Beneficial Leakage: The Effect of the Regional Greenhouse Gas Initiative on Aggregate Emissions

Subglobal and subnational policies aimed at reducing greenhouse gases are often thought to be less effective than more geographically comprehensive policies as production, and thus emissions, of trade exposed industries may move from the regulated to the unregulated regions. This so-called leakage may negate all emission reductions from the regulated regions and, even worse, may lead to an overall increase in emissions if the unregulated regions have equally or more emissions intensive production. However, if the unregulated regions have less emissions intensive production, the regional regulation may prompt more switching to the relatively cleaner producers than would otherwise occur, creating a type of beneficial leakage. We use detailed electricity generation and transmission data to show that this might be the case for the Regional Greenhouse Gas Initiative (RGGI), a CO$_2$ cap-and-trade program for the electricity sector in select Northeastern U.S. states. We find evidence that electricity generation did leak out of the RGGI region to surrounding state, but electricity generation in the non-capped jurisdictions is less emissions intensive than in the RGGI region, resulting in a net decrease in aggregate emissions. Back-of-the-envelope calculations suggest that one-quarter of apparent emissions reductions actually leaked but that this served to reduce total combined emissions by an additional one percent.