June 10, 2008
CARBON DIOXIDE EMISSIONS AUCTION
By: Paul Frisman, Principal Analyst
You asked about the Regional Greenhouse Gas Initiative (RGGI) carbon dioxide (CO2) emissions auction and similar auctions.
The auction, scheduled for September 10, 2008, is the first of a series of quarterly auctions to sell CO2 “allowances” that, in effect, will permit power plants in 10 participating states, including Connecticut, to continue emitting CO2.
The auction and subsequent cap and trade program are part of RGGI's effort to help curb the emission of greenhouse gases (GHGs) and improve the fuel efficiency of electric generators. RGGI's initiative calls for imposition of increasingly strict regional limits on CO2 emissions, and a cap and trade program in which participating power plants can buy and sell allowances.
Under the program, participating power plants in RGGI's 10 northeastern and mid-Atlantic states must hold one CO2 allowance for each ton of CO2 they emit, starting January 1, 2009. Power plant owners and operators will be able to buy and sell allowances.
It is the first auction of CO2 allowances in the U.S. The European Union has a CO2 emissions trading program, allowing member nations to auction a portion of their allowances. According to a 2008 Congressional Research Report, very few countries have auctioned their allowances. The U.S. Environmental Protection Agency (EPA) auctions sulfur dioxide allowances as part of its Acid Rain Program.
CO2 AND CLIMATE CHANGE
GHGs, produced in large part by the burning of fossil fuels, trap heat in the atmosphere, and contribute to global warming. CO2 is the most common of the six recognized GHGs. According to the Department of Environmental Protection (DEP), it accounted for 91% of the state's GHG emissions in 2000.
RGGI AND THE CAP-AND-TRADE PROGRAM
RGGI is an agreement among 10 northeastern and mid-Atlantic states to reduce GHG emissions. RGGI will initially concentrate on emissions from power plants with a capacity of at least 25 megawatts (MW). (A typical power plant has a capacity of 500 MW or more.) Regionally, these units are responsible for about 95% of CO2 emissions from the electric generation sector.
The RGGI states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Hampshire, New York, Rhode Island, and Vermont) have agreed to reduce the amount of CO2 their power plants emit through a “cap-and-trade” program.
This program limits the amount of CO2 power plants can collectively emit, and requires power plant owners and operators to hold one allowance for each ton of CO2 they emit. The total number of allowances issued cannot exceed the regional cap, which will decrease over time. Starting January 1, 2009, regional CO2 levels will be capped at 188 million tons, slightly higher than current levels, and gradually reduce to 10% below the starting point by 2019.
According to DEP there are 14 power plants in Connecticut with 36 generating units subject to the cap-and-trade program. Each of these units must surrender one CO2 allowance for each ton of C02 emitted. Connecticut's initial CO2 budget is 10.7 million tons, decreasing to 9.6 million tons in 2018.
The cap-and-trade program allows generators whose emissions exceed the amount of allowances they purchased at auction to buy additional allowances from generators who purchased more than they needed.
Other cap-and-trade programs have been used to reduce emissions of such pollutants as sulfur dioxide and nitrogen oxides. In most of those programs, the government or some other authority issues the allowances or credits to the participants. RGGI, however, states that the September 10 auction is the first in the nation for a mandatory GHG emissions reduction program.
The initial auction (a second will be held on December 17, 2008) will offer the allowances in lots of 1,000 through a single-round, uniform price, sealed bid format, in which participants bid secretly for allowances at the price they are willing to pay. Bidders can submit multiple bids for allowance at different prices.
Winning bidders will be determined by ranking them from highest to lowest bid, determining the number of allowances sought at each bidding level, and awarding allowances to the bidders (from highest to lowest) until all available allowances are awarded. All bidders then pay what is called the “highest rejected bid” for their allowances.
For example, assume there are 100 allowances available and bidders submit bids of:
● $20 each for 10 allowances;
● $18 each for 20 allowances,
● $15 each for 15 allowances,
● $10 each for 30 allowances,
● $5 each for 15 allowances,
● $4 each for 10 allowances, and
● $3 each for 20 allowances.
The 100 available allowances would be accounted for by the $4 bid. The $3 bid would therefore be rejected (the “highest rejected bid”) and each bidder would then pay $3 each for the number of available allowances on which he bid.
According to RGGI, each auction also will have the following elements:
1. allowances will be identified by “vintage,” i.e., the year the allowance was allocated;
2. allowances made available for auction in a particular three-year compliance period must be sold before the end of the compliance period;
3. a single bidder may purchase up to 25% of the allowances offered for sale in that auction;
4. a reserve price (floor) of $1.86 per allowance will apply in the first auction, and reserve prices in subsequent auctions will be the higher of (a) $1.86, adjusted annually starting in 2009 based on the consumer price index, or (b) 80% of the current market price of the particular RGGI allowance vintage being auctioned; and
5. unsold allowances will be made available for sale in future auctions in which a reserve price based on the current market price is used.
DISTRIBUTION OF ALLOWANCES AND AUCTION PROCEEDS
DEP has proposed regulations to auction 77% of its 10.7 million allowances, or 8.235 million allowances. The remaining 23% (2.46 million allowances) will be distributed (sold or offered for free) to combined heat and power units (1.925 million allowances); customer-side distributed resources (374,326 allowances); and voluntary clean energy purchase (160,426 allowances). (Combined heat and power (also called cogeneration) systems use waste heat produced in the process of generating electricity for manufacturing processes, space heating, or other useful purposes.)
The law requires DEP, in consultation with the Department of Public Utility Control, to invest the auction proceeds on behalf of electric ratepayers in energy conservation, load management, and class I renewable energy programs. It allows DEP to retain 7.5% of the revenue for administrative and other costs (CGS § 22a-200c).
DEP estimated a total of $27,486,241 in auction proceeds, based on a projected cost of $3 per ton. DEP's proposed regulations distribute the proceeds as follows:
1. Sixty-eight and one-half percent of the proceeds ($18.83 million) will be distributed to Connecticut Light & Power (CL&P) and United Illuminating (UI), with 80% ($15 million) of this amount going to CL&P and 20% ($3.76 million) to UI;
2. up to 23% ($6.32 million) to the Connecticut Clean Energy Fund;
3. up to 1% ($274,862) to the Connecticut Municipal Electric Energy Cooperative (CMEEC); and
4. DEP to retain 7.5% (about $2 million).
The Connecticut Clean Energy Fund, administered by Connecticut Innovations, Inc., develops and invests in renewable and clean energy resources, notably solar energy and fuel cells, and educates the public about clean energy. CMEEC buys power and performs other services for the state's municipal electric utilities. It is owned by municipal utilities in the cities of Groton and Norwich, the borough of Jewett City, and the second and third taxing districts of the city of Norwalk.
EUROPEAN UNION EMISSIONS TRADING PROGRAM
The European Union emissions trading scheme is the world's largest multinational GHG emissions program. It covers more than 11,500 energy intensive facilities in the 27 member countries, including oil refineries, power plants with a capacity of more than 20 MW, coke ovens and iron and steel plants, as well as cement, glass, lime, brick, ceramics and pulp and paper installations. These facilities emit about 45% of the EU's CO2 emissions.
According to the Congressional Research Service, although countries could auction up to 5% of allowance allocations in the program's first phase, which began on January 1, 2005, the allowances have generally been allocated free to participating entities. Phase 2, which began January 1, 2008, allows countries to auction up to 10% of their allowances. CRS reports that no country has proposed to auction the maximum amount, and that most countries do not include auctions in their allocation plans (Climate Change: The EU Emissions Trading Scheme Enters Kyoto Compliance Phase, CRS Report RL34150).
EPA ACID RAIN PROGRAM
This program is intended to reduce sulfur dioxide (SO2) emissions. Each allowance permits a unit to emit 1 ton of SO2. Affected utilities are allocated allowances based on their historic fuel consumption and a specific emissions rate. Once a year, EPA holds an allowance auction of about 2.8% of the total annual allowances. More information on this program can found at these EPA websites: http://www.epa.gov/airmarkets/progsregs/arp/s02.html and http://www.epa.gov/airmarkets/trading/auction.html.