Regional Greenhouse Gas Initiative auction prices hit their lowest mark since the program began selling polluting rights last year.
The auction to disperse CO2 emissions permits in ten northeastern states sold allowances for the 2009 vintage at a price of $2.19/each—down 32 percent from June—and allowances for the 2012 vintage at a price of $1.87/each—down 9 percent from June.
As Keith Johnson pointed over at Environmental Capital earlier this week, three things likely sent prices plunging:
First, state authorities appear to have made a similar mistake as European authorities did when they started their own cap-and-trade program. That is, they over-estimated the amount of permits that power companies would need to cover their emissions requirements. The result is a surplus of pollution permits, which pushes their price down.
Second, the recession whacked demand for electricity, which means that power plants emitted even less than they thought they would.
Third, cheap natural gas over the last year has made it easier for power companies to switch to the cleaner-burning fuel, which again means fewer emissions of greenhouse-gases.
Lawmakers plodding through a discussion of a national plan to cap CO2 emissions would be wise to learn a thing or two from RGGI. Namely, finding the right balance of permits and pricing is crucial to realizing environmental benefits with the least amount of economic woe. A “price collar,” like the one included in the bill passed by the House in June, may be one way to strike that right balance, as Ray Kopp points out in this post:
Short-run demand and supply conditions can lead to significant allowance price volatility, as we have seen in the European Union’s carbon market. Very low allowance prices may not provide the needed incentives for conservation, and the development and deployment of new technology. H.R. 2454 adopts and minimum price auction ($10 reserve price in 2012) to set an allowance price floor. To the extent the Strategic Reserve Auction can act as a credible price ceiling, the bill now contains a price “collar,” the combination of a floor and ceiling designed to minimize allowance price volatility.
Tiffany Clements is managing editor of Weathervane. Contact her at clements@rff.org.