Buckle Up: Mandatory U.S. Carbon Trading Kicks Off

Without much fanfare, the Chicago Climate Exchange (CCX) began trading futures in carbon credits issued by a new regional cap-and-trade system, the Regional Greenhouse Gas Initiative ("RGGI", pronounced “ReGGIe”). The New York Mercantile Exchange (NYMEX) will also begin trading on August 25.

The RGGI is the first mandatory U.S. cap-and-trade program and is a clear sign of things to come in the U.S. carbon trading market, especially as both presidential candidates, Barack Obama and John McCain, have expressed support for a federal cap-and-trade scheme.

Much negative has been said about the fact that the RGGI will be ineffective in reducing ghg emissions (for a variety of reasons, including the fact that the regional program only applies to fossil fuel fired electricity power providers, and that the emissions reductions required from these providers are too modest).

These (and other) arguments are clearly important, but we shouldn't discard RGGI by reason of its failings.

This is only the beginning of the U.S. emissions trading market, and RGGI offers us unique opportunities for learning, debate and lobbying, knowing that in the future further (more restrictive) cap-and-trade programs will become mandated across the U.S.

The RGGI itself acknowledges this is just the beginning:

Its founding documents expressly state that this regional initiative is meant to “facilitate” not “supplant” future trading programs. In addition, the RGGI’s policy documents recognize that “initially modest emissions reductions is intended to provide market signals and regulatory certainty so that electricity generators begin planning for, and investing in, lower carbon alternatives throughout the region, but without creating dramatic wholesale electricity price impacts and attendant retail electricity rate impacts”. (Also, it is interesting to note that the model for RGGI is actually based on the EPA’s own NOX and SOX Trading Programs).

So it’s probably worth learning about the program and watching the story as it unfolds. Here is a quick “simple” intro to RGGI (with more found inside Viridus).

- The RGGI is a consortium of 10 Northeastern and Mid-Atlantic States that have mandated a trading scheme to curb greenhouse-gas emissions. (For those interested, the states are Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire, New Jersey, New York, Rhode Island, Vermont. n addition, the District of Columbia, Pennsylvania, Ontario, Quebec, the Eastern Canadian Provinces, and New Brunswick are observers to the process).

- The RGGI only applies to fossil fuel-fired electric generating units serving a generator of 25 MW or larger. This means that the RGGI doesn’t apply to industrial emissions or other types of power providers.

- The RGGI requires signatory states to stabilize power sector CO2 emissions over the first six years of program implementation (2009 - 2014), at a level roughly equal to current emissions, before initiating an emissions decline of 2.5% per year for the four years 2015 through 2018 (i.e., this approach will result in a 2018 annual emissions budget that is 10% smaller than the initial 2009 annual emissions).

- The 2009 to 2014 annual budget allowance is 188,076,976 tons of CO2 per year, going down to 169,269,278 tons in 2018.

- Each CO2 allowance permits the emission of one ton of CO2.

- The first three year compliance period begins January 1, 2009.

- The RGGI apportions CO2 allowances among signatory states and each RGGI state will be offering CO2 allowances for sale in a CO2 Allowance Auction. The minimum bid quantity that can be submitted is 1,000 CO2 allowances (i.e. 1,000 tons of CO2).

- Two pre-compliance CO2 allowance auctions will be held on September 25, 2008 and December 17, 2008, and CO2 allowance auctions will continue to be held quarterly going forward.

- In the September 25^th auction, 12,565 lots of 1,000 CO2 allowances (for the year 2009) will be made available for sale.

Oh yes, there is a minimum financial security of $1,860 if you decide to bid. (The reserve price of $1.86 per CO2 allowance multiplied by 1,000 CO2 allowances).

So buckle up and start bidding.