New York along with nine other northeastern states is creating its own greenhouse gas “cap, auction and trade” system in an effort to reduce carbon dioxide emissions from power plants using fossil fuel. This “Regional Greenhouse Gas Initiative,” known as RGGI, was conceived by the states in the absence of any comprehensive national program, carbon tax or national cap and trade system designed to reduce carbon dioxide in the atmosphere.
Sale of CO2 Allowances
Regulations to implement a New York greenhouse gas allowance auction system have been proposed by NYSERDA and the New York State Department of Environmental Conservation, DEC. DEC will require New York utilities emitting carbon dioxide to purchase allowances, and NYSERDA will conduct the auctions.As the amount of allowances is gradually reduced, their cost will increase, and presumably the higher cost of production will induce buyers to purchase from cleaner sources and will induce power producers and sellers to reduce overall emissions in order to avoid or reduce the cost of allowances. Subsequently, after the initial auction, allowances may be bought and sold and traded by non utilities, including energy traders and hedge funds, in largely unregulated secondary markets.
In December 2007 PULP filed comments on the NYSERDA regulations. The comments point out that the new system is likely to increase the price of all electricity sold in the state, even electricity produced by generators that emit little or no carbon dioxide, such as hydro, nuclear, and wind power plants. This is because the wholesale energy markets are designed to pay all sellers the market clearing price, which is set by fossil fueled power plants.
In addition, there is a possibility that sellers will incorporate prices set in secondary markets for allowances when they make their price demands in in the day-ahead and real time single clearing price spot markets. These secondary markets and the prices of allowances are basically unregulated.
A possible result of the secondary market prices is that even if sellers have allowances purchased in advance from NYSERDA, they may make their price demands for electricity to be sold tomorrow in spot markets as if they are buying allowances today in the secondary markets, at possibly much higher prices. A similar phenomenon has occurred with respect to the pricing of electricity generated with natural gas. Power producers typically make their price demands based on tomorrow’s price of natural gas, even if they already have lower cost gas available under a long term contract. Volatile high prices in a secondary market for greenhouse gas allowances may thus enable sellers to ratchet prices much higher than they would be elevated by the price of allowances when they are initially sold by NYSERDA. It is not clear how the contracts for purchase of allowances would be regulated by FERC, but based on FERC’s enthusiastic embrace of deregulated wholesale markets, it is probable that FERC would take no action to assure reasonable prices when allowances are bought by sellers with “market based rate” permission and the price is added to wholesale rates.
A possible warning sign is that in Europe greenhouse gas allowances are adding substantially to the cost of electricity. Also, significant results from the cap and trade program, in terms of reduced emissions, seem to be absent so far.
If RGGI has similar results in New York, the cost of electricity could increase substantially. This may be dismissed by cap and trade proponents as only the cost of a few lattes, but it could make a very large difference to low income households who now have difficulty paying today’s energy prices and who run out of money for other essentials for their families before the end of the month.
PULP urged NYSERDA to commit 35 – 45 percent of the proceeds of its allowance auctions to increase energy efficiency services for low income households.