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KAI RYSSDAL: The markets have been a bit perilous the past 10 days or so. But just because stocks and bonds are going crazy doesn't mean there's not room for another experiment in capitalism. Later this week the country's first mandatory market in carbon is going to start trading in the Northeast. On Thursday the Regional Greenhouse Gas Initiative, or RGGI [pronounced Reggie], as the inevitable acronym has it, will hold its first auction of greenhouse gas permits.
But as Sarah Gardner reports from the Marketplace Sustainability Desk, bidding for those permits might not be all that hot.
SARAH GARDNER: This regional cap-and-trade scheme has been in the works for over five years. For now, it applies only to power plants.
The idea is to set a legal cap on yearly emissions. Companies that cut their greenhouse gases earn pollution credits. They can then sell those credits to other utilities that still emit above the limit. Over time, the cap is lowered, making polluting more expensive and credits more valuable. RGGI's goal is a fairly modest one: cut greenhouse gases 10 percent by 2018.
But Dale Bryk, a senior attorney at the Natural Resources Defense Council, says this cap-and-trade program is a huge step forward.
Dale Bryk: This is the first time that a government is auctioning pollution permits for a regulatory program instead of giving them away for free.
RGGI is determined to learn from the European Union's mistakes. When the EU launched a cap-and-trade system in 2005 it handed out most of its carbon permits for free, and it handed out too many. That allowed some of Europe's biggest emitters to turn around and sell their free permits for windfall profits.
RGGI, instead, will auction off its permits and invest the proceeds in energy efficiency and renewable technology. The auction will also set an initial price on the carbon credits before trading begins.
But RGGI may not escape all the problems the EU faced. Emily Mazzacurati is an analyst at market research firm Point Carbon.
Emily Mazzacurati: They set the cap a little too high, actually.
Mazzacurati says right now emissions are actually running substantially lower than the cap RGGI states agreed to several years ago.
MAZZACURATI: There was the assumption that emissions were going to keep growing between the time the cap was set in 2005 and the start of the program in 2009.
Mild winters and rising energy prices have helped cut electricity demand. But that means RGGI starts out with an oversupply of carbon credits. And that means less incentive for polluters to rush in with high bids, or cut their greenhouse gases.
When I asked some potential bidders whether they'll participate in Thursday's auction, they played their cards close to the vest. Martin Murray is a spokesman for PSNH, one of the largest electric utilities in New England….
MARTIN MURRAY: We're not going to divulge our actual purchase strategy or what auctions we will participate in, but we're certainly, if nothing else, going to be looking very actively at the first auction.
Murray notes that under RGGI rules, power companies have three years to buy the carbon permits they need, and auctions will be held each quarter. RGGI officials caution observers not to judge this first auction solely on the price the carbon permits fetch.
Phil Giudice is commissioner of the Massachusetts Department of Energy Resources.
PHIL GIUDICE: I don't have a target price expectation at all. I do hope for and expect we will have a robust auction -- that there will be a great number of buyers and participants.
Those buyers will no doubt include Wall Street brokers, who are also allowed to bid. Environmental groups may bid as well, although none have said they intend to. The Natural Resources Defense Council, though, is urging RGGI to retire some of its allowances early on to increase demand and spur pollution cuts more quickly.
The NRDC's Dale Bryk:
BRYK: We know we'll get that reduction over time. But we would like to see those reductions in the very first year.
Bryk and her colleagues are fully aware that RGGI's progress will influence debate in Washington next year on a federal cap-and-trade system.
I'm Sarah Gardner for Marketplace.