The Meaning of New York’s Carbon Trading Move

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| Sourced From The New York Times |

Governor David A. Paterson of New York is thinking of giving the utility industry more free allowances to pollute under the Northeast carbon-trading system, as my colleague Danny Hakim reports today.

Environmentalists are furious. But what does this mean for the nine other Northeastern states in the Regional Greenhouse Gas Initiative — the carbon emissions trading bloc that began last fall.

From a technical standpoint, not necessarily much. New York has the largest number of allowances in the trading system — about one-third of the total — but the already-low price of allowances across the states is unlikely to fluctuate if New York gives away a slightly larger share of its own allowances.

But as the Times article points out, a move by New York could upset the regional politics of carbon trading. Other Northeastern states participating in the initiative, for instance, could feel pressure from their industries to make an equivalent move — though it may not be as easy. Some states would have to consult their legislatures, rather than do it through the executive branch, as in New York.

In New York, the implications will be more significant. If the governor gives away, say, five million more allowances, as the industry wants, that means there will be $17 million less in revenue (going by the most recent auction prices) for the state to spend on programs that would include promoting energy efficiency or renewable energy. That is because the majority of allowances are not given away free but rather sold in an auction, and the proceeds go to each state.

There would also be an opportunity for “windfall profits” — the industries that received the allowances free could then sell them on the secondary market for the market price, and pocket the money. (Europe’s carbon trading system has been strongly criticized for allowing this to happen.)

Carbon traders worry that a move by New York could undermine confidence in the fledgling carbon-trading market.

The carbon-trading plan “has struggled with credibility from day one given the starting overallocation of emissions allowances,” Alex Rau, of the carbon trading firm Climate Wedge, said in an e-mail message, “and behavior from the regulators like this will only undermine what little confidence there has been in the market.”