Published September 26, 2008 09:46 AM

First U.S. greenhouse cap-and-trade market opens

Ten states in the U.S. Northeast kicked off the country's first cap-and-trade market on greenhouse gas emissions on Thursday, gaining accolades from environmentalists and many businesses but also eliciting concerns about how the states will spend the money the plan raises.

The states from Maryland to Maine formed the Regional Greenhouse Gas Initiative to limit emissions of carbon dioxide from power plants in the absence of guidance from the Bush administration on regulating planet-warming gases.

The group on Thursday conducted its first auction of permits to emit CO2 to utilities and investors who believe that their value will rise. It offered 12.5 million permits in the auction, each representing 1 ton of carbon dioxide, and will offer up to 188 million permits annually for three years.

By 2012 the region's power companies either must stabilize emissions at current levels or turn in permits they bought in the market. In the second compliance period, RGGI will lower the emissions cap 10 percent from current levels by 2019.

The states plan to spend money raised from the auctions on improving energy efficiency and alternative energy in hopes of shielding consumers from the program's costs.

But concerns have been raised about how the states will actually spend the money.

"There is a real danger that auction proceeds will be diverted to state budgets rather than used to accelerate the transition to a clean-energy economy," a New York Times editorial said on Thursday.

New York Gov. David Paterson said at the RGGI launch at the New York Mercantile Exchange that he understood the concern.

"There are times when governor types have raided incoming revenues for other purposes," he said, "and certainly this would be an economic condition that would create that temptation."

But he said he was sure New York's proceeds would be spent in the right place, because helping consumers pay power bills and potential jobs created by clean energy are integral to the state's economy. New York did not sell permits in Thursday's auction because it had not finalize rules in time. But Paterson said the state would be able offer permits in December, when RGGI will hold its second auction.

Among those watching RGGI's pioneering efforts are Western states and Canadian provinces who hope to establish a broader cap-and-trade market by 2012, Midwestern states who are considering a similar market, and U.S. lawmakers who hope to pass regulations to cap emissions sometime after the next president comes to power in 2009.

Laurie Burt, the commissioner of the Massachusetts Department of Environmental Protection, said her state is trying to spend the money equitably. "We need to develop creative ways to make sure the benefits of energy efficiency are going to all ends of the spectrum of energy consumers, not just large consumers, but low income citizens and tenants."

Jonathan Schrag, the newly appointed RGGI executive director, said each state is ultimately responsible for how it spends the money.

RGGI will reveal on Monday how much money the initial auction raised. In futures markets contracts for the allowances were being sold for a bit more than $4.00 per ton on Thursday.

(Editing by Gene Ramos)

Sourced from the Reuters InterActive Carbon Markets Community - a free, gated online network for carbon market and climate policy professionals.

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