The Northeast’s Cap-And-Trade System Just Had Its Most Successful Auction Ever

The city skyline of Boston, Massachusetts — one of RGGI’s member states. CREDIT: AP PHOTO / MICHAEL DWYER
The city skyline of Boston, Massachusetts — one of RGGI’s member states. CREDIT: AP PHOTO / MICHAEL DWYER

With the sturm und drang over new federal rules to cut carbon emissions from the nation’s power plants, it might go by unnoticed that nine U.S. states have had their own system to do that since 2008 — and this week, it had its most successful auction of carbon permits yet.

The Regional Greenhouse Gas Initiative (RGGI) is a cap-and-trade system that covers nine states in America’s northeastern corner. It works by placing a hard cap on the overall amount of carbon participants in the system can emit in a given year, then slices that cap up into permits — all worth a ton of carbon each — that emitters can then buy and sell among themselves. The idea is to create a market incentive to cut emissions: if a plant or businesses in the system reduces their emissions, they either don’t need to buy as many permits or can sell off excess ones for a profit.

So the price of the permits is a key indicator of whether the system is working; the higher the price, the greater the incentive. And this Wednesday, in an auction to distribute a portion of the permits for 2014, RGGI sold off 100 percent of the permits available for a clearing price of $5.02. That’s the highest price of any auction since the program began in 2008.

It was the 24th auction RGGI has held for permits since 2008, and the second it’s held this year. The previous auction also sold out all its permits for a clearing price of $4 — the highest price at the time — and on top of that it sold out all 5 million of the backup permits for 2014.

It’s a welcome development. Prior to 2014 the system was struggling, with prices bouncing off the mandated floor of $2 per ton. Thanks to forces like the recession and the natural gas boom, the cap was simply too high to force emitters to cut any more carbon than they would’ve done in RGGI’s absence. So the states got together and decided to lower the cap, dramatically dropping it from 165 million tons of carbon dioxide in 2013 to 91 million tons in 2014. From there, the plan is to ratchet it downward year by year to just over 78 million tons in 2020. The jump to $4 per ton and now to $5.02 suggest the move worked.

“Every auction reaffirms that RGGI’s market-based program is providing a clear market signal to reduce air pollution and drive the transition to cleaner, more efficient use of energy,” said Joe Martens, a Vice-Chair on RGGI’s Board of Directors.

The success of the latest auctions is also significant because RGGI can serve as the mechanism by which the northeastern states comply with the Environmental Protection Agency’s (EPA) new regulations calling for a cut in the greenhouse gas emissions from nation’s power plants. The hope is that the RGGI states will only need to adjust their cap slightly — or possibly even not at all — in order to meet EPA’s criteria.

“The release of EPA’s proposed carbon pollution rules has prompted many states to evaluate how they can cost-effectively reduce power-sector carbon pollution in as simple and transparent a manner as possible,” said Kelly Speakes-Backman, the Chair of RGGI’s Board of Directors. “With the RGGI states on pace to reduce our 2020 power-sector carbon emissions to levels about half that of 2005, the RGGI program has demonstrated a proven market-based model to do so.”

The system’s success is also raising the possibility that more states might join in order to meet their own obligations under EPA’s new rules. No state has officially approached RGGI yet, but representatives for the organization have spread the word at public meetings, and Speakes-Backman said “we’d certainly be open to it.”

Right now RGGI’s cap only operates through 2020, but an analysis by ENE EnergyVision suggested the downward trend of the cap could be continued past that year as part of an effort to cut the northeastern region’s greenhouse gas emissions 75 percent by 2050. So far RGGI only covers power plants, but ENE also advised that the system expand to include transportation.