Environmental Law

Nation's First Mandatory Carbon Emissions Auction Happens

By Dennis Pfaff and Kevin Livingston, Editors

The country's first auction of mandatory permits to allow for the emission of carbon dioxide -- the initial step in a hoped-for market-based solution to global warming -- took place Thursday.

According to a  statement from the 10-state Regional Greenhouse Gas Initiative, the auction began with a bell-ringing ceremony at the New York Mercantile Exchange in Manhattan, located, ironically, in a state that is not yet fully participating in the regional market. The initiative is a cooperative effort by Northeast and Midwest states to curb the amount of the principle greenhouse gas being spewed into the atmosphere. The so-called cap and trade program works principally by setting and then tightening limits on the emissions and putting a dollar value on them. The RGGI plan covers only power plant emissions. 

Final design of proceedings took shape earlier this year, as Climate Law Update reported at the time. The auction also opened as other states and Canadian provinces, including those in the West, are gearing up their own market-oriented systems to control emissions of heat-trapping gases, even as action on a federal system stalled in Congress earlier this year.

Thursday's auction launched amid some uncertainty over the prices the credits would bring. Michael J. Connolly (pictured), a New Jersey energy attorney for Thelen LLP described the signficance of the event this way: 

“Today's auction can be best appreciated as the first really tangible step by the states to implement both the laws they have passed and the regulations they have adopted in order to fill the vacuum they believe has been created  by the federal government’s unwillingness to move quickly to address climate change. There is great interest in assessing whether the market for the carbon emissions allowances being made available under the RGGI cap and trade program is very robust." 

The first auction involved more than 12.5 million credits or "allowances," each good for a ton of emissions. The initial allowances were issued by Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont. The other states in the initiative include New York, where the ceremonial opening of the auction took place, as well as New Jersey, New Hampshire and Delaware. Another auction is scheduled for December and by the time of a third auction, scheduled for 2009, all of the states are expected to participate, as they finalize their own regulatory structures. Credits bought in the auction can be used for emissions in any of the 10 states, however. 

Thursday's auction took place amid some speculation that prices would not fetch a high bid, raising questions about whether the costs of the permits would be enough to prompt power companies to look for alternatives to business-as-usual operations. Organizers of the auction had set a floor price of $1.86 a ton and articles in Bloomberg, the Washington Post and the Wall Street Journal's Environmental Capital blog cited experts and futures markets pegging the initial prices at between $3 and $5 a ton. 

Officials of the regional initiative have said they would make results of the auction public on Monday.

There was also at least some evidence, according to Carbon Finance, that more allowances were being available than were actually needed by power generators, potentially depressing prices. Power companies must hold enough allowances to match their carbon dioxide emissions for the first compliance period, in 2012.

Thelen's Connolly said that various factors would be at play in the initial auction, including the states of the economy and Wall Street. He added:

"Of course, a single auction will not tell the whole story by any means. But it can be seen as a precedent for the kind of system that might one day soon be in place all over the country, one that relies on the market, rather than entirely on government regulation as a mechanism for dealing with the carbon issue. It really bears watching by anyone who is involved in any way in the energy industry, including lawyers and consultants who work with both fossil and renewable power suppliers as well as other ‘green' industries.” 

Jonathan Schrag, the executive director of the Regional Greenhouse Gas Initiative, Inc. the nonprofit that is administering the program, put the auction opening in historical perspective:

 “Today marks the culmination of more than five years of research, design and
development of the nation’s first carbon market. It is fitting that our event took place on the shores of the river that Henry Hudson explored nearly 400 years ago. As with Hudson’s exploration then, these pioneering states are leading the way forward on the new, clean-energy economy that others will surely follow.”

 --Dennis Pfaff of Thelen LLP

Full post as published by Climate Law Update on September 25, 2008 (boomark / email).