World Energy Prepares for Nation’s First Carbon-Allowance Auctions

5/19/08Follow @wroush

A Massachusetts energy-trading startup is gearing up to host the nation’s first auction for greenhouse gas emissions allowances. The details are still being worked out, but if all goes according to plan, World Energy Solutions (TSX: XWE) of Worcester will conduct the online auction—in which power-plant owners will buy and sell the rights to emit certain quantities of carbon dioxide into the atmosphere—on September 10.

Carbon-emissions auctions aren’t a new concept. A carbon trading market has been in operation in the European Union, where most member states are Kyoto Protocol signatories, for three years. But greenhouse emissions trading is an untested idea in the United States, where the federal government has so far failed to enact policies limiting emissions of carbon dioxide and other gases that contribute to global warming. This federal inaction has led some individual states and regions to come up with their own ways to reduce CO2 emissions. And we live in one of them: Massachusetts is one of 10 Northeastern and Mid-Atlantic states participating in the Regional Greenhouse Gas Initiative (RGGI), which is about to impose a cap-and-trade system that will force the region’s power providers to either lower their own carbon emissions below pre-defined limits or buy enough carbon “allowances” from other plant owners to cover their excess.

A key premise of cap-and-trade schemes is that they’re more efficient at reducing emissions than rigid pollution caps, since the opportunity to sell carbon allowances gives companies an incentive to get below their own emissions cap by innovating—for example, by installing better pollution-control equipment or switching to non-fossil-fuel energy sources. A national cap-and-trade system for sulfur dioxide emissions, run by the Environmental Protection Agency, has brought about drastic reductions in acid rain, at a cost-per-ton far below what analysts and industry expected.

But cap-and-trade systems only work if there’s a transparent marketplace where polluters can buy and sell carbon allowances. And to create that marketplace, the RGGI states have turned to World Energy.

The company, which went public in 2006 on the Toronto Stock Exchange, is one of many businesses that sprang up to capitalize on the wave of deregulation that swept the nation’s electrical markets in the 1990s. It specializes in online reverse auctions where clients in deregulated states who want to buy power—say, city governments looking for the best rate on electricity for streetlights—can invite potential suppliers to bid against each other in real time. Until recently, most electricity customers turning to competitive suppliers sent out paper … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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