A crack at pricing carbon in the U.S.

The first regulated carbon market in the U.S. will take its cue from eBay.

The Regional Greenhouse Gas Initiative (RGGI, pronounced "Reggie") is scheduled to go online September 10. It's a cap-and-trade system for carbon that electric power generators in 10 Northeast states need to participate in.

An online auction company called World Energy won the bid to write the software that utilities will need to use.

I spoke with World Energy Solutions to get a feel for the mechanics behind carbon trading at RGGI. In a nutshell, it's a blind online auction where power generators are competing for the cheapest price, in this case, a permit to pollute.

World Energy Solutions already has a business operating energy markets where electricity purchasers in deregulated markets buy contracts from suppliers. For example, a handful of representatives from power producers could compete during a half-hour-long online auction for a municipality's planned power purchases.

The way a carbon cap-and-trade system works is that participants have to purchase allowances that allow them to emit a certain amount of carbon dioxide.

These allowances can be bought and sold. So if a power generator buys the right to emit 40 million tons of carbon, but manages to fall under that threshold, the company can sell those credits to a power generator that has gone over their ceiling.

In the RGGI scheme, polluters will buy these allowances once a quarter and will base their purchases on what sort of weather they anticipate and kind of fuels they use.

The blueprint for the cap-and-trade system draws from a successful U.S.-devised system to cut down on power plant emissions that cause acid rain. The market-based mechanism is meant to be a more efficient and flexible alternative to government-set limits and more politically palatable than a straight carbon tax.

The elusive price tag
There's a lot riding on RGGI and carbon trading, in general.

Many environmentally oriented consumers are looking for some sort of action to address climate change.

Policy makers, meanwhile, appear to be coming around to the conclusion that regulating greenhouse gases will be more effective than voluntary goals for large polluters.

There are a number of federal carbon-restricting laws now being proposed, which many people in the power industry expect to take effect within the next five years.

What form these regulations take--and how they are initially set up--will go a long way to determining whether they succeed in stemming the growth of greenhouse gases. RGGI will be considered as a template for other regional carbon exchanges being established in the U.S., and potentially for a federal regime.

For businesses, the emergence of RGGI and other carbon trading markets that operate in Europe and Alberta, for example, mean that they have an additional way to make money from green technology.

The operator of a solar power plant, for example, can sell the carbon reductions that a project generates. Several clean-tech start-ups anticipate they will be able to monetize carbon credits with the products they sell.

But the big unanswered question, which RGGI should help clarify, is what is the price of putting a ton of carbon in the atmosphere?

Initially, the price for carbon on RGGI is expected to be in the $5 to $7 range, said Phil Adams, the president and chief operating officer of World Energy. That's roughly the same price for carbon the voluntary Chicago Climate Exchange but far lower than the current price on European markets.

Carbon-trading research firm CarbonPoint said that RGGI may be over-allocated. That is, there may be so many allowances for emitting carbon that the price for carbon will stay very low.

Adams said that the first round of RGGI won't be perfect. But at least it's a start, which can be modified over time.

Between now and September, his company is trying to get a grip on the logistics of getting 250 emitters to participate in a quarterly auction without too many glitches.

"Herding the cats is job No. 1," Adams said. "Job No. 2 is making sure that nobody gets their nose out of joint because he's looking for one misstep as an excuse to sue somebody."

Update at 8:50 PT: An astute reader points out that the Chicago Climate Exchange is already putting a price on carbon in the voluntary market, which is noted in the article. I changed the headline to clarify that RGGI isn't the first attempt overall at pricing carbon emissions in the U.S. It's expected to be the first regulated carbon emissions market to go online in the U.S.