The Trouble with Cap and Trade

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On Tuesday, the State of California announced its plans for its own cap-and-trade program as part of Assembly Bill 32, which aims to cut Greenhouse Gas Emissions 15 percent by 2020.

The California Environmental Protection Agency's Air Resources Board released its scoping plan, which was praised by governor Schwarzenegger, environmentalists, and utilities.

But is all the praise deserved?

The California plan follows the same outline of other such plans: a cap limits the amount of GHG emitted by power plants, refineries, cement factories and the like, and requires a permit for every ton of CO2 released into the atmosphere.

The trouble with a California program -- or a Western States Program or a Regional Greenhouse Gas Initiative like we have in the Northeast -- is that it's a patchwork approach.

If you're a company with a national footprint, you have to react to all sorts of different regulations, that's why some companies want a national program.

Yet even a national cap-and-trade program is a flawed scheme for dealing with CO2 emissions. Despite the prevailing sentiment that cap-and-trade is market-based, most of the proposed programs will hand out a significant portion of the permits for free, which could have the unintended consequence of keeping the price of permits lower than desirable.

The EPA estimates that the average price per ton will be around $15 for possibly the next two decades. That's until 2030 folks.

Some analysts say that utilities need a carbon price of $50/ton before they'll commit the billions needed for new technologies, such as carbon capture and storage and alternative energy resources. When will we get to a $50 price for carbon? When it's too late.

At that rate, the price of carbon won't be enough to create incentives for investments in low-carbon energy infrastructure, energy efficiency, and transportation.

The potential for gaming the system is equally troubling. There is little agreement about monitoring and accounting of the permits and projects that qualify, which could provide an avenue for unscrupulous speculators to take advantage of the situation.

A cap-and-trade program potentially creates windfall profits for utilities, but it is unclear whether it will generate significant reductions in emissions or investments in clean technology.

And some analysts think it is doubtful that cap-and-trade will even put a dent in fossil fuel's price advantage. Others fear that much of the transactional value of the assets created by any cap-and-trade program will be in the hands of some of the same folks who gave us the subprime mortgage and credit default debacles.

Finally, if we are going to have a cap, and that seems to be the way it's going, I'd rather see a cap-and-invest structure where you auction of the permits to the highest bidder and use profits to create an R & D investment fund rather than giving the permits away for free.

It seems to me these flaws need to be addressed in any scheme that gets adopted before we head down the road of future regrets.

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Mr. September? RGGI Holds First CO2 Auction, Clearing Price of $3.07

Reggie Jackson may have been Mr. October, but there's a new RGGI in town.

The states participating in the Regional Greenhouse Gas Initiative (RGGI) recently announced that the auctioning of carbon dioxide (CO2) emissions allowances in North America is off to a strong start.

All of the 12.5M allowances offered for sale on September 25, 2008 were sold at a clearing price of USD$3.07 per allowance, which is about 65 percent more than the minimum set price of $1.86. $2 per ton had been a reasonable estimate of what a RGGI CO2 allowance is really "worth" in 2009, according to energy consultants at Webb, Scott & Quinn.

RGGI, Inc. reports that 59 participants from the energy, financial, and environmental sectors took part in the first-in-the-nation auction, starting the first of many CO2 allowance auctions.

Demand for the allowances appeared to have been strong with a total of 51,761,000 allowances demanded or four times the available supply for this first auction.

The USD$38.5M in proceeds produced from the auction will be distributed to Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont, the six RGGI states that offered allowances for sale during the first auction. The states are expected to invest those funds in energy efficiency and renewable energy technologies, along with programs to benefit utility rate payers.

Pete Grannis, Commissioner of the New York State Department of Environmental Conservation and Chair of the Regional Greenhouse Gas Initiative, Inc. "RGGI’s example shows that an open and competitive carbon market can be implemented."

Any CO2 allowances purchased at the first auction can be used by a regulated facility for compliance in any of the RGGI states, even if that state did not offer allowances in the first auction. Four out of the ten did not participate in this first auction.

The RGGI auction was administered by World Energy Solutions, Inc (TSX:XWE), which operates online exchanges for energy and green commodities, and overseen by Potomac Economics, RGGI's independent market monitor.

The next allowance auction is set for December 17, 2008. These early auctions, combined with the others being held in the first compliance period, according to RGGI, will ensure an ample opportunity for bidders to obtain the allowances they will need for compliance across the entire 10-state region. RGGI intends to hold quarterly auctions during the first RGGI three-year compliance period, which runs from January 1, 2009 to December 31, 2011.

James Letzelter of Webb, Scott says that "RGGI is indeed a real cost. At $3 per ton, a 10,000 Btu/kWh coal plant faces about $3 per MWh. A 7,000 Btu/kWh gas-fired combined cycle faces a cost of about $1.50 per MWh."

While that's not onerous, Letzelter concludes, "these prices will increase power market prices slightly (figure about $1.50 per MWh). Count that as "RGGI Bonus" revenue picked up by all market players, especially nuclear, hydro and renewable players with no RGGI costs."

The Regional Greenhouse Gas Initiative (RGGI) is the first mandatory, market-based effort in the United States to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states will cap and then reduce CO2 emissions from the power sector 10 percent by 2018.

Other regional greenhouse gas coalitions, such as the Western Climate Initiative and the Midwestern Greenhouse Gas Accord, are in the early stages of development.

Sources: RGGI, World Energy Solutions, Clean Edge News, Webb, Scott & Quinn

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