What a national cap-and-trade program might look like

Ten Northeast states already have their own greenhouse-gas emissions regime. It's one model for the federal plan.

Just after 9 on a recent morning, Bob Kasle sat down at his computer and glimpsed what could be the future of the climate bill the US House approved Friday.

It was, in the end, rather routine. It took the International Power employee about 20 minutes to complete his part in an online auction of more than 30 million carbon credits. His biggest concern, he confesses, was to not accidentally add too many zeroes to the bid.

But the Regional Greenhouse Gas Initiative (RGGI) – a coalition of 10 Northeastern states that has agreed to limit carbon-dioxide emissions – is anything but ordinary. It is the preeminent greenhouse gas cap-and-trade program in the United States, and as such, it is the closest thing to a domestic model for the legislation now on Capitol Hill.

The offices of Democratic Reps. Henry Waxman and Edward Markey, who shepherded the American Clean Energy and Security Act through the House, have called RGGI representatives to ask about their auctions. From its inception, RGGI had intended to be a forerunner of national policy: "When we started, we were hoping that there would be a larger-scale federal program in the future," says Laurie Burt, commissioner of the Massachusetts Department of Environmental Protection.

Now RGGI is providing a path for that federal effort. It "demonstrates that auctions can work," says Robert Stavins, an environmental economist at Harvard University in Cambridge, Mass.

In many respects, RGGI is a slightly less ambitious version of what the Waxman-Markey bill attempts. While RGGI aims to cut greenhouse-gas emissions 10 percent by 2018, the House measure aims for a 17 percent reduction by 2020. Likewise, RGGI requires only electric power generators of more than 25 megawatts to participate in its auctions. Waxman-Markey would affect a much wider swath of industries, including coal, oil, and iron, steel, cement, and paper manufacturers.

Yet, according to Commissioner Burt, many pieces of RGGI's working model found their way into the bill: Auctions would be quarterly and markets would be open to all bidders, not just those whose compliance is mandatory. Therefore, environmental groups or investors could also bid.

Additionally, there would be limits placed on the number of credits a bidder could acquire in each auction, reserve prices on allowances, and market monitors to ensure the integrity of the auctions.

Finally, compliance periods would be three years, which means that at the end of that period, companies must hold enough credits to cover their emissions during that time.

Yet RGGI is different in that it auctions 100 percent of its allowances. Then, it "takes those [auction] revenues, and turns them back into [energy] efficiency and clean-energy programs," says David Farnsworth of the Regulatory Assistance Project. "That way you get your cap and trade to work."

Waxman-Markey gives away 85 percent of the allowances at first – a compromise aimed at winning votes from crucial Republicans and coal-state Democrats.

But that could undermine the effectiveness of cap-and-trade, somewhat.

Waxman-Markey tries to offset this by allocating a significant percentage of its free allowances to local power-distribution companies with the express instructions that they be used to benefit consumers.

Still, with today's vote, RGGI has served its purpose. "To whatever degree the proponents of RGGI created it because they wanted to spur federal action, my view is that they ought to declare victory," says Professor Stavins.

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