The retail side of cap and trade: engaging the citizen-consumer in the fight against climate change

On December 8 2008, I became the first Canadian to help “retire” 12 tons of carbon from the carbon cap and trade system that covers emissions from power generating plants in the U.S. northeast. To be precise, I paid US$100 to buy 12 allowances (1 allowance = 1 ton) through the Regional Greenhouse Gas Initiative (RGGI). What did this accomplish? The allowance broker, in this case the Adirondack Council, says it will retire these allowances, i.e., remove them permanently from the system , on my behalf—rather than trading them with emitting companies. The Council claims this will remove an equivalent amount of carbon from the atmosphere.

How valid is this claim? Under cap and trade rules, companies can emit carbon up to the cap. If a company wants to emit over its cap, it has to purchase allowances. If there are no allowances left to purchase, then, theoretically, too bad—the company cannot emit any more carbon. The RGGI covers power plants (and only power plants), which means that the company would have to stop running its fossil-fired generators.

Would politicians in the ten RGGI states allow fossil-fired power plants to go offline at, say, three in the afternoon on a hot summer weekday if those plants had already reached their emission caps? That is the crux of the matter. RGGI is supposed to spur the right kind of investment to make sure politicians don’t ever have to make that kind of decision.

RGGI aims to lower the cap gradually through 2018, meaning that allowances will become scarcer as time passes. Since emitting companies are required to buy (and can sell or trade) allowances, this means allowances will become ever-more expensive, thereby, again theoretically, forcing emitters to find other non-fossil-fueled ways of putting electricity into the grid.

The inaugural RGGI auction raised over $38.5 million from the sale of over 12.5 million allowances, at a clearing price of $3.07 per allowance (see the RGGI press release). The $38.5 million will go to promoting renewable energy and conservation in the ten RGGI states. The Adirondack Council bought 1,000 of the allowances (and sold four of them to me on December 8). By removing these 1,000 units from the trading system, the Council hopes to put immediate pressure on emitters in the RGGI to find these other ways.

The potential problem with this, in my view, is RGGI’s conception of the right technological shift. The express aim is to put a price on carbon emissions, thereby sending a market signal that will “support the investment in clean energy technologies.” “Clean” appears to mean “renewable,” which means wind, solar, biomass. A combination of these generating technologies, plus conservation (i.e., making do with less) is supposed to produce a ten percent reduction in greenhouse gas emissions through the ten-state RGGI area. As I mentioned, the auction proceeds will go to promoting these technologies plus conservation.

As I have made plain elsewhere, a ten percent emission reduction from a mature modern power system with significant coal assets is possible only if a good proportion of those coal assets are replaced with nuclear and/or gas-fired generators. Is this happening in the RGGI states? To a degree, yes. Unistar plans to add 3,200 megawatts of nuclear power in RGGI states: a 1,600 megawatt machine at the Calvert Cliffs plant in Maryland, and a similar unit at the Nine Mile Point plant in New York; see article. This 3,200 MW of nuclear capacity will play by far the biggest role in meeting the RGGI target.

Ironically though, RGGI auction proceeds and market signals are not providing the initial stimulus to these projects. That is coming from the U.S. federal government, in the form of loan guarantees, construction delay insurance, and power production tax credits intended to spur new nuclear development in the U.S. These were enacted in 2005, long before the current bailout binge.

It is not a sure thing that the federal incentives will achieve the desired purpose (see Dan Yurman’s recent article on this issue). But this stands a better chance than RGGI of actually getting shovels into the ground.

As a participant in the RGGI allowance market, I am now emotionally invested in seeing that RGGI achieves its reduction target. I’d like to see the proceeds from future auctions go to the technologies that have the best hope of meeting the target.

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11 years ago

I’m fascinated that RGGI has included an option for Environmental Groups and even individuals to participate in the auction at all — something that had never occurred to me as being likely in a cap and trade system. However, I notice that RGGI has reserved the right to limit who can participate in the future, so it seems this is more of a goodwill move with an escape hatch, and one that may not make an impact until carbon allowance limits start to reduce as the program continues.

Still it will be interesting to see what kind of impact the RGGI has as it progresses and refines itself — hopefully it will hold true to its goals.

11 years ago

Mara,

You could be right that RGGI permitted the Adirondack Council to retire allowances as a goodwill gesture. That would be consistent with the approach of another major cap and trade system, the ETS. If carbon is supposed to carry a meaningful cost, it would be taxed rather than capped and traded. But if the idea is to introduce industry to the world of carbon costs, cap and trade is the way to go—provided there is ample wiggle room. Permitting the retirement of allowances on a large scale reduces that wiggle room (by reducing the number of units in the trading system and thereby raising their price), so it likely won’t be permitted on a large scale.

We should be clear though that my participation in RGGI was facilitated by the Adirondack Council (which is why I referred to the Council as the broker). RGGI auctions allowances in blocks of 1,000. One block would have cost me over US$3,000 in the first auction.

I should also clarify my question regarding the hot summer weekday scenario. The question should be, what happens on a hot summer weekday afternoon when a coal-fired power plant has emitted up to its cap, run out of allowances, and there are no allowances available on the market? This scenario could occur—in fact the system is designed to make it occur—since the number of allowances is supposed to drop in successive stages as we approach 2018. In that scenario, will the coal-fired plant be required to stop operating?

I just cannot see anybody taking a power plant off line in those circumstances. That would be like forbidding homeowners to use gasoline-powered generators during a blackout. It won’t happen. Which makes me wonder how meaningful it is that carbon allowances were retired in my name in 2008.

And again: individual RGGI states intend to guard against having to make such a choice by directing the auction proceeds to investments in “green power” and conservation—two approaches that, combined, can’t even come close to addressing the power shortfall that would occur if a big coal-fired plant were to suddenly become unavailable.

11 years ago

Hi Steve – your shut down example could be a lot more dramatic. Lets consider a freezing January late afternoon. Everyone is asking for more power, to finish the factory shifts and to keep the buildings warm. But the artificial limit has been reached. Someone has to suffer. Do we shut off power to the homes and let the mothers and babies freeze? Or do we shut down the hospital instead? How about the old age home, perhaps people wont mind if we freeze them to death. Or do we shut down the factories and cause millions of dollars of business losses? Or do we just feed in more power and keep everybody happy?

I sit here aghast at the degree of doublethink needed to make one even consider cap and trade as a realistic possibility. In my humble opinion the only measurable result of all this cap and trade bargaining will be a delay in the development of nuclear power, and significant worsening of the global heating problem as a result. I can only hope that your persistent lobbying for open-eyed realism will have some effect. Keep up the good work!

11 years ago

Good points Randal,

Any Canadian (federal or provincial) participation in a cap and trade system should be conditioned on nuclear power being eligible as one of the “clean” technologies toward which allowance auction proceeds are directed. In fact, the primary eligibility criterion should be potential low- or zero-emission kWh baseload per dollar (or likelihood of significantly reducing power-system emission intensity in kg/kWh). Auction proceeds should be proportionally allocated on that basis, with a set aside for wind, solar, biomass, geothermal, conservation.

[…] A month ago, I paid US$100 to retire 12 tons’ worth of RGGI carbon allowances in the names of several family members. I received several handsome certificates, which promise that the allowances will indeed be retired from RGGI. At the time, I wondered what that promise is really worth. What would happen if power generators covered under RGGI go over their emission caps? Of course they would not be shut down; they would be fined (see article). […]