Rggi Auction Design Comments Available Online

Michael Giberson

The Regional Greenhouse Gas Initiative (RGGI) folks have posted the comments filed in response to the final auction design report. Previously here I commented on one such filing, an analysis by economist Peter Cramton submitted by the ISO-New England and NYISO, that pointed out a potential flaw in the auction design.

Briefly scanning through a number of the twenty-four comments posted reveals a couple of themes that get repeated. Most of the commenters tend to support the overall RGGI auction design proposal, and characterize their comments as focusing on a few narrow issues.

Among the many parties representing electric power generators and consumers, several parties objected to the use of a reserve price in the auction, some objected to allowing non-power generators participate in the auction, preferring the “closed” alternative, and several worried that there could be an inadequate number of permits available. Generator interests were also concerned about the high percentage of permits to be auctioned from the beginning of the program rather than directly allocated to the parties that will require them.

The environmental and energy public policy groups filing comments tended to support use of a reserve price, favored allowing non-generators to participate in the auction, urged a strong market monitoring program, and worried that their may be an oversupply of permits in the early years of the program. Several commenters urged that plans be made for a smooth transition to any future nation-wide carbon cap-and-trade program.

Reliability: At least one party raised electric reliability concerns, and suggested that the program guarantee that sufficient permits will be sold into each state to ensure reliable operation of the state’s power grid. In principle the auction could be designed to respect such limits, but doing so seems to immediately break down the benefits of a regional approach: first, auction prices for permits in a state may have to diverge from prices outside; second, fragmenting the market through state-by-state reliability minimums can create localized market power problems; third, such a minimum would have to be enforced through out operations of the secondary markets – not impossible, but it adds more monitoring and costs. More problems are imaginable. The better approach is to build a good market design that allows properly-managed generators to obtain enough permits without a lot of excess risk, and then set non-compliance penalties at a level sufficient to penalize non-compliant generators without preventing them from providing power when needed for reliability.

Market design issues: Most of the parties filing comments were not as fascinated as I was by the technical market design issues raised by the report, but if you want more market design commentary see the remarks filed by Lawrence Ausubel (chairman of Power Auctions LLC and a colleague and frequent collaborator with Cramton in the University of Maryland economics department). In case you are wondering, Ausubel, too, objected to the proposed offering of two permit vintages in separate, simultaneous sealed-bid auctions and urged rather that the two permit vintages be offered together, using an ascending clock auction design.

Most of the comments are short and fairly non-technical, making a review of them a good way to get exposed to a variety of opinions on program design issues.


7 thoughts on “Rggi Auction Design Comments Available Online

  1. Mike,

    The whole (stated) point of the RGGI is to REDUCE greenhouse gas emissions in the region. Power generators are the largest emitters of greenhouse gases. Therefore, in principle, it cannot be that “sufficient permits will be sold into each state to ensure reliable operation of the state’s power grid” long term; and, even in the short term, greenhouse gas emitting manufacturers would have to move elsewhere (China or India) to ensure reliable operation of the state’s power grid. Of course, that would also reduce the power required to be generated in the states by reducing the power required by industries, businesses and their employees, since there would be fewer of each consuming power in the states.

    I recall a quote, from a US politician who’s name excapes me, during budget negotiations, which seems appropriate here: “Don’t cut you; don’t cut me; cut the guy behind the tree.”

    Standing around, singing “The answer, my friend, is blowin’ in the wind” won’t make it so.

  2. Ed, it is only not true that “sufficient permits will be sold into each state to ensure reliable operation of the state’s power grid” long term in the case that you hold the existing stock of power plants constant. The intention is, at the margin, to increase the cost of greenhouse gas emitting generation and therefore tend to increase investment in non-greenhouse gas emitting generation and investment in load-side management.

    Also, of course, the price of power will increase, which will tend to shift energy consuming activities outside of the region.

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  4. The initiative is described by the RGGI coalition as “the first mandatory, market-based effort in the United States to reduce greenhouse gas emissions.” Under the RGGI process, the 10 participating states agreed to stabilize power-sector carbon emissions at their capped level by 2014. Thereafter, the cap will be reduced each year from 2015 through 2018, by a total of 10 percent.
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