The New York State Energy Research and Development Authority (NYSERDA) approved regulations on Monday for the state’s participation in the Regional Greenhouse Gas Initiative (RGGI) auction system. RGGI is an commitment between ten northeast and mid-Atlantic states to reduce carbon dioxide emission from the electricity generating sector.

Under RGGI, participating states establish their own auction rules. New York’s regulations specify that all of the state’s allowances shall be auctioned, and that revenue will be used “to promote and implement programs for energy efficiency, renewable or non-carbon emitting technologies, and innovative carbon emissions abatement technologies with significant carbon reduction potential . . . .” In order to determine how best to use the funds, NYSERDA will “convene an advisory group of stakeholders representing a broad array of energy and environmental interests” at least once per year.

System-wide auctions are expected to take place quarterly, with the first one occurring on September 25, 2008. This first auction will include 12.5 million allowances from six states: Connecticut, Maine, Maryland, Massachusetts, Rhode Island, and Vermont. Other states, including New York, will wait until the second auction, on December 17, 2008, to sell their 2009 allowances.

RGGI auctions will generally use a uniform-price, sealed-bid format. This means that market participants submit sealed bids indicating how many allowances they desire and the price they are willing to pay for them. After bidding is complete, all auction winners pay the same price, even those whose bids were originally higher than the final sale price. Next week’s auction and the December auction that includes New York are critical for the future of allowance allocation mechanisms in compliance markets. Stakeholders and other interested parties will be watching the results closely hoping to determine whether this type of auction succeeds in distributing large numbers of allowances. If the strike price ends up lower than expected it may be evidence that industries remain unwilling to internalize the expenses of greenhouse gas emissions upfront and that alternative allocation methods may be needed in addition to - or in lieu of - auctions. Alternatively, it may just mean that many of the significant participants wanted to sit round one out and observe how their competitors approach the bidding process. On the other hand, if the auction is successful it has the potential to provide important precedent for a future nationwide carbon allowance allocation scheme.

For further information about this topic, please contact Akin Gump.