Auction Set For Carbon Allowances

The first U.S. auction of carbon dioxide allowances is scheduled for Sept. 25, as 10 states in the Northeast launch a market-based cap-and-trade system.

Connecticut and the other New England states, plus New York, New Jersey, Maryland and Delaware have formed the Regional Greenhouse Gas Initiative and set the goal of cutting carbon dioxide emissions by 10 percent by 2018.

RGGI executive director Jonathan Schrag said he hopes Thursday will bring a “terrifically competitive and fun auction.” Bids are expected from utilities, manufacturers, investment firms and even individuals.

Emission allowance auctions have been conducted in Europe, but this will be the first in the United States. One group of Western states and another group of Canadian provinces are also moving toward holding carbon allowance auctions.

The RGGI bidding process started over the summer when interested parties were required to submit pre-registration forms in an effort to qualify would-be bidders.

Schrag declined to reveal who or even how many had registered.

“I can’t give out any specific information but I can say that we have had robust participation from all sectors,” he said. “There are interested parties that range from manufacturing to investment firms to individual investors.”

A total of 12,565,387 carbon dioxide emission allowances will go for auction. Of those, 1,372,530 allowances will be from Connecticut. Allowances can be transferred between states if the owner has allowances in more than one state.

Each allowance represents one ton of emissions. The minimum bid per allowance will be $1.86, and the minimum quantity for a bid is 1,000. So a participant’s minimum bid would be $1,860.

Beginning Jan. 1, power plant operators who go over their emission limits must buy carbon allowances to cover the amount they exceed their limits.

The point of the cap-and-trade system is to reduce greenhouse gases that contribute to global warming.

A second RGGI auction is scheduled for Dec. 17. The number of allowances for that event has not been set and will depend on the results of the first auction.

The initial auction, which will be conducted online, will profit each of the RGGI states. For example, if each allowance is auctioned off at the bare minimum, Connecticut stands to pocket roughly $2.5 million.

Secondary Market

But those who closely follow the auction process say they’re particularly interested in seeing what happens after the auction is over and a secondary market for the allowances opens up.

Stephen Humes, a lawyer with Hartford-based McCarter & English who focuses on climate change and renewable energy issues, has been following RGGI’s efforts for several years.

“The potential bidders in this auction could be anybody,” he said. “There are a fixed number of allowances to cover emissions of power plants and large industrial boilers, but investors are going to get in on it too.”

Humes suggested a hypothetical scenario in which energy producers bought 372,530 allowances, while investors bought 1 million allowances. That means energy companies that miss out on the auction but still need allowances to operate will need to turn to the investors.

“There’s going to be a secondary market for sale and resale where the possibilities are almost endless,” Humes said. “The entities that need the allowances are going to have to buy them from strictly financial participants that are clearly trying to make a profit.”

It’s not clear yet how it will work out.

“There is a fair amount of uncertainty in the energy sector, but the investment side seems excited for a new market and the possibilities,” Humes said. “It could end up costing the energy sector.”

The windfall for investors could be tremendous, considering that the world carbon market is now $60 billion, driven by the roughly $42 billion carbon market in the European Union.

New Carbon Finance, a New York-based research company, estimated early this month that carbon trading could become a $1 trillion market by 2020 as more regions of the United States and Canada join the action.

Futures Trading

In August, the New York Mercantile Exchange announced that it would begin trading futures contracts for carbon dioxide emissions.

The first auction comes in the wake of one of the worst weeks ever for the U.S. stock market.

“I don’t think it’s going to affect the auctions that much,” said RGGI’s Schrag. “We’re building a long-term market that’s not going to be affected by a short-term burp in the stock market.”

The state Department of Environmental Protection is the lead state agency for the auctions. Chris Nelson, senior environmental engineer for DEP, said its main role has been to review possible bidders.

Nelson said DEP would like to see all the allowances sell in the first auction.

“There are no objectives other than to have carbon deductions at reasonable prices,” he said. “I think everyone is taking the wait-and-see approach to how it turns out.”

Officials at the Department of Public Utility Control will be monitoring the results, according to DPUC spokesperson Beryl Lyons.

“We will be interested in the market component because any charges will be dispersed by the DPUC,” she said.

When the auction is completed, the DPUC and DEP commissioners will have to sign off and approve the final results as will agency heads in the other nine RGGI states.

As a result of Connecticut’s deregulation of electricity, utilities like Connecticut Light & Power won’t be affected by the auctions.

“We’re not generating power anymore,” said CL&P spokesman Mitch Gross. “We’re not directly involved, but we continue to advocate on behalf of helping to offset the increasing price of power.”