"Have the RGGI states repeated the mistakes of the European carbon trading system?"
[Another guest post by John Atcheson who has than 30 years in energy and the environment with government, private industry, and the nation’s leading think tanks (see “Utility decoupling on steroids.”]
On September 25th, the Regional Greenhouse Gas Initiative will hold its first auction. Six of the ten RGGI (pronounced Reggie) states will inaugurate the nation’s first mandatory GHG cap and trade program, designed to harness market forces in cutting GHG emissions. Some 12,565,387 CO2 allowances will be issued by Connecticut, Maine, Maryland, Massachusetts, Rhode Island, and Vermont in this round. Allowances purchased in RGGI auctions can be used for compliance in any RGGI state. A second auction will be held in December.
An important feature of RGGI is that the vast majority of allowances will be auctioned, rather than allocated for free, as was done with the Acid Rain trading scheme, and states will use the revenue generated from the auctions to invest in programs designed to stimulate energy efficiency and renewable energy.
Initially RGGI will cap emissions from 233 electricity plants at no more than 188 million short tons a year between January 1, 2009 and 2014. Thereafter, it will lower the cap by 2.5 percent a year, each year until 2018, for a total of 10 percent.
As with the European Union’s Emission Trading Scheme, RGGI’s initial allocation of credits is likely to exceed actual emissions, which will depress carbon prices and get trading off to a relatively slow start.
The target cap of 188 million tons was based on estimates made in 2004 and 2005, but recent data indicates that total emissions in RGGI states in 2009 — the first compliance year — will be lower. The New York Times reports that emissions fell to 164.5 million tons in 2006 (the last year with complete data), and estimates suggest that when data is finalized, 2007 emissions will come in at about 172.4 million tons.
Participants in the RGGI allocation process admit that politics played a role in the overestimate. Lobbying has been furious, as it was — and still is — in the EU’s ETS. In fact, The Guardian reports that even in round 2 of the ETS, over-allocation of credits is a serious problem.
With both Presidential candidates talking about a cap and trade program, it seems likely that there will be legislation passed within the next year or two containing a provision for one. By taking a look at what RGGI and the European Union have done right, and what they’ve done wrong, we can get some insight into how to structure such a Bill. We can also see how serious each candidate’s climate proposal is.
Let’s look at some of the things RGGI did well.
First, RGGI chose to auction nearly all allowances, meaning every ton of carbon will be priced.
Second, the RGGI states placed rigorous requirements for offsets, such as tree planting.
Third, by creating a consensus model rule the RGGI rule enabled credits to be traded across all 10 states, which increases the fungibility of the credits. Larger markets create more opportunities for trades and hence function more efficiently in terms of finding a price.
RGGI also built in flexibility — both with regard to target allocation caps and the potential sectors covered — so it can grow and adapt as more information becomes available and as experience is gained.
By far, the most important lesson is that the caps and allocations matter. Stringent caps will cut more carbon by inducing scarcity and thus, raising the price. The more an allowance is worth the more intense will be the pressure to game the system. If we learned one thing from the current meltdown in the financial sector it is that transparency and an active government role in regulating the terms of transactions are critical to any trading system. And carbon credits, it must be remembered, are a financial instrument, subject to the same abuses and failings as CDO’s credit default swaps and the other assorted sordid instruments of greed that are bringing us to our knees. Carbon can be a safe and low risk area for investments, done right. In fact, some are projecting that carbon trading will exceed a value of $1 trillion a year by 2020.
What does the EU ETS and RGGI experience tell us so far about the climate strategies of McCain and Obama?
Well, if you like the old uber-free market stuff that got us where we are today, offsets aplenty, with allocations handed out for free, and a vice president who thinks the jury is out on climate change, McCain’s your man, but you won’t cut much carbon. If you want a serious plan that respects climate science, that auctions allowances and uses the revenue from those auctions to help Americans transition to clean energy, and that puts strict limits on offsets, and that will actually cut carbon, then Obama is your man.