Ten States Formally Begin Carbon Trading

On Thursday, for the first time ever, the United States will see a price on carbon emerge from a mandatory emissions cap-and-trade program.

The auction this week is the first held by the Northeast Regional Greenhouse Gas Initiative (RGGI). RGGI caps carbon dioxide emissions from power plants in 10 Northeastern states to 188 million tons CO2 (171 million metric tons). Approximately 90% of the allowances are to be auctioned on a quarterly basis, and that percentage will likely increase over time. This large-scale auctioning of allowances is a first for U.S. cap-and-trade programs. WRI served in an advisory role to the states and stakeholders that designed the Regional Greenhouse Gas Initiative.

The price of an allowance in this first auction is expected to be under $5 a ton based on reported futures transactions. Notwithstanding the relatively low price, the RGGI auction marks an important milestone for U.S. climate action, as it is a significant step towards a national emissions program to fight global warming by trading carbon in a regulated market.

RGGI’s auctions are open to anyone who registers to participate in advance. The results of the bidding will be posted here.

This effort is being closely watched by two other regional initiatives. Along with RGGI, the Midwest Greenhouse Gas Reduction Accord (MGGRA) and the Western Climate Initiative (WCI) will eventually cover more than half the U.S. population with efforts to reduce carbon emissions. The four Canadian provinces participating in the Western Climate Initiative make up 80% of Canada’s population.

WCI released its program design recommendations this week. WRI continues to advise both the WCI and the MGGRA efforts.

RGGI offers a number of important lessons for the design of cap-and-trade programs beyond the use of auctioning. The program’s offsets component represents an alternative to the approach used under the international Clean Development Mechanism (CDM). RGGI establishes a “positive list” of eligible offset projects, including all requirements and methodologies. The approach is designed to remove much of the guess work that hampered the CDM process. Both the WCI and the MGGRA have largely adopted the RGGI offsets approach, and this bodes well for adoption on the national level in the U.S. and Canada.

A few problems have also come to light: most notably, the formula for setting the cap. The initial cap was set using a four-year old projection of emissions growth in the electricity sector for 2009. Actual emissions growth has been much lower, and now the initial cap is more than 5% above what the industry is currently emitting. Adjustments to the cap are being considered, but any such adjustments would require full regulatory approval. Hopefully this flaw can be avoided in future market designs.

WRI will continue to watch the progress of RGGI during its first year, and bring those lessons to other regions and to the discussions of cap-and-trade in Washington, D.C. and elsewhere in the world.