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This article is from the In-Depth Report Copenhagen and Climate Change

Carbon Dioxide Auction Launches U.S. Effort to Combat Climate Change

Six northeastern states auction off the right to emit global warming pollution
coal-fired-power-plant



©istockphoto.com

Power plant owners and speculators yesterday bid for the right to emit carbon dioxide (CO2) as part of a new multistate government program designed to reduce global warming pollution. Interested parties during an online auction offered at least $1.86 per ton of CO2 emitted; there were 12 million allowances (one per ton) to emit climate change–inducing CO2 from power plants in eastern seaboard states from Maine to Maryland available in a market known as the Regional Greenhouse Gas Initiative (RGGI, pronounced "Reggie.")

"When your job can provide some social benefit it's exciting and it makes me proud. My kids are saying 'Dad, you've done something about global warming,'" says Phil Adams, president of Worcester, Mass.–based World Energy, Inc., the company that ran the auction. "RGGI is taking a historic step."

The goal is to cut current pollution levels (estimated by the states at 188 million metric tons emitted annually) from the 200-plus power plants in the region by 10 percent by 2019. RGGI builds on the market known as the European Union Emissions Trading Scheme, which covers CO2 emissions from the E.U., as well as from the ongoing sulfur dioxide emissions market in the U.S.

That sulfur dioxide market, run by the U.S. Environmental Protection Agency (EPA), has reduced sulfur dioxide levels by 40 percent since 1992 by allowing companies to buy and sell the right to emit the acid-rain forming pollution from coal-burning plants, which has increased the acidity of lake waters throughout the region. Under that program, power plant owners who installed equipment to scrub the sulfur dioxide out of the emissions from their smokestacks could then sell for a profit any leftover allowances to other polluters unable or unwilling to make the pricey upgrades. This allows polluters to meet an overall target for emission reductions at the lowest price.

The power plant owners are also helped in this task by the fact that, prior to the RGGI auction, governments had simply given away allowances to pollute to the polluters based on how much they had emitted in previous years. But instead of allowing polluters to benefit from this, in essence, extra cash, the overseers of RGGI decided to force polluters to pay for at least some of the right to pollute and then use those funds to help pay for energy efficiency and renewable energy programs in the various states, further reducing global warming pollution and potentially offsetting increased energy costs.

One study of RGGI found that, on average, New York State residents would see power prices increase by 78 cents per month (because power companies are allowed to pass along to consumers increased costs), according to the New York State Energy Research and Development Authority. The actual increase will depend on the prices set by this and subsequent quarterly auctions—a minimum of $1.86 and a maximum of $10 per ton, according to RGGI rules.

But another analysis by the RGGI states found that implementing such a cap-and-trade scheme with an auction would actually lower residential electricity bills by as much as $100 per year. "Consumers will not have to make a choice between environmental preservation and their pocketbooks," says senior attorney Dale Bryk of the New York City–based environmental group Natural Resources Defense Council, which supports such market-based mechanisms for pollution control. "This system is designed to protect both."

RGGI represents the first mandatory cap-and-trade scheme for global warming pollution in the U.S., but it only covers the 10 eastern seaboard states that signed on to do this: Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. And although it may prepare them for any federal program—both presidential candidates support a national cap-and-trade program for greenhouse gas emissions—it may also end up driving electricity production outside the region higher. After all, the 10 RGGI states are connected to a national grid for power that can allow, for example, cheaper, dirtier power from coal-fired power plants in Ohio to substitute for reduced electricity production at a coal plant in New York State.

The RGGI program also might not actually curb emissions, because power plants are already emitting less than the proposed cap—due to take effect on January 1, 2009, and based on projections from 2005—thanks to slower than anticipated growth in electricity generation. In 2006, the 233 power plants emitted roughly 164 million metric tons of carbon dioxide—or 24 million metric tons les than the proposed cap. If the supply of allowances is more than utilities need, then prices of the allowances to pollute will remain low and provide no incentive for carbon-cutting measures.

Also confounding the effort is the collapse of major financial institutions, such as investment bank Lehman Brothers, which had a team of brokers specifically dedicated to trading in such carbon markets, which will have an impact as it may limit the number of financial speculators in RGGI.

Some, including New York City mayor Michael Bloomberg and the U.S. Congressional Budget Office, have suggested that a national carbon tax—an extra cost per amount of fossil fuel burned—would be simpler and more effective than any cap-and-trade system.

But the Northeast is not alone in addressing this issue with a market. On Tuesday, the governments of California and six other western states as well as four Canadian provinces proposed a new plan to cut greenhouse gas emissions by 15 percent below 2005 levels by 2020 using a similar cap-and-trade market—and would expand such regulations to encompass not just CO2 from power plants but also cars and trucks as well as other greenhouse gases, such as potent methane.

An open market also offers the opportunity for individuals and environmental groups to directly participate in reducing CO2 emissions from power plants. For example, the Adirondack Council, an environmental organization devoted to protecting the large park preserve in northern New York State, registered to participate in the auction in order to purchase and permanently take out of circulation some tons of greenhouse gases.

"In 1984 New York [State] created the nation's first cap-and-trade program for air pollution," says Brian Houseal, the council's executive director. "The very next year, New England states began to impose similar rules. Five years later, Congress had amended the Clean Air Act to create a national program based on New York's model. That is exactly what we hope will happen with RGGI and climate change. We just hope it happens faster."

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