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RGGI – or "Reggie" – is a cap-and-trade effort that began this year and may help to shape U.S. policy.

By JOHN RICHARDSON, Staff Writer October 4, 2009

A one-year-old regional experiment with carbon cap-and-trade has so far generated $13.5 million for energy conservation efforts in Maine.

But it could ultimately have a far bigger impact, in Maine and nationwide.

A much more ambitious cap-and-trade plan introduced to the U.S. Senate last week is based, at least in part, on the lessons learned here.

"The hope ... was that it would influence the national policy," said Thomas Tietenberg, a retired Colby College economics professor who helped develop Maine's piece of the program. "And I think it did."

Maine was one of 10 states to create the nation's first market-based system to fight climate change. By putting a price on carbon dioxide emissions, it encourages large power plants to become cleaner and more efficient.

It's too early to measure any effects on pollution or on electricity prices, especially given a recession that has reduced production – and thus emissions – far more than any government action.

The program has its flaws, including a cap on emissions that turned out to be too generous. But it also is seen as an innovative way to fight climate change, and as a model.

"Clearly (it) has established that a cap-and-trade system can work and work very well in the United States," said David Littell, commissioner of Maine's Department of Environmental Protection. "Before that, people were skeptical."

The Regional Greenhouse Gas Initiative, or RGGI, was effectively launched in September 2008 with the first carbon allowance auction in the United States.

RGGI, which is pronounced "Reggie," requires large electricity producers in the Northeast to have one allowance for every ton of carbon dioxide they put into the atmosphere from burning coal, oil or gas. They can either buy the allowances at quarterly government auctions or trade among themselves.

The basic idea is that the power industry has a new incentive to shift to cleaner burning fuels, such as gas, and to reduce carbon dioxide emissions that scientists say contribute to global warming.

The other principle behind cap-and-trade systems is that the number of overall allowances in the marketplace – the cap – will gradually be reduced over time, ensuring across-the-board pollution reductions.

RGGI is similar to a cap-and-trade system in Europe, with an American twist. The Europeans gave allowances away, while RGGI auctions them off to the highest bidders.

Ted Koffman, former House chairman of the Legislature's Natural Resources Committee, remembers how a visit from members of Britain's Parliament helped convince state officials in the Northeast to try something new.

"They felt they had failed because they gave away the allowances. It didn't create a market," said Koffman, who is now executive director of Maine Audubon. "We felt if we got it right, we could help the nation get it right."

Giving away allowances reduces the initial cost to the companies – and to electric ratepayers – but opens the door to unpredictable prices in the private trading market for allowances.

Auctioning off allowances sets a stable, and public, clearing price, while contributing to an increase in electricity costs. However, the Northeastern states decided to use the revenue generated by the auctions to pay for energy efficiency improvements, ranging from small residential projects to large industrial ones. That, according to economists, would eventually reduce the need for new power generating capacity and, as result, reduce electricity rates.

"The notion that you would auction off the allowances was a completely alien philosophy until RGGI," Tietenberg said.

In Maine, RGGI is expected to increase electricity costs about 1.5 percent over 10 years.

RGGI has so far held five electronic auctions of carbon allowances, with power plants and other investors paying a total of $432.7 million...