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Print Edition StoriesFriday, December 18, 2009
Lower carbon costs are obstacle for energy efficiency projects
By Jackie Noblett
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Declining prices in the cost of carbon emissions allowances in the Northeast cap and trade program are a good sign for electricity generators and power companies but could put a crimp in the abilities of Massachusetts and other states to finance energy-efficiency initiatives with the proceeds.
Massachusetts has netted some $79 million from the auctions of the right to emit carbon dioxide but part of those quarterly windfall payments have declined by one-third since a price peak in March. The payments are far below the roughly $100 million a year some state officials thought Massachusetts would receive when the system was established.
State energy officials contend the proceeds are just one part of the revenue base to spend up to $2 billion on energy efficiency over the next three years. They say they are confident in the system.
“Over a three-year period we don’t know how much (proceeds) will come from Regional Greenhouse Gas Initiative ... but it’s still a very new market,” said Philip Giudice, commissioner of the state Department of Energy Resources. “It’s functioning well.”
The Regional Greenhouse Gas Initiative, known as RGGI, is seen in the United States and around the globe as an example of how to run a market for carbon dioxide, balancing the desire to cut emissions with concerns on the cost of such a program. That balance has likely produced an oversupply of allowances — the bane of previous schemes — at least in the short-term, and illustrates the troubles with building a market based on projections that are highly susceptible to outside influences.
Yet RGGI officials contend their system has shown that auctioning carbon on an open market does work.
“Price is probably not the most vital statistic, it’s just one market indicator,” said Jonathan Schrag, executive director of RGGI Inc., which manages the auction system for the 10 participating states. “There were over 100 participants in the last auction, and it’s a healthy sign for the process.”
Analysts point to a mix of too many carbon allowances being auctioned off combined with a poor economy and cheap natural gas — which burns cleaner than oil or coal — depressing demand for such allowances as the source of downward pressure.
“Gas prices are at historic lows, so it’s not directly related to cuts in emissions,” said Emilie Mazzacurati, manager of North American carbon market research for Oslo, Norway-based Point Carbon.
She added that if power generators and financial institutions that can sell the allowances on secondary commodities markets did not believe the credits would have some currency under a federal cap and trade system, the allowances would be trading for less than they are now.
Allowances for the 2009 compliance period sold for $2.05 cents in the December auction, down from $3.07 in the first auction in September 2008, and from $3.51 cents at its peak in the March 2009 auction. Allowances for 2012 cleared at $1.86 cents, down from $3.05 its first auction in March.
Yet business leaders warn the price declines are a drop in the bucket for most ratepayers.
“Nobody’s going to see that in their bill,” said Robert Rio of the Associated Industries of Massachusetts, “but any time the free market works, that’s a good thing.”
Environmental groups say they are concerned about the decline, not only because of its impact on energy-efficiency funding, but also because it indicates a reduced incentive for power companies to cut carbon emissions.
“RGGI was always presented as a mild, moderate program. It simply does not make the real reductions in carbon dioxide emissions,” said Seth Kaplan, senior attorney at Conservation Law Foundation. He said the RGGI states should revisit the cap and lower it to force greater reductions.
Giudice said energy-efficiency subsidies are tied to RGGI and other sources of revenue like ratepayer surcharges and selling energy efficiency programs on a regional power procurement system, and the state has dropped its funding to match declining income.
“This is not a crystal ball with perfect foresight,” he said. “We are all trying to learn as much as we can.”
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