On September 25, 2008, under the auspices of the Regional Greenhouse Gas Initiative (RGGI), the first U.S. carbon auction will be held. 12,565,387 CO2 allowances will be offered.1 As several Canadian provinces hold observer status within RGGI, the outcome of the auction will be closely watched.

RGGI: An Overview

The Regional Greenhouse Gas Initiative (RGGI) is “the first-in-the-nation mandatory, market-based effort in the United States to reduce greenhouse gas emissions.”2 The ten states that comprise RGGI are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. Ontario, Quebec, New Brunswick, Nova Scotia, Newfoundland & Labrador, and Prince Edward Island hold observer status.3

RGGI was established by the signing of a Memorandum of Understanding (“MOU”), which committed the signatory states to implement the initiative in accordance with the Model Rule.4 The Model Rule is the template for each state’s cap-and-trade regulations. As the system will primarily be state-regulated, it is unlikely that RGGI contravenes the Compact Clause of the U.S. Constitution.5 At the same time, however, the decentralized nature of the initiative raises enforceability concerns.6

Power plants in member states are to stabilize their emissions at current levels through 2014. The emissions cap will then decline 2.5 percent per year until 2018. Fossil fuel-fired generators of at least 25 megawatts are subject to the cap. A generator is considered to be “fossil-fuel fired” if at least five percent of its input comes from fossil fuels. The generators meeting this criteria comprise approximately 95% of CO2 emissions.7 CO2 emissions generated by the combustion of eligible biomass are excluded in the calculation of emissions. The first three-year compliance period begins January 1, 2009.

Allowances

The vast majority of allowances will be auctioned rather than allocated. The revenue from the auctions is intended to go towards “consumer benefit or strategic energy purposes.” Early reduction allowances are granted for emissions reductions, excluding facility shutdowns, made between 2006 and 2008. RGGI also encourages, through the Model Rule, the voluntary retirement of allowances to match increases in renewable energy purchases.8

Temporal Flexibility Mechanisms

The Model Rule allows for “banking” (the storage of allowances for future periods) but does not allow for the “borrowing” of allowances from future periods. The Model Rule also includes the possible of extending the compliance period from three years to four in the event that a “trigger event” (e.g., the price of allowances reaches a ceiling) occurs.9

Emissions Monitoring

The emissions monitoring provisions of the Model Rule are based on Environmental Protection Agency (EPA) rules. Many of the emitters subject to RGGI already monitor their CO2 emissions under EPA Acid Rain rules and those that do not are nevertheless subject to the Clean Air Interstate Rule (CAIR).10

Offsets

Initially, emitters will only be able to offset 3.3% of their compliance obligations, though this maximum increases if a “trigger event” occurs. Offsets must come from one of five categories:

  • Landfill methane capture and destruction;
  • Reduction in emissions of sulfur hexafluoride (SF6);
  • Sequestration of carbon due to afforestation;
  • Reduction or avoidance of CO2 emissions from natural gas, oil, or propane end-use combustion due to end-use energy efficiency in the building sector; and,
  • Avoided methane emissions from agricultural manure management operations.11 The offset project must occur in the U.S. Also, the Model Rule offset provisions place great emphasis on additionality. The offset regime is considered to be one of RGGI’s greatest strengths.12

The Auction: What to Expect

The 2008 auctions are being held as “pre-compliance events to facilitate market price discovery and compliance planning by regulated CO2 emitters prior to the beginning of the first RGGI compliance period on January 1, 2009.”13

According to Steve Fine of ICF International, the RGGI auction is at risk of being oversupplied, suggesting that it will demonstrate a similar pricing pattern to the first phase of the European Union’s Emissions Trading Scheme. Current emissions in RGGI member states total approximately 180 million tons while the cap is set at 188 million tons. While power generators may overbid to cover their positions and drive up the price, compliance buyers may sit out the auction and drive down the price.14 Thus, a number of unpredictable variables will make the first auction an interesting one. The second auction is scheduled for December 17.