The New York Mercantile Exchange will begin trading futures contracts for carbon-dioxide emissions allowances Monday.

The futures contracts will be based on the first mandatory U.S. program to trade the allowances and will start just a week after another exchange, the Chicago Climate Futures Exchange, began offering similar contracts.

Both exchanges will allow investors to bet on the carbon cap-and-trade program created by the Regional Greenhouse Gas Initiative, also known as RGGI, a consortium of 10 eastern states that banded together to develop a trading scheme to curb greenhouse-gas emissions.

While other exchanges trade carbon credits that companies and consumers can buy voluntarily, the RGGI program is the first mandatory program limiting carbon-dioxide emissions in the United States. The cap-and-trade program sets a limit for how much carbon dioxide power plants can emit and allows companies that generate more than permitted to buy allowances from those that emit less.

The European Union already has such a program in place, while a group of western U.S. states and Canadian provinces is finalizing its own cap-and-trade scheme (see U.S. and Canada to Create Carbon Cap-and-Trade System). A bill to create a national trading scheme in the United States died in June after Senate Republicans blocked a vote.

The Chicago exchange, CCFE, began trading the futures last Friday, a move that renewed the public’s attention on the RGGI and brought new criticism about its effectiveness in curbing emissions and spurring greentech developments.

Analysts and bloggers have said the emissions cap set by RGGI is too high, so power plants likely wouldn’t emit more than permitted. A high cap provides few incentives for power plants to reduce emissions or buy allowances, a scenario that would lead to low trading prices (see Green Light post).

RGGI has set a cap of 188 million tons of carbon-dioxide emissions per year from 2009 to 2014. The cap is roughly 4 percent above the annual average that RGGI states emitted between 2000 and 2004. The limit will drop by 2.5 percent per year from 2015 to 2018, resulting in a 10-percent emissions reduction from the 2009 limit.

But RGGI's executive director, Jonathan Schrag, argued that “any discussion of overallocations is short-sighted.”

He said power plants might emit less than allocated in the short term because factors, such as a cooler summer, are leading to lower electricity demand. “We are focusing on a long-term market,” he added.

Critics also pointed to a problem experienced by the European Union’s carbon-trading program in 2006, when carbon prices fell dramatically after the program distributed more emissions permits than businesses needed.

Schrag said the RGGI has set a reserve price of $1.86 per allowance, which equals 1 ton of emissions, to prevent a carbon-market collapse. That means allowance prices can’t drop below $1.86 each, at least until prices at secondary markets, such as the CCFE and NYMEX, reach $1.86, Schrag said.

Critics also noted that the trading program only affects power plants and not other industrial operations, such as oil refineries, that also spew carbon dioxide.

“RGGI is a modest effort to reduce greenhouse-gas emissions, but it only impacts electric utilities,” said Peter Fusaro, chairman of the Global Change Associates, a New York City-based energy and cleantech consultancy. “RGGI is a start, but it’s not the end game.”

Fusaro said the Western Climate Initiative and California’s own proposed carbon cap-and-trade program both plan to curb emissions more aggressively and create a larger carbon-trading market.

California passed a law requiring the state to return its greenhouse-gas emissions to the 1990 levels by 2020. Reaching that goal would involve reducing carbon-dioxide emissions by 10 percent from today’s levels, which amounts to a reduction from 14 tons of emissions for every person in the state now to 10 tons per person by 2020.

The state is working on a plan to carry out the mandate, scheduled to take effect in 2012, and has proposed a cap-and-trade program as part of the plan (see California Offers Plan to Clear the Air).

If the federal government creates a carbon-trading program with goals that mirror California’s, “we will have the largest carbon market in five years and dwarf Europe’s,” Fusaro said.

The RGGI is scheduled to begin auctioning emissions allowances on Sept. 25 and plans to give few or no freebies, according to a summary of the trading program.  Power-plant operators will have to comply with emissions limits starting on Jan. 1.

Proceeds from the sales will fund renewable-energy projects, as well as consumer energy-efficiency programs.

States that belong to the RGGI include New York, Maryland, Vermont, New Jersey, Connecticut, Rhode Island, Delaware, Maine, Massachusetts and New Hampshire.