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Carbon Trading Begins in the Northeast

September 24, 2008

On Thursday, September 25, the Regional Greenhouse Gas Initiative ("RGGI"), an effort spearheaded by ten northeastern states, will auction the first CO2 emissions allowances for electricity generators with nameplate capacity of 25 MW or more (233 plants in all) that will be subject to an emissions cap beginning on January 1, 2009.

The goal of the program is to stabilize CO2 emissions through 2014 by capping them at 188 million tons per year, then reducing the total by 2.5% per year over each of the next four years. State regulators in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont have adopted or will adopt rules implementing the RGGI system, which will allow generators to hold and acquire allowances through market-based auctions and trading systems. Proceeds will be used to fund renewable energy development.

Each allowance represents one ton of CO2, and the Sept. 25 auction will offer 12,565,387 allowances for sale.  Unsold allowances will be rolled over into subsequent auctions.  In addition to holding allowances, emitters can also ensure compliance with the RGGI cap by investing in CO2 emissions offsets such as carbon capture and sequestration and afforestation projects.

From 9:00 a.m. to noon on Sept. 25, qualified bidders will submit sealed bids in a single round of bidding on RGGI's Internet-based trading platform. The reserve price has been set at $1.86/allowance, although some private trades earlier this summer were reportedly completed at as high as $7/allowance. No bidder will be permitted to buy more than 25% of of the allowances offered for sale at a single auction. Potential bidders began the qualification process in July; and while names haven't been made public yet, large trading houses like Barclays and Vitol, as well as smaller start-ups like ECOSYS Capital have participated in private trading.

However, there is some uncertainty about the level of participation in light of the fact that a significant number of the allowances available will not yet be needed. Additionally, the cap is higher than the actual total CO2 emissions of regulated emitters, at least for now, owing to the fact that the initial cap was set by RGGI states back in 2004 when projections were higher and political pressures to cut emissions less severe.

In August, NYMEX (through partner The Green Exchange) and the Chicago Climate Exchange both began trading RGGI allowance futures contracts, allowing the regulated community to begin hedging price risk ahead of the first auction. The contracts represent 1,000 allowances. But in light of weak demand, futures prices have already fallen about 40% in the last three months, to about $5/ton (compared to $38/ton in Europe).

If and when federal action is taken on climate change, RGGI and other regional initiatives may become obsolete or preempted entirely. Climate change legislation considered earlier this year would have offered trade-in credit for programs like RGGI under the federal program.  Many on the Hill and in the Administration will likely be watching RGGI's launch closely for clues as to what shape future federal initiatives should take.

The next RGGI auction is planned for December 17 and quarterly thereafter.

To learn more about climate change issues and Sutherland's interdisciplinary climate change practice, please click here.

For more information, contact:

Catherine Krupka

Susan Lafferty

Nate Teti

Ben Norris

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