Our story so far: in a “cap and trade” system, the government sets allowable levels of emission for every power plant in the country. This is the “cap” level for emissions in our “cap and trade” system.

Every power plant in the country purchases (or perhaps, to get things started, is given at no cost) a set of “allowances” equal to their cap level of emissions. Each of these allowances could be considered a “right to pollute” up to a certain amount. Once the allowance level has been hit, the allowance is “retired” and taken out of circulation.

Allowances can be used until they are used up, or they can be sold (”traded” in the parlance of the system). If a power plant improves their efficiency or creates new ways to reduce their emissions, they may have leftover allowances at the end of the year which they can sell to other plants who are in danger of busting their caps.

Cap and trade accomplishes two things: it creates a truly fair energy market by forcing polluting power plants to bear the cost of the damage they do to the environment, and it creates a system where the market forces of profit and loss, rather than just government intervention, forces power plants to reduce their emissions.

Green energy plants enjoy the benefit of not having to buy allowances, because they produce no emissions. With the energy market more fairly balanced to account for the true cost of energy production, green energy can now compete for price and increase its share of the market.

Until….the government lowers the cap. Then, things get a lot better for green energy, and a lot worse for everyone else.

Supply and demand tells you what will happen. With the cap lower, there are fewer allowances. With allowances scarcer, the price per allowance rises. With the price to pollute increasing, fossil fuel plants must either invest more to reduce their emissions, or raise prices to offset the cost of increasingly expensive allowances. Either way, emissions go down and green energy increases its share.

Then…the government lowers the cap again. The day may come when the phrase “lower the cap” will replace “lower the boom.” Each lowering of the cap makes fossil fuels a less sensible energy option.

Eventually, a cap and trade system could reverse the current reality in the energy market. Fossil fuel plants will have to pay so much for allowances that they won’t be able to compete for price. Those plants that do survive will do so because they have innovated and improved…which is what the free market is supposed to do best. The government will play a role, but only a partial role, in the process, so no one will be able to grouse about “socialization” of energy…although there’s sure to be plenty of grousing.

And green energy will gradually take its place as the logical energy of the future.

This, at least, is the plan.

What this means to you. How will this actually pan out? We should get our first idea toward the end of the year. Right now, the cap and trade plan is on the back burner, but expectations are that the Administration will try and have an initial system in place before December.

Your focus right now should be on whether the initial setup will involve an auction of allowances, or a giveaway. An auction out of the gate will have a serious, and immediate, impact on electricity prices beyond the end of the year. Even if it doesn’t come in 2009, a serious impact is on the horizon.

Meanwhile, NYMEX sits comfortably in the mid-$3.00 range, and natural gas storage levels sit at near record levels. If the thought occurs that now is the time to put a cap on your future electric bills, all we can say at Cost Containment Intl. is that we agree.

Check the NYMEX