Carbon-Dioxide Allowance Trading Taking Shape in Northeastern U.S.

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--One of the more controversial portions of the recently passed Waxman-Markey omnibus energy bill is the creation of a "cap & trade" system to reduce greenhouse-gas emissions in the U.S. The Regional Greenhouse Gas Initiative (RGGI), created in September 2007, offers a glimpse of how one aspect of a national "cap & trade" program could work.

"RGGI is the only mandatory cap & trade system in the U.S.," RGGI Incorporated Communication Manager Emilee Pierce tells Industrial Info. "It was deliberately set up as a modest program. The states didn't want to send shock waves through the system and wanted to get a cap & trade system up and running in the U.S. The states sought to create a simple process to auction carbon-dioxide emissions allowances to show how an auction could work."

Although its fate is uncertain in the U.S. Senate, the version of the American Clean Energy and Security Act of 2009 (Waxman-Markey) that was passed June 26 by the U.S. House of Representatives called for auctioning 15% of carbon-dioxide emission allowances to industries that emit carbon dioxide. The vast majority of carbon-dioxide emission allowances, 85%, were granted at no cost to emitting industries in order to help them transition to a more carbon-constrained future.

An emission allowance is the right to emit one ton of carbon dioxide per year. The cap & trade provision of Waxman-Markey is modeled on the very successful, market-based program to cut sulfur-dioxide emissions from power plants contained in the Clean Air Act amendments of 1990.

RGGI is a 10-state regional compact whose greenhouse gas-reduction mandate only applies to fossil-fueled power plants larger than 25 megawatts that are located in the Northeastern or Mid-Atlantic states. RGGI's mandate covers an estimated 98% of all power plants located in that region. Waxman-Markey, by contrast, applies to all industries across the U.S. whose processes emit carbon dioxide, including power plants, oil refineries, chemical manufacturers, and farms.

Working together, the 10 RGGI states created an online auction process to reduce greenhouse-gas emissions from small power plants operating in those states. Carbon-dioxide emissions from power plants in the region are capped at about 188 million tons per year through 2014, Pierce says. After that, the cap will be lowered by 2.5% per year from 2015-18, for a total reduction of 10%.

Each fossil-fueled power plant larger than 25 MW that is covered by RGGI must possess carbon dioxide emissions allowances equal to its total CO2 emission levels over a three-year period. A power plant in New York emitting 100,000 tons of carbon dioxide annually must possess a total of 300,000 allowances to cover three years (2009-11) of its operations. Emissions and allowances will be trued-up every third year, Pierce says.

Prices for 2009 allowances fell by 8% at RGGI's most recent online auction, to $3.23 each. That auction took place on June 17. The prior auction, held March 2009, brought a price of $3.51 per 2009 allowance. Allowances for out years, in this case 2012, fell to $2.06 in the June auction, compared to $3.05 in the March auction. Auctions held in 2008 resulted in allowance prices in the $3 range as well. RGGI will hold its next auction on September 9.

In the debate over Waxman-Markey, the non-partisan Congressional Budget Office (CBO) estimated that carbon-dioxide emissions allowances could cost between $13 and $16 each. Some electric utilities, prodded by state regulators, have used various placeholder estimates of up to $25 per ton of carbon-dioxide emissions in their long-term energy plans. These values were used mainly to show how differing carbon-dioxide costs could affect the economics of a utility's resource decisions regarding the use of coal, gas, nuclear or renewable energy.

To date, the four RGGI auctions have sold more than 110 million allowances, raising a total of $366 million for the RGGI states. Funds raised by the auction are invested in renewable energy, energy-efficiency and programs that benefit consumers in the RGGI states. Each state is given a proportional share of the quarterly auction proceeds to invest in clean-energy projects.

The process has drawn cheers from regulators, environmentalists and other observers. RGGI "demonstrates that auctions can work," Robert Stavins, an environmental economist at Harvard University, tells The Christian Science Monitor. "To whatever degree the proponents of RGGI created it because they wanted to spur federal action, my view is that they ought to declare victory."

Dan Mees, a spokesperson for World Energy Solutions, tells Forbes magazine, "The good thing for us is that we have auction-based experience from RGGI, and we have offset experience as well from other projects. I think we're well-positioned for U.S. cap-and-trade opportunity." World Energy, based in Worchester, Massachusetts, developed the computer systems that automate the RGGI auctions.

Venture capitalists are enthusiastic about the profit potential for allowance-trading and other aspects of the carbon market. Capital is still available for low-carbon projects," Martin Whittaker of Mission Point Capital Partners tells Reuters. "There's still a lot of optimism and a lot of growth in and around the carbon market at all levels: the trading level, at the project level and at the company level."

"I think everyone's quite bullish on it," adds Arrun Kapoor of SJF Funds, a venture capital fund in which half of the investments are in "green" projects. He also tells Reuters that rising concerns about climate change, energy security and the volatile price of oil are pushing demand for innovative approaches to lower carbon emissions and enhance U.S. energy independence.

As Waxman-Markey was being composed, congressional staffers drafting the 1,200-page bill contacted RGGI to better understand how it operated, according to press reports.

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