By   /   January 10, 2011  /   News  /   No Comments

Who is secretly buying the carbon dioxide “pollution permits” sold under the nation’s first mandatory cap-and-trade system?

That $777 million question – and your right to know – may be answered by an open records lawsuit filed by investigative reporter Mark Lagerkvist of New Jersey Watchdog, an investigative news web site.

The CO-2 permits are issued by 10 Northeastern states and auctioned by the Regional Greenhouse Gas Initiative (RGGI).  RGGI covers New York, Massachusetts, Maryland, Connecticut, Maine, Vermont, New Hampshire, Rhode Island, Delaware and New Jersey.

Adding intrigue to the auctions has been the presence of Goldman Sachs, Merrill Lynch, Morgan Stanley, JP Morgan, Barclays Bank and other speculators who see an opportunity to profit by reselling permits to electric utilities.   The utilities are required to obtain a permit for each ton of CO-2 their power plants release; they pass along that cost to consumers and businesses through higher rates.

Bidding against utilities, speculators have purchased $125 million of the $777 million in permits sold at auction since 2008, according to a New Jersey Watchdog analysis of aggregate data from RGGI.  Who actually purchases those permits is secret; RGGI and the 10 state governments have a pact to keep that information out of public hands.

Lagerkvist’s suit in state court against the New Jersey Dept. of Environmental Protection (NJDEP) raises a number of crucial questions:

  • Does the public have a right to know who buys public assets from state governments?
  • Are governments allowed to avoid disclosure and transparency by operating through non-profit corporations they create, govern and finance?
  • Can governments circumvent open records laws by using private contractors to act as custodians of public documents and data?

Hide & Seek with Public Records

To avoid disclosure, RGGI and NJDEP are playing hide-and-seek with the auction records.

RGGI is a 501c3 non-profit corporation created, governed and financed by the 10 states.  RGGI received $2.5 million in public funds during 2008 and 2009.  Yet RGGI claims it is not a “public agency” subject to open records laws.

NJDEP, a public agency, denied a state Open Public Records Act (OPRA) request for auction records by Lagerkvist.  NJDEP argues it does not “make, maintain or keep on file” any records of who purchases the permits the agency issues and regulates, so the documents are “not government records.”

The records exist in an electronic database called the Regional Greenhouse Gas Initiative Carbon Allowance Tracking System (RGGI COATS).  New Jersey and the other states paid nearly $550,000 in 2008 and 2009 for a RGGI subcontractor to create and maintain the database.

All 10 states have access to RGGI-COATS, yet New Jersey authorities still claim they do not have the records.  In response, Lagerkvist sued NJDEP in Mercer County Superior Court.  A court hearing is scheduled for later this month.

Protecting “Trade Secrets”

In case the court doesn’t buy its “duh” defense, New Jersey has a second line of objections to fight disclosure of its auction secrets.

NJDEP asserts the identities of CO-2 permit buyers should be “subject to confidentiality as trade secrets and/or proprietary commercial/financial” information.   According to the agency, release of that information poses “potential harm to the performance of the auctions” and “the private right to access (i.e., disclosure) would be outweighed by the public interest in confidentiality of any records maintained by RGGI.”

Here’s the real public interest: the 10 RGGI states have auctioned permits to allow the release of 318 million tons of carbon dioxide into an atmosphere shared by all citizens.  Once an auction is over, the public has a right to know who bought those governmental permits, which are public assets.

RGGI has ignored advice from experts urging disclosure, including a 2007 study funded for RGGI by the New York State Energy Development Research Authority. “Information from the auction that should be publicly disclosed includes the auction clearing price, the identities of winning bidders and the quantity of allowances obtained by each winning bidder,” the study recommended.

The U.S. Environmental Protection Agency provides even greater transparency in its own annual auctions of SO-2 (acid rain) pollution permits.  Since 1994, the EPA has released the names and bids of auction winners.   Starting with 2003, those reports have been expanded to include information on unsuccessful bidders and their bids.  The federal agency has credited transparency as a reason for the success of its auctions over the past 16 years.

RGGI’s Failures & Future

In contrast, RGGI’s cap-and-trade system is a failure.  It will have no impact on CO-2 emissions for at least 20 years, according to its own consultants.  RGGI set its cap too high at 188 million tons a year.  Only 123 million tons of CO-2 were released by utilities in 2009, and emissions will stay under the cap through 2030.

The bottom line: RGGI’s cap is useless – and its efforts to limit CO-2 discharges are expected to remain ineffective for at least two decades.

By design, the permits are supposed to increase in scarcity and cost, putting a squeeze on utilities to cut emissions.  But thanks to RGGI’s blunders, permits are plentiful and plenty cheap.

Prices have plummeted to $1.86 a ton, the lowest bid allowed by RGGI – and far below the record high of $3.51 a ton.  At December’s auction, RGGI only managed to sell 57 percent of the permits it offered.  Looking ahead, RGGI’s consultants project the auction prices will remain at the minimum through at least 2030.

Critics contend RGGI is more of a tax scheme than climate solution.  Without reducing CO-2 emissions, RGGI has raised more than three-quarters of a billion dollars by selling permits under a cloak of secrecy.

How states spend that money is yet another controversy.  Instead of devoting the proceeds for green projects, some states are using the revenues as slush funds.  New Jersey diverted $65 million to plug state budget gaps in 2010, and New York spent $90 million for a similar purpose in 2009.

Despite its flaws, RGGI plans to expand its cap-and-trade system through an alliances of regional systems that could include 23 states with half of the U.S. population, pluse four Canadian provinces with three-quarters of that nation’s populace.

“Cap-and-trade is alive in the U.S. and will continue to move forward,” RGGI executive director Jonathan Schrag proclaimed at a trade conference in December.