Sept. 9 (Bloomberg) -- Prices of permits to emit carbon dioxide in the U.S. Northeast may fall to the lowest levels on record at an auction today amid economic weakness and delays in establishing a national pollution-trading market.

The Regional Greenhouse Gas Initiative for 10 states from Maryland to Maine offered 30.6 million permits at its fifth quarterly auction after prices fell 50 percent in a year. The recession sent natural gas prices tumbling 79 percent and cut demand for power from coal-fired plants, reducing the need for carbon contracts. The auction results will be released Sept. 11.

“The states set their carbon caps thinking emissions would be higher, but what actually happened is the recession and cheaper natural gas brought emissions down,” Milo Sjardin, a New York-based carbon market analyst with New Energy Finance, said in a telephone interview.

Senate delays in creating a so-called cap-and-trade system are contributing to the price decline, Sjardin said. A bill requiring that U.S. polluters buy a permit for each metric ton of carbon dioxide they produce passed the House of Representatives on June 26.

Barbara Boxer of California, the Democratic chairwoman of the Senate Environment and Public Works Committee, pushed back the initial August deadline for her panel to pass a cap-and- trade bill to September, citing the Senate’s focus on health- care legislation. The House plan would absorb the regional market and convert the permit surplus into federal allowances.

Futures Trading

December contracts for the regional system, known as RGGI, fell 3 cents, or 1.1 percent, to settle at $2.57 at 5 p.m. in New York on the Chicago Climate Futures Exchange, the fifth straight record low. A $2.60 settlement was posted at 4 p.m., according to data compiled by Bloomberg. The contract fell as low as $2.36.

The price in the auction may fall to between $2.30 and $2.40, said Paul Tesoriero, director of environmental trading at Evolution Markets LLC in White Plains, New York. In the previous auction, held June 17, they went for $3.23.

“Through the year we’ve seen emissions forecasts coming down and federal climate legislation take a back seat to health- care, so RGGI prices are headed lower,” Tesoriero said.

The number of permits in the program was set in 2005 and won’t be reviewed for another three years. The minimum bid the states will accept for each permit in today’s auction is $1.86.

“The expectation that a federal cap-and-trade bill will pass Congress has been the main reason that the price has stayed higher than the auction reserve price,” Sjardin said.

Northeast Permits

Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont agreed to make 188 million permits available every year from 2009 through 2014. The number would then drop each year. The total was intended to give power plants room to boost emissions between 2005 and 2009 before beginning cutbacks.

Permits should trade at the minimum price because pollution levels are below the group’s 2018 target of 169 million tons and will probably stay there, Sjardin said in an Aug. 7 research note.

There will be a surplus of 78 million permits in the regional cap-and-trade program by 2014, according to estimates in a report released today by Oslo-based environmental market analysis firm Point Carbon. The surplus would come even if emissions climb with a recovering economy, the report showed.

Excess Permits

Power plants could use this bank of permits to comply with the program’s targets through 2018 instead of cutting back their emissions. “The accumulated bank will be large enough that it will not be depleted before the end of the program,” Point Carbon said.

If passed by Congress, a national cap-and-trade program would be unlikely to see carbon prices as low as those currently seen in the Northeast, John Reilly, associate research director at the Massachusetts Institute of Technology’s Joint Program on Global Change, said by phone.

Under the House-passed bill, the federal government would auction around 18 percent of the permits in a national cap-and- trade program, according to the Congressional Budget Office. In 2012, the minimum bid would be $10 a permit, which is “pretty certain to at least keep the price at $10,” Reilly said.

The reduction targets in the House bill, 17 percent below 2005 levels by 2020 and an 83 percent cut by 2050, are tougher than the Northeast’s, which should also spur demand for federal cap-and-trade permits, also called allowances, he said.

Even if there is a surplus of permits at the beginning of a national cap-and-trade system, “the program is going to continue to tighten and therefore firms will bank allowances from the early periods” to count toward tougher emissions limits in the future, Reilly said.

To contact the reporter on this story: Simon Lomax in Washington at slomax@bloomberg.net.

Last Updated: September 9, 2009 19:06 EDT