Hammering out Carbon Controls

Hammering out Carbon Controls

January 07, 2009

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

The Northeastern region conducted its second carbon credit auction, raising $106 million to be divvied up this month among 10 states in the area and then used to promote clean energy technologies. That process is being viewed by the incoming presidential administration as a possible national prototype.

Trading carbon emissions is a free market approach to controlling greenhouse gases that are tied to climate change. The thinking is that by trading credits, a "price" for emission levels is set that will send the proper investment signals to those who have to decide how to cut their releases. Installing environmental controls, for example, may or may not be cheaper than buying carbon credits.

The Regional Greenhouse Gas Initiative (RGGI), which held its auction in December, said that it sold 31.5 million credits at $3.38 apiece. Utilities were the biggest buyers, although financial and environmental firms that sought to "retire" such allowances so as to diminish the supply and raise the price also participated. An earlier auction held last September raised about $38 million through the sale of 12 million credits.

"Auctions continue to be the way to go," says Phil Adams, president of World Energy that held the RGGI auction. "It's a way to raise funds and put the money back into clean technology. In the green space, this kind of initiative is enjoying its moment in the sun."

According to the U.S. Energy Information Administration, the total carbon dioxide emissions in this country grew in 2007 by 1.3 percent over the previous year. The United States emitted 6.02 billion tons. That's about 76 million tons more than in 2006, which is the result of increased energy production.

Policymakers are addressing the challenges. A liquid market for the trading of carbon emissions has been established while the infrastructure to facilitate such activity is functioning. Market intelligence firm Point Carbon says that such advances along with an increasingly stable regulatory framework have instilled investor confidence. It is predicting a cut in greenhouse gases of 2 billion metric tons by 2012.

For his part, President-elect Obama has vowed to cut the level of greenhouse gas emissions to 1990 levels by 2020 and by 80 percent by 2050. Among the key approaches he will espouse is a cap-and-trade system and to do so by auctioning the credits as opposed to giving them away. In the case of the European Union, it began its emissions trading scheme in January 2005 with 27 participating nations. As a way to develop its system, it has gifted the allowances but is now at the stage that it will sell them.

"A cap-and-trade system will put a price on those emissions, creating an incentive to develop and adopt more carbon-efficient technologies -- much like the recent run-up in gasoline prices shifted consumer purchases in favor of fuel-efficient vehicles," writes Richard Morgenstern, senior fellow at Resources for the Future.

Real Constraints

The RGGI is the first obligatory auction in the United States and one where each power producer must buy credits to match every ton of carbon dioxide that they release. The law will permit the total amount of emissions from all plants to remain at roughly 188 million tons until 2014. At that point, such emissions must fall by 10 percent a year for the next four yearAs the RGGI shows, efforts to control carbon releases are real. And while the incoming administration is encumbered with solving the nation's economic woes, addressing emission reductions is not a mutually exclusive endeavor. Cap-and-trade programs not only give industry reasonably-priced solutions but they also motivate businesses to adopt current technologies. Indeed, green energy innovations and next-generation jobs may be a central catalyst to better times.

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