Genesis Wren Miller

September 29, 2008

As our financial markets are crumbling, a new market is emerging. The Regional Greenhouse Gas Initiative (RGGI) is on the brink of launching, and yet what should be an exciting time is tainted by the woes of the financial markets and the lack of thrust the initiative is projected to have in the near future. RGGI is a pact by ten Northeastern and Mid-Atlantic States to reduce carbon dioxide emissions by capping emissions from power utilities. The program calls for each state to set emissions limits and issue their own tradable permits for carbon pollution. The theory is that, with the cap in place, the market will put pressure on the industry to curb emissions. This is achieved because the cap creates a limit that will force those who need to emit to buy increasingly expensive permits; as the cap is lowered over the years, so are the available allowances, thereby encouraging the industries to make efforts to reduce emissions to avoid the expense.

The program is momentous. It is the first government mandated cap and trade program in the United States, and as a result carries the weight of serving as a model for a potential federal market since both presidential candidates support the idea of a federal cap-and-trade regime. While the cap will officially be set in place January 1, 2009, over-the-counter exchanges are already taking place among the utilities and the first of the planned quarterly auctions will be held on September 25th.

Sadly, but, not surprisingly, there are strong doubts about the strength of the program. By design, the viability of the emissions trading scheme is heavily dependent upon the size of the cap imposed. Succumbing to utility company pressures, the RGGI cap was set in 2004, safely above the anticipated emissions level at 188 million tons per year from 2009 to 2014. Starting in 2015, the cap will be reduced by 2.5% each year through 2018. But since 2004 emission from all 10 states have actually decreased rather than increased, and because the cap is so high the supply of allowances is greater than the demand. Likewise the prices for extra allowances will not be very high for the utility companies and analysts project that the overestimation will keep the prices too low to effect any change in industry behavior for at least the first six years.

This was not an unforeseeable problem. The European cap-and trade regime suffered a collapse of carbon prices in 2006 due to similar overestimation in setting a cap. What is troubling is that RGGI demonstrates that the scheme failed to learn from the European model, and as our federal government stands on the brink of putting in place a federal cap-and-trade regime, they may not learn either. Such ineffectiveness pushes back any real accomplishments in the effort to curb carbon emissions and alleviate global warming. The question is; are the cap-and trade programs going to be too little to late? Is there really time for us to copy others mistakes? State officials have been aware of the problem since last year, and have been discussing possible solutions, but for now it is not clear "if" and "when" RGGI will have any valuable effect.

Sources:

Flicity Barringer and Kate Galbraith, The Energy Challenge: States Aim to Cut Gases by Making Polluters Pay, N.Y. Times, Sept. 16, 2008, available at http://www.nytimes.com/2008/09/16/us/16carbon.html.

Craig Rubens, Traders Start Snapping up U.S. Carbon Futures on the Cheap, http://earth2tech.com/2008/08/18/us-cap-and-trade-launch-highlights-hurdles/ (last visited Sept. 18, 2008).

Commodity Online, Nymex to Launch RGGI for Carbon Trading, http://www.commodityonline.com/news/Nymex-to-launch-RGGI-for-carbon-trading-10731-3-12.html (last visited Sept. 18, 2008).

Reuters, U.S. exchanges launch cap and trade CO2 contracts, http://www.reuters.com/article/marketsNews/idUSLI72300220080818?sp=true (last visited Sept. 18, 2008).

Beth Daley, Emissions down, but lasting efforts may suffer, Boston Globe, Jan. 3, 2008, available at http://www.boston.com/business/articles/2008/01/03/emissions_down_but_lasting_efforts_may_suffer/.

Margo Thorning, American Council for Capital Formation, A Reality Check on Initiatives to Reduce Greenhouse Gas Emissions in California, Oregon, the Northeast and in Europe (2007) available at http://www.accf.org/pdf/Reality-check-ghg.pdf.