The Regional Greenhouse Gas Initiative (RGGI), the U.S’s first market-based regulatory program to reduce greenhouse gas pollution, enters its 6th year of operation with a renewed mandate and record high sales.

The scheme’s most recent auction sold over 37 million CO2 allowances and generated $105.9 million for reinvestment by the nine RGGI member states* in a variety of consumer benefit initiatives, including energy efficiency, renewable energy, direct bill assistance, greenhouse gas abatement, and climate change adaptation programs.

Allowances sold represented 100 percent of the allowances offered with bids ranging from $1.98 to $5.03 per allowance.

According to an independent market monitor’s report, electricity generators and their corporate affiliates have won 88 percent of CO2 allowances sold in RGGI auctions since 2008. Total proceeds from all previous auctions have exceeded $1.2 billion.

RGGI is composed of individual CO2 budget trading programs in each state, based on each state’s independent legal authority. A CO2 allowance represents a limited authorization to emit one short ton of CO2, as issued by a respective state.

A regulated power plant must hold CO2 allowances equal to its emissions to demonstrate compliance at the end of each three-year control period. RGGI’s second control period began on January 1, 2012 and extends through December 31, 2014.

An independent report by the Analysis Group found that the investment of RGGI proceeds from its first three years of operation:

•Generated $1.6 billion in net economic benefit region-wide;

•Put $1.1 billion in electricity bill savings back into the pockets of consumers in the region;

•Created 16,000 job-years in the region; and

•Kept $765 million in the local economy due to reduced fossil fuel demand

“The RGGI auctions continue to demonstrate that a market-based program that spurs investments in energy efficiency and low-emission electric generation can simultaneously achieve the goals of cleaner, cheaper, and more reliable energy,” said Collin O’Mara, Secretary of the Delaware Department of Natural Resources and Environmental Control and Chair of the RGGI, Inc. Board of Directors.

The RGGI success reflects an important transition in the global carbon trading sector, namely fading reliance on multi-lateral mechanisms to give legitimacy to how carbon markets will function and how or whether these programs will be linked together.

As noted in a recent GLOBE-net article, the emerging international architecture of carbon trading is focusing more on separate emissions trading systems serving distinct jurisdictions as opposed to the integrated global trading architecture envisioned 15 years ago by the designers of the Kyoto Protocol. See Globe-Net article ” World Carbon Markets at a Turning Point”

One of the key success factors for the RGGI scheme is the fact that each state directs its own strategy for investing RGGI proceeds in programs that benefit consumers or build a clean energy economy.

The fact that individual states are free to determine how the proceeds of the RGGI auctions are to be used was reinforced in a recent rule change implemented following a comprehensive two-year program review called for in the original RGGI Memorandum of Understanding.

The Updated Model Rule will guide the RGGI states as they follow state-specific statutory and regulatory processes to propose updates to their individual CO2 Budget Trading Programs.

Among the many findings of this comprehensive review was the fact that a significant excess supply of allowances relative to actual emission levels in the region existed, and the current cost control measures in the program, which are based upon expansion of the percentage of offset allowances allowable for compliance, would likely be ineffective in controlling costs if the emissions cap was made binding.

As a consequence, the participating states agreed to lower the regional CO2 emissions cap to align the cap with current emissions levels while accounting for allowances held by market participants in excess of the quantity needed to demonstrate compliance.

The new Regional Emissions Cap in 2014 will be equal to 91 million tons, down from 165 million tons - a reduction of 45 percent. The Regional Emissions Cap and each Participating State’s individual emissions budget will decline 2.5% each year 2015 through 2020.

Keeping the level of allowances at levels that are realistic relative to the actual market is another critical factor in the success of carbon markets. As noted above, an excess of carbon allowances has crippled the world’s largest carbon trading system, the European Union’s Emissions Trading Scheme (EU-ETS, leading to such low prices in the open market that traders are leaving the system.

The RGGI’s successful track record demonstrates the viability of market-based mechanisms to address power plant global warming emissions, notes the Union of Concerned Scientists, and provides a template for other jurisdictions seeking to use similar approaches to reduce global warming pollution. The next RGGI emissions auction takes place in June, 2013.