On December 20, 2005, the governors of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York and Vermont signed a Memorandum of Understanding (MOU) in which they agreed to implement a regional cap-and-trade program to regulate carbon dioxide (CO2) emissions in the Northeastern United States. The program, known as the Regional Greenhouse Gas Initiative (RGGI) sets a maximum level, or cap, for regional CO2 emissions . . .

and allows regulated entities to trade emissions permits, known as allowances, which, when combined, add up to the total emissions cap for the region. This type of program is similar to that envisioned in the Kyoto Protocol and the European Climate Exchange. In general, RGGI will cover electric generating units that generate more than 25 megawatts and burn more than 50% fossil fuel. In addition to emissions allowances, RGGI also provides for offset allowances for emissions reductions or carbon sequestration taking place outside the electric generating sector. Offsets will be issued for various projects, including landfill gas capture and combustion, afforestation (i.e. planting lots of trees), and end-use energy efficiency in new and retrofitted buildings. As called for in the MOU, the seven participating states issued a Model Rule in July 2006, which will become the foundation for the individual states' rulemakings. New York, by far the largest and most influential state involved, is expected to begin its rulemaking process in fall 2006 or spring 2007. This is a tremendously complex and detailed undertaking, and I foresee at least two potential points of debate during the states' rulemakings: First, what will be the initial allowance allocation method? The model rule currently provides for 'grandfathering,' i.e., granting emissions allocations in proportion to sources' current fuel use or emissions, rather than opening up with an auction, which may be economically and environmentally preferable, although not in the interests of the larger generators. And second, what will the scope for offsets be? How many offsets credits will be allowed, and will any type of offsetting activity not in the Model Rule be considered? It will be interesting to see how these and other issues are resolved in the Northeast's bid to be on the cutting edge of market-based greenhouse gas regulation in the United States.