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.

Ken Silverstein EnergyBiz Insider Editor-in-Chief

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 techn ology. 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 i n 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 years.

Because the program does not require local utilities to purchase allowances for electricity imported to the region, its design could trigger more coal generated electricity imports – and significantly more emissions from coal plants in states bordering the region. If plants just outside the area generated electricity at full capacity, for example, the resulting emissions would equal 350 percent of the amount the plan aims to cut in its final year, says a report by the Union of Concerned Scientists.

“Fortunately, the RGGI states have several options to close the door on increased coal electricity imports,” says John Rogers, a clean energy analyst for the group. “States could prevent local utilities from contracting with dirty energy sources. They could require utilities to account for global warming pollution from all of the electricity they sell, not just from RGGI power plants. States also could make sure that proposed transmission projects not serve as poll ution delivery systems.” Conservat ives, meanwhile, say that any mandatory cap-and-trade rules would be costly and hurt the economy. They say that any federal legislation that would adopt such a regime would be unwise.

Such thinkers also believe that technology is the key to reducing emissions in greenhouse gases and that those countries that take the lead in this pursuit will have the strongest economies. They go to say that at present there are no cost-effective technologies to remove carbon dioxide and that government interference with the laws of supply and demand when it comes to energy generation would only be economically detrimental.

“The cap-and-trade schemes, as well as carbon taxes, limit emissions by making energy more expensive,” says David Kreutzer, senior policy analyst for the Heritage Foundation. “In addition to having a direct impact on consumers’ budgets for gasoline, heating oil and natural gas, these higher energy costs force cutbacks on the production side of the economy and lead to lower output and income.”

As 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.

More information is available from Energy Central: Capping and Trading - Getting a Handle on Carbon, EnergyBiz, May/June 2008 Cap-And-Trade Headache, EnergyBiz, May/June 2008