When 10 states in the US Northeast launch the country's first cap and trade emissions market this week, their greatest service to the fight against global warming may be the mistakes they make. In the absence of guidance from the Bush administration on how to regulate greenhouse gas emissions, the states from Maryland to Maine stepped forward to form the Regional Greenhouse Gas Initiative. The program will cap emissions of carbon dioxide (CO2), the main greenhouse gas, at 233 fossil fuel-fired power plants starting in January. RGGI, to be launched on Thursday, will serve as a live model for Western states and Canadian provinces that hope to form a regional carbon market by 2012. It may also become a blueprint for an eventual US-wide initiative to limit emissions, since both presidential candidates -- senators Barack Obama and John McCain -- favor "cap and trade" markets which US lawmakers invented to successfully cut down acid rain and which have been used in Europe to tackle greenhouse gases since 2005. "It's a lot easier to design from a prior model than it is to start with clean sheet of paper," said Seth Kaplan, a lawyer at the Conservation Law Foundation in Boston, referring to the RGGI process. RGGI will launch with an initial auction to sell power generators about 12.5 million tradable permits each worth one ton of CO2 emissions. Generators that cut emissions below the limits, through measures like energy conservation and green energy investments in solar and wind, will then have assets -- the permits -- they can sell to generators that could not cut emissions. More auctions will follow on a quarterly basis. Money raised from the auctions is expected to shield homeowners and businesses from any higher energy costs resulting from the emissions caps by funding energy-efficiency programs. But Thursday's auction may face a problem. Demand for the permits is expected to be thin because the region's emissions have fallen below the group's cap, thanks to milder temperatures and as power generators switched to cheap natural gas, a cleaner fuel than oil. Please click ID: nN03524153) for related story. "That's what you would call a design flaw," said Kaplan. "It would be shocking if first time out of the gate we created a perfect program." LESSONS The expected lack of demand is a reminder of problems that plagued the early days of carbon trading in the European Union when prices plunged after it became clear that actual emissions would be lower than the cap. In that case, polluters had overestimated their future emissions. But in both instances it illustrates how difficult it is to set emissions caps before the start of a program. "The lesson is that up-to-date accurate emissions data are crucial, and that cap and trade systems should include a provision for updating the cap within a reasonable time before it actually takes effect," said Lance Pierce, the director of the climate program at the Union of Concerned Scientists. "State regulators must be able to quickly asses how much global warming pollution the plants are actually emitting and, if necessary, lower the cap," he said. Environment Northeast, a green group that helped form RGGI, said this month that the region's CO2 emissions in 2007 were about 9 percent below the cap of 188 million tons of carbon dioxide that the group set as the initial cap. Jonathan Schrag, the executive director of RGGI, has said the group could retire permits if they fail to sell in the auction for the US$1.86 per ton reserve price. He also left open the idea of changing the cap at a later date. That could help remove excess supply, bring up prices and make it more painful for companies to pollute. But it may not happen until 2012, when polluters have to comply with the caps. RGGI has already provided a service to US lawmakers who are hoping to shape a national carbon market, Kaplan said, because it helped prod them to include auctions in their climate legislation. So far US climate legislation has failed, but it stands to grow stronger by watching RGGI closely, he said. (Reporting by Timothy Gardner, editing by Matthew Lewis) Story by Timothy Gardner