Is US scheme repeating EU's emissions trading mistakes?

The US's first cap-and-trade carbon market conducted its second carbon credit auction this week, as a report revealed that emissions in the region were 16 per cent below the scheme's cap.

The Regional Greenhouse Gas Initiative (RGGI) held the second of its "pre-compliance" auctions yesterday in the run-up to the mandatory compliance period, which begins in January.

But the auction came amid fears that the economic downturn meant the US scheme could repeat the mistakes evident in the first phase of the EU's emissions trading scheme by setting the cap too high - a scenario that led to a glut of available emission permits and a collapse in the price of carbon.

Non-profit policy thinktank Environment Northeast released RGGI Emissions Trends & the Second Allowance Auction, a report which said emissions were currently 16 per cent below the cap. It pointed to skyrocketing fossil fuel prices earlier in the year as the primary reason for a lower than expected emissions rate.

"RGGI was negotiated back in early 2003 through 2005, and at that time everybody thought the trend would be up," said Derek K Murrow, director of policy analysis at Environment Northeast. "Since it was negotiated we've seen a signfiicant decline, which is really a good thing. Now the question is whether that trend will continue as the programme starts up in 2009, in which case the cap might need to be bought down more quickly after the first compliance period. Or will emissions return to their historic levels, in which case the cap would be constraining?"

This is the second RGGI auction. The first, in September, put 12.5m credits from six of the ten participating states onto the market. Yesterday's auction offered 31.5m allowances from all ten states. Trading begins in January, and there will be quarterly auctions for the next three years. Current plants call for the cap to be reduced by 2.5 per cent a year between 2015 and 2018.

Murrow suggested that it was unclear if the cap would need to be dropped faster to deliver a meaningful price for carbon, claiming that significantly lower oil prices, combined with greater electricity consumption from potentially hotter summers, could create an upturn in emissions next year.

The auction came as OPEC confirmed it would cut daily production by an unprecedented 2.2m barrels of oil per day to try and buoy up tumbling oil prices. In addtion to OPEC's attempts to scale back supply an estimated 45m barrels of oil are currently being stored at sea on oil tankers as the market faces a continued glut.