramatic increases in the subsequent December auction. Virginia’s continued efforts to separate from RGGI, although unaffected by the results of the November 8th elections, face significant legal roadblock. As state participation in RGGI is passed through legislative action, state officials challenge the governor’s ability to use executive action alone without including legislation to solidify a state’s withdrawal. For more details on state's legal discrepencies, click here. Until these legal parameters are clarified, legislative hurdles will, therefore, pose significant delays, and mitigate, any short-term disruptions to the carbon market.

All data on polling projections and figures via The Associated Press.