RGGI Holds First Mandatory Carbon Auction in the U.S.

     The Regional Greenhouse Gas Initiative (RGGI), the first mandatory, market-based carbon dioxide emissions (COS) reduction program in the United States, held its first auction of CO2 emissions permits on September 25, 2008.  RGGI sold nearly 12.6 million CO2 permits to 59 participants at a clearing price of $3.07 each. Participants included members of the energy, financial, and environmental sectors.  Each permit will allow its holder to emit up to a ton of carbon dioxide.  A total quantity of 51,761,000 allowances was demanded at the auction, over four times the quantity available for sale.

            New York, New Jersey, New Hampshire and Delaware, which represent 55 percent of the allowances to be traded under RGGI, did not offer permits at this inaugural auction because of regulatory delays.  However, all ten states will offer allowances in the next auction on December 17, 2008.  Quarterly auctions will continue to take place through 2011.

           RGGI regulates 233 electricity generating plants throughout the Northeast and Mid-Atlantic regions. Regulated power plants will be able to use a CO2 allowance issued by any of the participating states to demonstrate compliance with the state program governing their facility.  Two three-year compliance periods, meant to stabilize emissions, will begin on January 1, 2009 and continue through 2014. The cap, now set at 188 million tons of CO2 per year, will be reduced 2.5 percent annually between 2015 and 2018 for a 10 percent total reduction. However, because of mild weather, a slowing economy, and utilities companies in the northeast shifting from higher-carbon fuels to lower-carbon ones like natural gas, it is estimated that actual CO2 emissions may not approach the level of the cap. In 2006, the most recent year for which there is complete data, CO2 emissions in the region totaled only 164.5 million tons.

RGGI is composed of individual CO2 Budget Trading Programs in each of the ten participating states. The states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont are signatory states to the RGGI agreement.  Pennsylvania, a major coal producer, participates as an observer.  These ten programs are implemented through state regulations, based on a RGGI Model Rule, and are linked through CO2 allowance reciprocity. Taken together, the ten individual state programs function as a single regional compliance market for carbon emissions.

Many of the energy companies which participated in the auction have expressed their concern with fact that the program is regional, not national.  Lack of Federal regulation in this area has already led to the formation of multiple interstate compacts.  On September 23, 2008 the Western Climate Initiative (WCI), consisting of the U.S. states of Arizona, California, Montana, New Mexico, Oregon, Utah, and Washington, and the Canadian provinces of British Columbia, Manitoba, Ontario, and Quebec, unveiled a draft of its cap-and-trade program set to begin in 2012.  Observers states to WCI include Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, the Canadian province of Saskatchewan, and the Mexican states of Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora and Tamaulipas.

A similar cap-and-trade program is in the early stages of development amongst the members of the Midwestern Governors Association (MGA).  The Midwestern Greenhouse Gas Accord (MGGA) is a regional agreement similar to RGGI.  Signatories to MGGA are the U.S. states of Minnesota, Wisconsin, Illinois, Iowa, Michigan, Kansas, and the Canadian Province of Manitoba.  Observer states include Indiana, Ohio, and South Dakota.  MGGA was the fourth tier of the MGA Energy Security and Climate Stewardship Summit Platform, signed on November 15, 2007.

     This article was co-authored by Kevin McGuire and Mary Beth Naumann, Jackson Kelly PLLC. For more information on the authors see (McGuire) here and (Naumann) here.