Bells Ring for First U.S. Carbon Auction

How much will companies pay to pollute? $3.07 per ton of carbon dioxide, according to the results of the nation's first carbon-emissions auction, released this morning. The auction, which took place online 25 September, drew 59 bidders from northeastern and mid-Atlantic states and reaped more than $38,500,000. Organizers and experts alike pronounced the event a success and say it could eventually become a model for a future federal auction program.

The auction's premise is that putting a price tag on pollution--so-called carbon trading--will eventually reduce emissions industrywide. Companies must pay for the right to emit greenhouse gas emissions and are penalized for excess pollution. States can use the money to develop renewable energy, if they choose. The Regional Greenhouse Gas Initiative (RGGI), a consortium of 10 northeastern and mid-Atlantic states that organized the event, is counting on the strategy to reduce their power industries' carbon emissions by 10% by 2018, by selling fewer allowances each year. Companies can sell excess allowances to others, and they'll benefit from buying early if future auctions raise the price of polluting.

Carbon trading has had a shaky record elsewhere in the world. The European Union set up a carbon-emissions trade system in 2005 but gave out allowances rather than selling them. This sparked concerns that the system would not encourage reduced emissions overall. In contrast, RGGI set a minimum value of $1.86 per ton at the auction. All of the power companies in the RGGI states were required to purchase enough allowances to cover their emissions for 3 years, either through this auction or another trading agent; environmental groups and investors could also purchase allowances, the former hoping to reduce the number of credits power companies could use to pollute. Companies can bank any extra allowances they purchase.

Thursday's auction sold more than 12,500,000 allowances--all of the allowances up for bidding. Then RGGI settled on a "Goldilocks" price of $3.07 per ton, says Jim Rubens, an energy policy adviser at the Union of Concerned Scientists. "Too high would cause the pessimists and fear mongers to revel in their claim that this will destroy the economy; ... too low, you wouldn't get a change."

The money will go to the six states that put allowances up for bidding: Connecticut, Maine, Maryland, Massachusetts, Rhode Island, and Vermont. The states have pledged to plow the money into developing renewable energy. "We will use these funds to help municipalities find greener solutions to their energy challenges, and help consumers reduce their energy bills," said Massachusetts Governor Deval Patrick in a statement. "With a difficult winter ahead, we expect to put these resources to work immediately." Says RGGI executive director Jonathan Schrag, "We think this was a strong start for carbon trading in North America."

But some question whether charging companies $3.07 per ton to pollute will substantially lower carbon dioxide emissions. Robert Stavins, an environmental economist at Harvard University, notes that the auction leaves out major emitters such as the transportation industry. Still, he praised the efficiency of RGGI's online auction model and says it will provide good ammunition for proponents of auction trading in the United States. Other such carbon cap-and-trade systems are under consideration in several states, and presidential candidates John McCain and Barack Obama have voiced support for the concept.

RGGI states have agreed to auction their allowances in quarterly installments; the next auction is scheduled for December.

Posted in Environment, Policy