Northeast States' Carbon Allowances Sell at Price Well Above "Floor"

November 9, 2008
by CHRISTOPHER BALL
Client Alert Newsletter November 2008

On September 25, 2008, the Regional Greenhouse Gas Initiative ("RGGI") conducted its first auction of carbon dioxide ("CO2") emission allowances. RGGI is the first mandatory cap-and-trade program in the United States for CO2, the most significant greenhouse gas emitted by human activities. Through RGGI, ten northeastern and mid-Atlantic states (Connecticut, Delaware, Massachusetts, Maryland, Maine, New Hampshire, New Jersey, New York, Rhode Island and Vermont) implemented a cap-and-trade program designed to cap at their 2009 levels the CO2 emissions of the states' fossil-fuel-fired power plants rated as greater than 25 megawatts in size. The program then lowers the cap by 2.5 percent annually for four years for an eventual reduction of 10 percent below 2009 levels by 2019.

The CO2 auction marked an important milestone in the program's already lengthy regulatory history. The participating states' efforts began in 2003, and a memorandum of understanding among the states was signed in 2005 formally establishing the program. Because state departments of environmental protection generally have authority to regulate "air pollutants" or "air contaminants," to establish the requisite regulatory authority for RGGI several states had to promulgate rulemakings designating CO2 as a pollutant or contaminant. Passage of authorizing legislation was also required to establish legislative approval of the states' involvement in the RGGI program. Finally, the states jointly drafted a model rule detailing the programmatic elements of RGGI, and have subsequently worked to adopt their own versions of that model regulation.

The regulatory and legislative measures set the stage for the September auction by capping the participating states' annual CO2 emissions at 188 million tons for the years 2009 to 2014, and allocating allowances among the states. In the auction, six RGGI states (Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont) offered more than 12 million CO2 allowances for sale with each allowance permitting the holder to emit one ton of CO2. The remaining states did not have the final regulatory measures in place to enable participation in the auction. The allowances can be used by their holder to demonstrate compliance with any individual participating state's RGGI requirements.

All 12 million of the offered allowances, in lot sizes of 1,000 allowances, were sold at a clearing price of $3.07 per allowance, significantly exceeding the reserve price of $1.86 per allowance. Fifty-nine participants from the energy, financial and environmental sectors took part in the auction, making bids for more than 51 million allowances, four times the available pool of allowances. While the details of who purchased what allowances have not been released, the majority of allowances were reportedly purchased by electricity generators. The $38.5 million raised by the initial auction will be distributed to the six participating states, which have indicated that they will invest the funds in energy efficiency, renewable energy technologies and programs to benefit energy consumers.

The next auction is scheduled for December 17 and will include all ten participating RGGI states, offering more than 31 million CO2 allowances. Following the December auction, auctions are planned quarterly for the three-year period from January 1, 2009 to December 31, 2011.