Outside the beltway, energy policy at the fore
Posted October 1, 2008 at 10:10 am 
Filed in: With the financial crisis taking center stage in Washington this month, the chances of passing a comprehensive energy bill before the end of the year look bleak. As we have noted in this space before, that is truly unfortunate. If anything, the financial meltdown and ongoing energy crisis are related. In fact, they may be joined at the hip. To the extent that mortgage defaults are at the heart of this problem, it seems fair to note that skyrocketing energy costs played a role—even if only at the margins—in making it much more difficult for many Americans to make ends meet.
Don’t forget that this summer’s record oil and natural gas prices impacted much more than the price of gasoline at the pump. Higher fuel prices mean higher transport costs for a wide range of goods, including food and other essential products. These high prices reduce disposable household income, which in turn has a negative impact on U.S. businesses and employment.
Outside of Washington, energy issues remain in the spotlight.
On Thursday, for example, 10 states in the Northeast and Mid-Atlantic took part in the first U.S. auction for CO2 permits. The 10 states participating in the Regional Greenhouse Gas Initiative (RGGI) include New Jersey, New York, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island and Vermont. The permits sold for $3.07 per ton, and are designed to reduce emissions from fossil-fuel burning power plants. The 10 RGGI states have agreed to reduce the cap on power plant emissions by 10 percent at year end 2018.
While some are touting this experiment as a potential model for a broader U.S. carbon cap-and-trade system, RGGI appears to have significant limitations. First, a permit price of $3.07 per ton of CO2 is exceedingly low. By way of context, the first auction RGGI permit price would represent just a 3 percent increase in cost for CO2 emitted per million Btu of natural gas consumption (based on the 2007 avg. U.S. wellhead price). For coal, the figure is 6 percent (based on 2007 avg. spot price for Pennsylvania Rail Car).
Second—and closely related—is the fact that RGGI has not set a very ambitious target. Under the plan, CO2 emissions from power plants in the 10 participating states can actually grow by nearly 10 percent over the next three years.
A final point here: a CO2 price of about $50 per ton would be required to increase gasoline prices by 50 cents. Admittedly, RGGI targets only power producers, and a broader market might generate somewhat higher prices—but not without much more ambitious targets.
For more on RGGI click here.
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