Cap And Trade Moscow power plant emissions

Published on September 15th, 2013 | by Silvio Marcacci


Latest RGGI Auction: Time To Reconsider “Success” In Carbon Markets?

September 15th, 2013 by  

Most birthdays are celebrated with cake and funny hats, but America’s first functioning cap-and-trade program marked five years of carbon dioxide allowance auctions by raising over $100 million for clean energy efforts across the Northeast US.

The Regional Greenhouse Gas Initiative (RGGI) sold over 38 million carbon allowances early last week during its 21st carbon auction at a clearing price of $2.67, generating $102.5 million for the nine participating member states.

Despite selling 100% of all allowances offered for sale, prices in this auction swooned a bit from the record high set during RGGI’s previous auction in June. This raises an important question – if carbon markets are driving clean energy investments while emissions fall, does the auction price even matter?

Carbon Market Swings Belie Overall Stability

RGGI held its first auction in 2008, and since then prices more or less remained steady until the shale gas revolution and economic recession cut power demand and emissions, with prices generally hovering around $2 for a permit to emit one ton of carbon beyond the system’s “cap”.

Available allowances built up as demand fell, and the market was soon oversupplied. In response to these changing market dynamics, RGGI member states agreed to reform the program earlier this year, cutting the system’s cap by 45% starting in 2014, with an additional 2.5% decline every subsequent year from 2015-2020. This response to market conditions, it should be noted, is  the type of flexibility the European Union’s Emissions Trading System (EU ETS) has had trouble enacting.

The market responded in turn, and auctions held in March and June rebounded by selling out of all available permits at climbing clearing prices of $2.80 and $3.21, respectively. With cap-and-trade concern at an all time high due to the Australian market’s pending rollback and slow recovery of prices in the EU ETS, RGGI’s price stumble could be cause for concern by some – especially as carbon prices slip in California’s nascent carbon market.

What If “Success” Isn’t A High Price On Carbon?

But here’s the thing: So what if allowance prices in RGGI (or any carbon market) stumble? The value of any single allowance only reflects what the polluting entities and market participants think their emissions and emissions reductions measures are worth under the cap.

When the system’s functioning, that cap will be consistent with the trade occurring within the market. And when the system’s functioning well, it will drive investment in the kinds of technologies that cut emissions across the board. Put another way, “success” may simply be the fact that there’s a working carbon market in place, providing incentive to either cut pollution or pay for clean energy.

That’s important, especially considering the investment constraints currently facing clean energy developers, generally declining public funding for renewable projects, and the political challenges setting and maintaining the “right price” on carbon. Jesse Jenkins recently laid out this theory in a thorough and well-reasoned piece, from which I’ll borrow a key quote:

“In the face of political economy constraints on carbon pricing…it is time for policy makers, academic researchers, and climate advocates to get creative about re-envisioning the role of carbon pricing in climate mitigation efforts.

Perhaps we will start viewing the revenues potentially raised by carbon pricing policies as just as important as the price signal they establish and think proactively about how best to structure the kinds of public investments that could make up for the shortfalls of a constrained carbon price.”

Accumulating The Social Benefits Of Carbon Through Markets

Bingo. Cumulative proceeds from RGGI auctions currently total $1.4 billion dollars, and that amount may hit $2 billion as early as 2020. Those dollars are divvied up and invested in initiatives chosen by each member state like energy efficiency, renewable energy, utility bill assistance, and greenhouse gas abatement programs.

Since 2008, RGGI has seen a 30% reduction in regional power sector emissions and 84% of all allowances have been sold to electricity generators and their corporate affiliates. System investments have already returned $1.3 billion in energy bill savings, offset 27 million megawatt-hours of electricity generation, and prevented 12 million tons of emissions – all at the same time member states increased GDP twice as fast and cut carbon 20% faster as other states. Is it any wonder the Northeast US routinely ranks at the top of energy efficiency lists?

The same trend is apparent in California’s carbon market. The system’s value has boomed to an estimated $1 billion dollars, generated hundreds of millions of dollars earmarked for clean energy and emissions reduction, and routinely sold out of available allowances during auctions.

All of these points illustrate that in a well-functioning cap and trade system, the social cost of carbon is paid by those who create the emissions, while revenue from those sales creates direct economic and environmental benefits for the people who bear the burden of that carbon pollution.

It’s kind of the ideal outcome during a period where political action on climate is almost non-existent and private investment in decarbonization is far from abundant. Analysts often focus on considering the price of carbon within a market as the ultimate indicator of its health, but with 60 carbon pricing systems underway worldwide and international linkages starting to take hold, maybe it’s time to reconsider exactly what we consider “success” in carbon markets.

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About the Author

Silvio is Principal at Marcacci Communications, a full-service clean energy and climate policy public relations company based in Oakland, CA.

  • Steeple

    This is all due to nat gas displacing coal fired power in the part of the US with the oldest and least efficient coal plants.

    Thank you, Hydraulic Fracturing.

  • anderlan

    Wow that stock photo of Moscow looks like simcity–more and more fossil towers built up uncreatively in a straight row as the city grew.

  • anderlan

    The goal is close to zero pollution, so there needs to be a way of recalibrating the price as fast as the market moves.

  • RobS

    Surely this is just reflective of a relatively high supply compared to demand. If every emitter stopped emitting tomorrow and switched to emissions free technology then there would be no demand for carbon credits and the price would be zero. would that indicate a total failure of carbon pricing? of course not. The simple fact is that little encouragement is needed to reduce emissions, many of the options available are actually cheaper then continuing business as usual. INevtiably this low demand is resulting in a low price. You could drop the cap faster to lower supply and bring supply and demand back into balance, however if the desired outcome is being achieved this seems unnecessary.

    • Matt

      Yes it depends on the “desired” out come. I have kids and grand kids so was hoping to leave them a livable plant. But let me try with something simpler to compare to. Assume you (or son or grandson) (its an age thing) is taking honors calculus, and everyone get 100% not just on the final but for the whole year. We might think that the goal, standard, desire was set a bit low. I think the goal is a massively lower of GHS output. I think a price of $2/ton which is way below the impact of that ton. Could be an indication that the goal was set to low.
      But yes, the market did reach the goal easier than the creators thought possible, so they adjusted the goal.

  • Matt

    So the thing to look at is. (A) do you have most (all would be nice) of the contributors included in your cap. (B) Is the cap dropping fast enough. Remember that dropping sooner is a lot better than dropping latter. RGGI handle this by dropping the cap 45% in 2014. It might have better to drop 10% from the current amount each quarter. And have a automatic (10% drop) if prices drop below the reserve. At two dollars, maybe the reserve should raise 25% a year. This would give a clear signal of where to investors. But they did take a step to keep the market working.
    And yes, not having a way to adjust the cap downward is what hurt the Europe market. They believe the bull that industry told them.
    It can’t be done!!!
    No wait it can be done, but will cause complete destruction of our economy!
    No wait it can be done, but will be very costly.
    Then once the market is in place, bam the reduction happen so fast that there is a over supply.

    • Matt

      Now if we could just get the smoke belt to join into the RGGI. From Indiana east and from Tennessee north.

      • Bob_Wallace

        Keep your eyes on the number of coal plants that close in that area over the next few years. The EPA is hitting them with a big stick.

  • Omega Centauri

    Interesting. It sounds like contrary to what we hear from the denialist camp, -the burden on existing industry isn’t very large, and they are making the adaptations at remarkably low price. That was the goal afterall. As much as I’d like polluters tp pay $100plus per ton, which is more consistent with the damage caused, as a society/economy, if we can get the reductions at low cost, then we are better off.

    • Ronald Brakels

      Quite. A low carbon price means that cutting carbon emissions is cheap. That’s a good thing.

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