From Auctioning Art to Auctioning Carbon Dioxide Emission Allowances

From Auctioning Art to Auctioning Carbon Dioxide Emission Allowances

July 25, 2008 02:09

By Grace Kurdian, McCarter & English, New York City

How far we've moved from the days when an auction simply conjured images of art trades at venerable art houses. Yesterday, the Regional Greenhouse Gas Initiative ("RGGI") released the bid preparation process (notice, qualification documents and background information concerning the auction process) for the first regional, mandatory, market-based carbon emissions auction to be held in the nation. The first RGGI auction of carbon dioxide allowances will be held on September 25, 2008. A second auction is planned for December of 2008. The auctions will be conducted using an electronic, internet-based platform through which bidders will submit their bids in a uniform-price, sealed-bid (single round) auction.

RGGI, a non-profit corporation to emerge from a cooperative started in 2003 and eventually entered into by 10 Northeast and Mid-Atlantic States (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New Hampshire, New York, Rhode Island, and Vermont, referred to as the "participating states"), is a regional mandatory, market-based cap-and-trade program that was initially intended to cover carbon dioxide emissions from power plants in the region. RGGI stems from the participating states' commitment to cap/stabilize and then to reduce the amount of carbon dioxide emissions that power plants in the region emit.

The RGGI goal is achieved through complementary, interconnected carbon dioxide Budget Trading Programs implemented by each participating state. The "allowances" are issued by the participating states, and each "allowance" represents the right to emit one ton of carbon dioxide. At the end of each compliance period, each regulated entity is required to prove compliance with each participating state's carbon dioxide Budget Trading Program.

It is anticipated that RGGI may be extended in the future to include other sources of greenhouse gas emissions (beyond power plants), and to cover greenhouse gases other than carbon dioxide. However, at this stage, the scope of RGGI is limited to carbon dioxide emissions from power plants.

Through the assistance of various working groups, the cooperative has: produced a Memorandum of Understanding, drafted a detailed Model Rule, provided for each participating state to follow the statutory or regulatory process required by each respective State to determine whether allowances would be allocated or auctioned and to determine the legal authority for conducting an auction of such allowances, engaged in design studies to determine the parameters of the allowance auction, created an allowance tracking system, and designed the allowance auction process. The funds collected from the auction will, in turn, be invested in energy efficiency and renewable energy projects throughout RGGI's participating states and also be used to assist particularly low-income consumers as to fuel assistance programs. (As an example of the public policy issues at play here, Connecticut changed its draft auction rules for RGGI just this week to require that funds raised be returned to ratepayers if the auction price for emissions allowances exceeds $5 per allowance.)

The Auction Notice released Thursday sets forth the process that potential bidders must follow to qualify and participate in the RGGI carbon dioxide allowance auction. The documents necessary for participating in the auction are available on the RGGI website at To participate in the auction, one must open a general account in the RGGI carbon dioxide allowance tracking system ("RGGI COATS"); submit a Carbon Dioxide Allowance Auction Qualification Application, become qualified by each of the states participating in the first auction; submit an Intent to Bid; and provide financial security approved by each of the states participating in the first auction. A detailed timeline is set forth in the Notice. Questions as to the auction process may be posted online through July 30, 2008. Completed Carbon Dioxide Allowance Auction Qualification Applications and Intent to Bid documents are due by August 8, 2008. By September 10, 2008, applicants will receive information concerning their qualification status. The final auction participation status will be sent to qualified applicants by September 22, 2008, and the first auction will be held later that week, on September 25, 2008.

The auctions to be held in 2008 are intended to provide emitters (regulated power producers) an opportunity to get a sense of the market price and plan for the first RGGI compliance period, which begins on January 1, 2009. The allowances purchased during the 2008 auctions may be used to demonstrate compliance in any of the ten participating states. During the September 25, 2008 auction, over 12,560,000 carbon dioxide allowances will be available for purchase from states including Connecticut, Maine, Maryland, Massachusetts, Rhode Island, and Vermont. The allowances purchased through the auction may be used by any regulated facility to meet their compliance requirements in any of the RGGI states, even in those RGGI states that are not offering allowances to be used in the first auction.

In short, the first and second RGGI auctions will provide an opportunity for those who have been ahead of the curve, attuned to the developments in the area of climate change, to collect allowances and develop their emissions reduction strategies and budgets even before the January 1, 2009 compliance period trigger forces all regulated power plants to face the upcoming regional compliance requirements.


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