The Regional Greenhouse Gas Initiative had its first auction this week since lowering its cap — and the results suggest the system is once again effectively reducing carbon emissions.
Encompassing nine states in the northeast, RGGI is a cap-and-trade system that started operating in 2008. It sets an overall cap on the amount of carbon dioxide that can be emitted by the participating states. Then it breaks that amount into permits — each allowing for one ton of emissions in a given year — and auctions them off to the firms subject to the system.
That’s where the problem lay: starting in 2010, the cost of the permits in RGGI’s auctions flatlined at just under $2 per ton. At such a low price, the incentive to cut was low-to-non-existent — a sign that RGGI’s cap was so high it wasn’t reducing carbon emissions beyond what business-as-usual would’ve done.
Just like the failed emission permit market in Europe, the US States involved responded to perceived market failure by cutting the amount of permits available to trade. The permit prices are now rising to levels which create incentives to physically reduce emissions rather than just to buy them. This cooperation across State boundaries shows that America itself doesn’t have to sign up for Kyoto if the States act as though they had signed up. That’s the beauty of the Federal System.