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Economists and policymakers frequently talk about the "social cost of carbon"—the price that society as a whole pays for disruptions caused by climate change and ocean acidification. Although there are various ways of calculating it that give different results, the US currently estimates the cost at $37 a ton. At least nationally, however, there have been no attempts to get anyone to actually pay this price for their emissions.
But locally, a number of states are trying. Most of the Northeast has banded together to form the Regional Greenhouse Gas Initiative, or RGGI. This is a cap-and-trade system, where emissions allowances are auctioned by the group. Unfortunately, plans for the auctions were made prior to the boom in fracking, which has dramatically lowered the emissions of electricity generation in the US. As a result, RGGI emissions allowances have been auctioned off at the legal minimum, just under $2 a ton—well below just about any estimate of the social cost of carbon.
As a result, the group decided to take two actions. To begin with, it reduced its total cap on CO2 emissions by 45 percent. Then, it reduced the number of allowances auctioned off. It does so by holding back a pool of allowances until the auction price reaches a preset value. Currently, that value is $4/ton. As a result, three consecutive auctions have resulted in prices above $4. The reserve price is set to rise by $2 every year until it hits $10, then rise by 2.5 percent each following year.
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