Common Tragedies

Thoughts on Environmental Economics

Somewhere, somehow, capitalism is working…

Posted by Danny Morris on September 30, 2008

Buried under piles of headlines proclaiming financial apocalypse yesterday was a little tidbit on the RGGI allowance auction from ClimateWire:

The Northeast carved a landmark path into the thorny effort to address climate change last week, attracting 59 utilities and traders to the nation’s first carbon auction, which raised $38 million for clean energy programs, organizers announced yesterday.

The auction overcame preliminary jitters to unload more than 12 million permits — the maiden maximum — that utilities will need to have for every ton of carbon dioxide they emit. Officials with the Regional Greenhouse Gas Initiative, the 10-state consortium that made history with the event, were exuberant…

So, not an earth-shattering event, but it’s still progress. The clearing price was a mighty $3.07, which means I could have bought 10 tons of CO2 with the money I used to settle my bar tab this weekend. Hey, you gotta start somewhere right? This auction will not change the country’s approach to climate change overnight, especially when overnight can be the difference between going bankrupt or not. There are some positive signs, however. The auction shows that RGGI regulators are technically savvy enough to sell emissions allowance and utilities will actually buy them. It appears that regulated parties are more than willing to participate:

…the demand for allowances outweighed the number of permits fourfold. Some saw that as a strong sign that utilities are eager to begin stockpiling allowances before the first deadline in 2012 by which their permits must match their emissions…

See? There are still some places in the country where markets work…

Check out the whole article, or for those who cannot afford a subscription to E&E News, I copied the article below.

STATES: Carbon auction is a success, but will emissions drop? (09/30/2008)

Evan Lehmann, ClimateWire reporter

The Northeast carved a landmark path into the thorny effort to address climate change last week, attracting 59 utilities and traders to the nation’s first carbon auction, which raised $38 million for clean energy programs, organizers announced yesterday.

The auction overcame preliminary jitters to unload more than 12 million permits — the maiden maximum — that utilities will need to have for every ton of carbon dioxide they emit. Officials with the Regional Greenhouse Gas Initiative, the 10-state consortium that made history with the event, were exuberant.

“It was really a flawless auction,” said Jonathan Schrag, executive director of the regional project.

The sale proved that regulators have the technical expertise to sell pollution permits, known as allowances, and that utilities will buy them. But it also spurred questions about whether any of it will make a difference.

Allowances sold for a clearing price of $3.07, the cost at which a coal-fired electricity plant can unload 1 ton of the heat-trapping gas into the air. Economists widely agree that the price is too low to push the 233 utilities regulated by the project to dramatically clean up their operations.

“The only way it can be that low is if we’re not asking the firms to cut back their emissions very much,” said Gilbert Metcalf, an economics professor at Tufts University.

“If [the price of allowances] is up to $10 or $15 then we’re going to see significant changes, and significant reductions in emissions,” he added.

High cap gives utilities breathing room

The idea is that utilities would see an economic advantage in replacing current technology with new — and very expensive — ways to produce cleaner electricity if the allowance cost makes a big jump. Many believe the permit price would need to rise as high as $30 to jump-start a widespread move toward carbon capture and sequestration.

“I don’t think [utilities] are going to be shocked by the price,” said Chris Sherman, general counsel of the New England Power Generators Association, a trade group representing power plants.

“This price is not going to motivate much in the way of different decisions,” noted Scott Bloomberg, an expert in business carbon policies with the research group CRA International.

The price is low, some economists say, because there are too many allowances. The states’ annual cap of 188 million tons is higher than last year’s emissions by about 9 percent. That gives the utilities breathing room; they might not be scrambling for allowances to account for emissions that spill over the cap.

Many are encouraged by the results. After all, the entire block of allowances was sold. That was an open question before the nation’s inaugural auction. And they sold for more than the program’s reserve price of $1.86, which was seen as another good sign.

RGGI official: Price was ‘on the money’

“Fifty-nine participants is actually a significant number. It shows that there’s a diverse number of players who are interested in the market,” said Evan Ard, a spokesman for Evolution Markets, a brokerage firm that specializes in energy and environmental trading.

Schrag said the allowance price matched predictions from earlier computer models.

“I think this is really showing we hit it right on the money,” he said.

Officials with RGGI, pronounced Reggie, are revealing only the broad outlines of the auction’s results. They won’t release the names of bidding companies, or which bids were accepted and rejected. That disclosure could interfere with the upcoming December auction, or the quarterly sales afterward, said Schrag.

Industry participants are just as stealthy.

“We have some assets in New England, and we were procuring allowances for those assets,” said David Byford, a spokesman for Dynegy Inc., a power generator with plants in Maine and Connecticut.

He declined to provide details about the company’s bids or its number of allowances.

Allowances from six of the 10 states participating in the program were available in last week’s auction. All of the New England states offered permits, except New Hampshire. The Granite State will join the other latecomers — New York, New Jersey and Delaware — in the upcoming December auction. Those four states account for 55 percent of the cap.

Cheap allowances now, windfall later

Schrag noted that the demand for allowances outweighed the number of permits fourfold. Some saw that as a strong sign that utilities are eager to begin stockpiling allowances before the first deadline in 2012 by which their permits must match their emissions.

But others privately questioned that assertion, saying many of those bidders could have submitted low-ball offers that were rejected. That doesn’t accurately depict the demand for allowances — or the market’s effects on reducing pollution.

Still others wonder whether utilities are looking fast-forward — to a time when — or if — a federal cap-and-trade plan is imposed and they can cash in cheap RGGI allowances. Some predictions assume that federal allowances could sell for $15.

It’s unclear if a national plan would accept existing allowances, but some plant operators might be betting that it could, said Robert Stavins, co-director of the Harvard Project on International Climate Agreements at the Kennedy School of Government.

“What may turn out to be the greatest value of a RGGI allowance is not its use within RGGI, but rather its value for conversion into a federal allowance,” Stavins said.

One Response to “Somewhere, somehow, capitalism is working…”

  1. Tom Stone said

    Minimum purchase is 1000 allocations (~$3,000). You might have to increase your bar tab a bit. Next auction is December – plenty of time to knock off a few more.

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