Insights into Competition in the Electricity Market: Evidence from the RGGI

Are environmental regulations the primary driver of rising electricity prices? Evidence from the Regional Greenhouse Gas Initiative (RGGI) suggests a more nuanced reality. This paper examines the impact of RGGI on wholesale and retail electricity prices using a difference-in-differences framework. We analyze three key policy events—the 2005 announcement, the 2009 implementation, and the 2014 adjustment of the emissions cap—drawing on detailed panel data from power plants in both RGGI and non-RGGI states. Our results indicate that wholesale electricity prices in RGGI states did not increase following the 2005 announcement relative to non-RGGI states. By contrast, retail electricity prices rose by about 11% in the short run, coinciding with electricity market restructuring, though this retail price gap declined over time. Over the subsequent decade, RGGI states achieved substantial reductions in CO2 emissions alongside a transition to cleaner generation technologies. Importantly, the industry’s response to environmental regulation did not immediately affect electricity prices. However, as the emissions cap tightened, price effects became more pronounced: following the 2014 adjustment that reduced the cap to roughly 50% of its 2008 level, wholesale prices increased by 0.68 to 5.57 cents/kWh. These findings suggest that while the short-run effects of environmental regulation on electricity prices are limited, more stringent caps over time can lead to measurable price impacts.