Northeast CO2 Permits Draw Low Price, Some Don’t Sell

Carbon dioxide permits in the U.S. Northeast’s cap-and-trade program sold at auction this week for $1.86 each, the minimum allowable bid, and 43 percent of the allowances didn’t sell at all.

The price for Regional Greenhouse Gas Initiative allowances matched the record low set at the last quarterly auction in September. The results of the Dec. 1 auction were released today on the program’s website.

“Supply clearly exceeds demand and the states should cut back the number they are making available,” Peter Shattuck, a carbon-markets policy analyst at Environment Northeast, an advocacy group based in Rockport, Maine, said in a telephone interview.

Of the 45.3 million carbon dioxide permits offered this week, 19.4 million didn’t sell. Each allowance gives a power plant the right to emit one ton of carbon dioxide in a cap-and- trade program that covers 10 states from Maryland to Maine.

In September, 25 percent of the allowances offered didn’t sell. The higher number of unsold permits this week was “totally expected” because of a growing surplus of allowances, said Paul Tesoriero, director of environmental trading at Evolution Markets LLC in White Plains, New York.

‘Too Many’

“There’s too many out there,” Tesoriero said in a telephone interview. In the secondary market, permits for December delivery fell 2 cents, or 1 percent, to $1.89 each on the Chicago Climate Futures Exchange.

The surplus is the result of a gap between the carbon dioxide output from power plants and the number of permits being issued. The Northeast states decided in 2005 how many permits to issue, leaving room for emissions to rise before the carbon limits became enforceable last year. Instead, emissions fell as the economy slowed.

The pollution trading program’s carbon dioxide limit, or cap, is currently 188 million tons a year. Power plants in the region released 124 million tons of carbon dioxide last year by burning fossil fuels such as coal and natural gas, according to a report this month from the New York State Energy Research and Development Authority.

The weather, improved energy efficiency and lower prices for natural gas, the cleanest-burning fossil fuel, also drove power-plant emissions lower as the worst recession in seven decades curbed demand for electricity, the report said.

Number Declines

Under the rules of the carbon trading program, the number of permits issued each year will begin to drop in 2015 until 169 million are issued in 2018, 10 percent lower than the current cap, according to Bloomberg New Energy Finance estimates.

Environmental regulators in the Northeast plan to review the rules of the cap-and-trade program in 2012. They have already asked environmental groups, power plant owners and other stakeholders whether to lower the cap by cutting back the number of available permits, Shattuck said.

He said the supply should be cut because “the goal of program was to reduce from 2009 levels and the cap was set well above 2009 levels.”

The cap shouldn’t be changed, said NextEra Energy Inc., the largest U.S. producer of renewable electricity, in a Nov. 30 letter to the officials in charge of the Northeast carbon market.

Economic Impact

“Making the program more stringent or more costly, particularly during this economic downturn, would only serve to place a greater burden on customers and delay an economic recovery,” said the Juno Beach, Florida-based company, which also operates power plants that run on fossil fuels in the 10- state region covered by the cap-and-trade program.

State environmental regulators are currently debating whether the program could be “linked” to a planned carbon market on the West Coast so they operate as a single emissions- trading system, Kedin Kilgore, head of U.S. emissions trading for London-based Barclays Plc, said in a telephone interview.

The western program would be led by California, which has set tougher pollution targets than the Northeastern states, Kilgore said. Unless the Northeast program sets a tighter cap by cutting back the number of available permits, California may not want to merge the two, he said.

This week’s sale of carbon allowances raised $48.2 million, bringing the total raised since the first auction in September 2008 to $777.5 million, according the Northeast cap-and-trade program.

Most of the money is being spent on energy-saving and renewable-electricity projects “to help our businesses become more efficient, support job growth, and lower our electric bills,” David Littell, a commissioner with the Maine Public Utilities Commission and chairman of the cap-and-trade program’s board of directors, said in an e-mail.

New York, New Jersey and New Hampshire have used some of the auction revenue to help close budget shortfalls.

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

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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