US regional cap-and-trade comes on line

The still embryonic US carbon market took another step towards maturity this week when the Chicago Climate Exchange (CCX) began trading futures in carbon credits issued by a new regional cap-and-trade system.

The voluntary trading exchange for greenhouse gas emissions traded futures in 70,000 allowances that will be issued by the Regional Greenhouse Gas Initiative (RGGI), a carbon trading system that is due to start auctioning the allowances among its nine member states.

"We are auctioning allowances on 25 September, and are then doing it four times a year," said RGGI spokesman Jonathan Schrag. "We think that auctions are the most economic and fairest way to distribute the public's right to clean air. "

RGGI futures traded at between $5.25 and $5.70 per tonne, roughly a fifth of the equivalent price on the European exchanges. Schrag explained that it was a "different market", not least because the RGGI scheme only covers electrical power plants.

The cap on emissions set by the market is higher than emissions have typically been in the region, although it will begin dropping after 2015. Critics claim that this could lead to low carbon prices, similar to those experienced during the first phase of the European Emissions Trading Scheme, which may in turn make it more cost effective for power plants to simply buy extra allowances than to install expensive carbon capture equipment.

"Any discussion of the level of the cap is based on short term trends which are the weather and fuel switching, and those trends can go up and down," argued Schrag. "We think the long term market stability is ensured by a reserve price. So any discussion of over-allocation is based on short term trends."

The RGGI is the first mandatory carbon trading system to be introduced in the US, although more are expected in the coming years with the Western Climate Initiative proposing a regional cap and trade scheme for western states, and both presidential candidates have expressed interest in a federal scheme.