Emissions auction aims to be US model

Power plants in 10 states will bid on the right to pollute

WORCESTER - In the 14th-floor offices of World Energy, Richard M. Domaleski, Philip V. Adams, and their employees are checking off the final items on a to-do list for an unusual online auction their company is scheduled to oversee tomorrow.

Think of it as eBay with a twist: Instead of products, they'll be hawking pollution.

Power companies, environmentalists, financial institutions, and others are expected to participate in the bidding. They'll be competing for allowances that give 233 power plants in Massachusetts and nine other Eastern states the right to emit greenhouse gases, which contribute to global climate change. The idea is that by requiring power plants to buy allowances for every ton of carbon dioxide they emit, their operators will have a financial incentive to reduce pollution.

That's the ultimate goal of the Regional Greenhouse Gas Initiative, or RGGI, a multistate coalition stretching from Maine to Maryland. The coalition decided to hold an allowances auction to cut the amount of carbon dioxide generated by power plants in the region.

Carbon dioxide trading already exists in Europe. Some carbon dioxide allowances also are being traded in the United States on a voluntary basis through the Chicago Climate Exchange. But the regional initiative is the nation's first mandatory capping effort for carbon dioxide.

In anticipation of the initiative's auction, the Chicago Climate Futures Exchange and the New York Mercantile Exchange recently began trading RGGI futures.

"This is sort of a benchmark moment," said Seth Kaplan of the Conservation Law Foundation, a nonprofit environmental advocacy group with offices throughout New England. He said some environmental advocates have been pushing for carbon dioxide regulations for over a decade.

Overall, 188 million allowances - one for each ton of carbon dioxide - will be auctioned off in batches over the next year. Similar auctions are scheduled for December and on a quarterly basis thereafter. Proceeds will fund green efforts and energy efficiency programs in many of the participating states. Over the next decade, the cap will be lowered to gradually reduce overall emissions by 10 percent, which will serve to raise the price of allowances and increase pressure on power plants to invest in clean technologies to avoid the higher cost of polluting. Similar cap-and-trade programs have been used to help reduce acid rain.

"We are building a new kind of regulatory program that is market-based," said Jonathan E. Schrag, the executive director of RGGI Inc., the initiative's nonprofit corporation.

The mandatory auction is the regional initiative's first, and a sort of a test run the rest of the country - especially Congress - and the rest of the world will be watching, said Ian Bowles, secretary of the state's Executive Office of Energy and Environmental Affairs.

"Our nation is way out of step with the rest of the world in terms of taking some steps to reduce greenhouse gas emissions, so in the absence of federal actions you are seeing 10 states come together," Bowles said. "I think we have to be clear that this is just the start."

Tomorrow, more than 12.5 million allowances will go on sale for three hours starting at 9 a.m., though buyers - whose numbers haven't been disclosed by RGGI Inc. - won't know what they'll be paying or how many credits they're getting until Monday, at the latest. A minimum price has been set at $1.86 per allowance.

World Energy, an energy procurement company, was selected by the initiative in March to oversee the auction. Adams, the company's president, said he believes his company was chosen for its experience handling environmental commodities and government transactions, and setting up auctions.

"The basic idea is like eBay," Adams said. "There's nobody going, 'Going, going, going, gone!' "

But some worry consumers will end up paying for the initiative's efforts.

"Whatever the allowance price is, it's going to be passed on to the consumers," said Robert Rio, a senior vice president for Associated Industries of Massachusetts, a trade group. "We are watching [the auction] with concern."

Jim Norvelle, a spokesman for Dominion power company, the largest power generator in New England, had additional concerns, especially about the initiative's breadth.

"We would much rather see a national policy than a regional one," said Norvelle, whose company operates Salem Harbor Power Station in Salem and Brayton Point Power Station in Somerset and will be bidding on allowances. "Certainly, greenhouse gas emissions are not solely a regional issue."

Norvelle said Dominion officials also question whether there will be too few buyers for the allowances being auctioned, in part because the emissions cap was originally determined by estimating 2009 pollution levels - a cap that some now believe is too high. In recent years, emissions dropped as Northeastern power plants, which can burn oil or natural gas, started burning gas because the price fell at the same time oil skyrocketed. Natural gas pollutes less than oil.

Derek Murrow, director of policy analysis for Environment Northeast, a nonprofit environmental advocacy group, said if there are not enough buyers, it will only serve to keep the initial allowance price low.

"The first auction is really just a small release of allowances to the market for price discovery purposes," he said. "I think a lot of people will just be kind of testing the waters."

Even so, Murrow added, the importance of the auction and the initiative's overall cap-and-trade program should not be understated. Greenhouse gases, he said, exaggerate ozone and smog pollution and contribute to extreme changes in temperature and weather patterns.

"I think increasingly, the general public is aware that we need to do something about climate change," Murrow said.

Erin Ailworth can be reached at eailworth@globe.com.