The Brayton Point Power Station in Somerset, Mass., is shown in this Oct. 23, 1996 file photo.
Precedent-setting carbon auction Thursday
East Coast power plants will bid on CO2 permits Sept. 25.
By Mark Clayton | Staff writer of The Christian Science Monitor/ September 23, 2008 edition
Reporter Mark Clayton reports on a regional auction of ‘carbon credits’ – permits to release greenhouse gases – that may set a national precedent.
Reporter Mark Clayton
For almost as long as people have worried about global warming, economists have called for taxing carbon emissions. As long as sending CO2 skyward was cost-free, they argued, the practice would continue.
Starting Sept. 25, for the first time in US history, a price tag will begin to be placed on millions of tons of carbon dioxide spewing from every major power plant from Maine to Maryland.
Just what that price will be won’t be known until after Thursday’s computerized auction of about 12.5 million tons of “carbon allowances,” essentially permission slips to pollute.
Utility companies will bid on the allowances. They may be used, saved, or traded so that any company with a need to send more CO2 up the stack can buy more – at the market price. The amount of CO2 to be cut over the next decade is modest – about 18 million tons annually (US power plants collectively emit about 2.8 billion tons of CO2 yearly). But the auction and process of setting a price for carbon are critical first steps, many say.
At least 15 other states in two groups – a Western and a Midwestern greenhouse-gas-reduction compact – are moving ahead with greenhouse-gas (GHG) reduction plans of their own. Congress, meanwhile, is mulling more than a half-dozen plans to cut GHGs nationwide.
So the 10 Northeast and mid-Atlantic states that make up the Regional Greenhouse Gas Initiative (RGGI) are guaranteed to get a lot of attention.
“It’s the first CO2 auction and first compliance market for carbon in the US,” says Emilie Mazzacurati, a senior analyst for Point Carbon, a carbon-market information company. “The RGGI states have really been pioneers. Now everyone is watching. But they’ve been really careful with their approach [to the auction] and I think they will get it right.”
Unlike a standard regulatory approach that simply limits emissions, the new “cap and trade” RGGI system adopted by Maryland, Delaware, New Jersey, New York, and the six New England states (Maine, New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island) is a market-based approach.
RGGI mandates that regional power plant emissions not exceed 188 million tons of CO2 annually for six years. After that, the cap drops 2.5 percent per year. By 2018, power plant emissions – and the cap – will have dropped 10 percent. Unlike previous cap-and-trade attempts, RGGI will auction nearly all its allowances instead of giving them free of charge to industry or “grandfathering” them.
When Europe’s carbon-trading scheme began in the early part of the decade, carbon permits were given to power companies to compensate them for the cost of cutting emissions. But power companies were also allowed to pass along the higher costs to consumers. The CO2 allowances, when sold on the carbon market, were a multibillion-dollar windfall.
“If power companies are given allowance for free, and they’re able to pass on their costs to ratepayers, they’re able to have a net profit from that policy,” says Richard Newell, a Duke University economist. “Auctions provide a mechanism for government to capture that potential windfall.” Those policymakers and economists who believe carbon regulation is inevitable say auctioning most allowances may be the fairest way to proceed.
Even some utility companies concur.
“We feel this [auction] is an appropriate step … and we don’t believe it will be overly costly,” says Robert Teetz, environmental management director at National Grid, which expects to compete in RGGI auctions. Spurring “additional energy conservation is the right thing to do, and customers’ bills will go down.”
In RGGI’s case, most proceeds will go to fund energy efficiency programs to cut future energy demand.
Proceeds under a national plan could be huge – $100 billion or more. Besides funding energy efficiency and renewable energy, a substantial portion could be funneled back to low- and-middle-income taxpayers as tax breaks to compensate those most affected by rising energy costs, according to the Congressional Budget Office.
RGGI costs will be modest at the start. Already, futures contracts are being sold on RGGI allowances, putting their costs just under $5 per ton of CO2. But analysts like Ms. Mazacurrati see them dropping lower in price due in part to a shift by power producers away from oil to natural gas, which has lower emissions.
But that won’t necessarily last, and experts don’t think it will unduly dampen demand for the allowances.
“RGGI can’t solve the world’s carbon problem on its own,” says William Shobe, an economist at the University of Virginia who helped design the RGGI auction. It’s doing what it can – and it’s offering to be part of a national program.”
[Editor’s note: The headline to the original version gave the wrong day for the carbon auction.]
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Comments
2. Mike | 09.24.08
Please disregard the last sentence in the comment above. It pertains to a different subject altogether.
3. Lee Brewer | 09.25.08
Hi Mike, I get that you don’t like the auctions and neither do I, since I know that our NJ public utility commission will use this to justify permission for more rate increases. But if the technology exists for improvement, are you against that?
Will the Utilities just voluntarily out of altruism make those improvements? I have not seen any stock holder or privately owned business do anything other than what they should do - make the greatest profits possible for their owners. This means without a regulation or a profit incentive, no improvements would ever be made.
So, reluctantly I would support this as a tax on a utility’s decision against long term capital improvement for the good of the public.
4. Rachard Itani | 09.25.08
There are two serious problems with auctioned allowances under a cap-and-trade system: 1- the system operates essentially under a command economy model, where government (remember the USSR) decides how many items (shoes, cars, widgets, etc.) to manufacture (allowances are nothing but another such item) to release to the market; 2- The government always gets it wrong: it either over supplies or undersupplies the required number of items. This is inevitable as neither governments nor economists have never been able to predict economic performance accurately (remember President Truman’s plea for a “one-armed economist.” He always got “on the one hand, Mr. President… and on the other…” When allowances are in over-supply, their price tends towards zero. Then they are under-supplied, their price will tend towards infinity (basic law of supply and demand.) This is untenable, as investors in energy efficiency projects need a market-based price signal. The command economy model is not market-based, therefore investors are loath to invest in projects supported in part by the sale of emission reduction certificates in the absence of such price signals. Therefore, not enough projects, and the monies raised from auctions go into the government’s coffers. Now the Government has never spent money wisely, nor always where it’s needed. Hoping that government will spend the monies raised from auctions on “energy efficiency measures” is like believing in the tooth fairy. From the very start, the RGGI has been flawed and oversupplied in allowances. Perhaps this is one way for the government to to keep the price of allowances low, but that only serves to deter investors counting on income from them to partly fund their energy efficiency projects. The only way to correct this situation is through the Upstream Carbon Offset model, which prices CO2 reductions into the price of fossil fuels entering a given market or territory, and –as importantly– restricts government to a pure regulatory and oversight role: setting reduction targets and ensuring that no one is cheating. Thus, the market –and only the market– regulates the quantity and price of emission reductions. While consumers end up paying more per unit of energy, the market-based system ensures that they end up paying less overall on their energy purchases (It should matter less if the price of natural gas is up 10% as a result of this model, if, through energy reduction measures offered by companies that utilize revenues from this 10% increase result in a 50% reduction in our heating bills.) The cap-and-trade model adopted in the US has been proven to be a failure in Europe. It’s a mystery that the US should adopt such a failed model at this time, and one that is based on communist economy principles at that. But in view of the Administration’s rush to nationalize the US financial system, we ought not to be surprised. The nationalization, of course, is being carried out in the best of robber-baron, “free-market” (sic) tradition: nationalize losses after having privatized profits. Only a real free market works. Recessions have always resulted from government intervention: the great depression of 1929 from government (the Fed) restricting credit, and the 2008 melt-down as a result of the government flooding the market with too much credit, with zero oversight. Thus, the RGGI and other cap-and-trade systems will go through the same boon and bust cycles, until government gets out of the market and performs the only function that its role (and the law) should allow it to play: in this case, target setting for emission reductions, and oversight to ensure no one cheats.
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1. Mike | 09.24.08
If it looks like a tax, and quacks like a tax, it is a tax… As the concentration of CO2 in the atmosphere continues to increase while the world cools over the next twenty years because of observed natural changes in the heat coming from the sun and the cyclical effect of the Pacific Decadal Oscillation changing to its cool mode, recall that we already know today that increased concentration of CO2 in the atmosphere DOES NOT cause global warming. Global warming and cooling is by and large a natural phenomenon. It has been going on for thousands of years.
See http://www.youtube.com/watch?v=FOLkze-9GcI .
The politicians and the environmentalists have knowingly created a phony “crisis” to tap into another revenue source to attempt to control the behavior of a once much-freer people. These groups know that the way to corral public opinion is to create crises. And since the media lives off crises, real and imagined, they wittingly or unwittingly comply.
Unfortunately, everyday people have bought into the notion that they are to blame. Increasing the cost of energy will increase the price of energy to pay these new taxes. The energy companies do not pay these taxes. They are always paid by consumers through higher prices. The environmentalists love higher prices for energy, regardless of their devastating effect on lower and middle income families. Politicians love higher taxes so they can position themselves as more powerful and more “caring” by doling out subsidies to favored corporations and interest groups.
Once additional taxes are extracted from the people and placed in the government coffers, the money is passed out as subsidies to the companies whose lobbyists are the most effective. Instead of the marketplace determining what the most promising technologies are, we have the politicians and the lobbyists doing the job — a job for which they have no qualifications or expertise and for which they have a dreadful record of misguided decisions and blatant corruption. Is that the kind of system you want to continue to promote?
It’s time to let these companies fail, file for bankruptcy and resolve these issues in bankruptcy court, just like any other corporate failure.