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March 19, 2008 / or4green

Carbon Dioxide Auctions

Starting in 2011, power plants in several northeast US states participating in the Regional Greenhouse Gas Initiative (RGGI) will have to account for their CO2 emissions. To do so they will be able to purchase carbon emission “allowances” in a series of auctions, the first of which will be on September 10. Initially, the auction format will be single-round, uniform-price, sealed-bid though this may change in the future. A description of the uniform-price auction can be found here. Auctions are a popular area of study in operations research. A post on knowledgeproblem.com goes into some depth on issues surrounding the auction format used in these CO2 auctions. It references a piece by economist Peter Cramton written on behalf of the New England and New York electricity market operators advocating another type of auction (ascending clock).

How much will these allowances cost? The first auction will have a reserve price of $1.86 per ton. One way to find out how many tons of CO2 your local power plant emits is through the carma website. For example, according to carma, the largest CO2 emitter in eastern Connecticut (US) is the AES Thames plant at 1.7 million tons of CO2 per year. Those emissions will cost upwards of $4 million starting in 2011.

This adds another layer to the power companies’ portfolio optimization problems. Do they try to stock up on allowances in the first auction or take a wait-and-see approach?

Some are concerned these costs will be passed on to electric rate-payers. But the hope is that with deregulation, and so customer choice, there will be more incentive for the development of clean energy.

For more information, see the links above and:
Regional Greenhouse Gas Initiative website
Carbon dioxide up for sale, Hartford Courant
RGGI auction rules fire starting pistol on allowance price run-up, Carbon Finance

Update: – more references listed in this post (scroll down)

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