Carbon Markets

Carbon markets are an essential component of cap-and-trade programs that aim to reduce greenhouse gas emissions using a market-based approach.  Even if the U.S. does not commit to a cap-and-trade program, voluntary markets and regional markets will continue to expand.

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Carbon markets are an essential component of cap-and-trade programs that aim to reduce greenhouse gas emissions using a market-based approach.

  • The U.S. House of Representatives passed a cap-and-trade program in June as part of the Markey-Waxman bill, The American Clean Energy & Security Act of 2009.
  • The Senate is considering a cap-and-trade program in the Kerry-Boxer bill, The Clean Energy Jobs and American Power Act of 2009.
  • The Regional Greenhouse Gas Initiative—RGGI—established the nation’s first working cap-and-trade program among 10 Northeastern states that covers the electricity generation sector.
  • The Western Climate Initiative designed a cap-and-trade program that will take a multi-sector approach and cover emissions from power plants, industry and transportation. The program is set to begin in 2012.
  • The Midwest Climate Accord is also establishing a multi-sector greenhouse gas cap-andtrade
    program.

Even if the U.S. does not commit to a cap-and-trade program, voluntary markets and regional markets will continue to expand.

  • RGGI is the third largest carbon market in the world. Its auctions have raised $494 million to date. That money is then funneled back to the states on a pro-rated basis.1
  • Within RGGI, carbon is now trading around $2 per ton. If the U.S. passes federal cap-and-trade legislation, the price of carbon is expected to rise to $15 per ton.2

What do carbon markets mean for states?

  • Funds from carbon markets can be funneled back to consumers and industry to help offset the expected higher costs of electricity.
  • For example, during the last RGGI auction, money flowed back to the states to help finance a range of energy efficiency programs including retrofits of low-income apartment buildings and incentives for purchasing energy efficient appliances.
  • Under a federal cap-and-trade program, the average household electricity bill is anticipated to rise by $175 a year.3
  • The more states that develop cap-and-trade programs, or join existing ones, the more likely it is other states and the federal government will follow.

However, for a carbon market to operate successfully, it must achieve the following:

  • Proper regulation and oversight by either the Federal Energy Regulatory Commission or the Commodity Futures Trading Commission.
  • Be transparent, and limit the participation of individual stakeholders to prevent manipulation.4

References:
1 1. Regional Greenhouse Gas Initiative, "Auction Results."
2 2. Wheeler, Timothy, “Cap and Trade Emission Reductions Programs Catch On”, The Baltimore Sun, December 16, 2009.
3 3. Ibid.
4 4. Stevenson, Andy, “Regulating Trading in the Carbon Market”, Natural Resources Defense Council, January 2009.

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