U.S. exchanges launch cap and trade CO2 contracts

LONDON, Aug 18 (Reuters) - The U.S. Chicago Climate Futures Exchange has completed the first exchange-traded deals in permits to emit carbon dioxide under a U.S. cap and trade scheme, the bourse said on Monday.

The Regional Greenhouse Gas Initiative (RGGI) comprises 10 northeastern states and may be a precursor to a federal U.S. carbon market, something both presidential candidates support.

Emissions trading schemes force businesses to buy permits to emit heat-trapping gas carbon dioxide, and the smaller the cap the higher the price of permits.

But the RGGI scheme -- which formally launches on Jan. 1 2009 -- caps carbon emissions by power generators at higher than historical levels, and as a result will not drive serious emissions cuts, said analysts.

"It seems it will be long (with surplus permits) for at least the first six years because of the way they set the caps," said Trevor Sikorski, analyst at Barclays Capital.

The Chicago futures exchange, owned by the Chicago Climate Exchange (CCX), offered the first exchange-traded RGGI contracts on Friday, CCX said. The New York Mercantile Exchange Inc NMW.N (Nymex) launches a similar futures contract on Aug. 24.

The over-allocation of permits undermines the credentials of the scheme, however, and suggests that RGGI has not learned from a European Union emissions trading scheme. EU carbon prices collapsed in 2006 after the scheme allocated more emissions permits than businesses needed.

"Our expectation is RGGI prices will be low," said Sikorski.

The CCX contracts settled on Friday at $5.58 per tonne of avoided carbon dioxide (CO2) emissions. The EU this year tightened the cap on its scheme and EU allowances were trading at 23.6 euros ($34.75) on Monday morning.

But even the EU price is well below a carbon price of 35 euros or more needed to drive utilities to switch substantially from coal to lower carbon-emitting natural gas, a key step to cut greenhouse gas emissions, according to Deutsche analysts.

Prices of $5 may at best be enough to drive companies included in the RGGI scheme to offset their emissions by funding local reafforestation projects, said Sikorski.

One political concern was that tough RGGI targets may have put local power generators out of business, given that installations in surrounding areas do not face a carbon price.

The RGGI scheme binds carbon emissions by power generators in northeastern states at 188 million tonnes per year from 2009-2014, and 2.5 percent less annually from 2015-2018.

The CCX exchange traded 60 lots of emissions allowances under the RGGI scheme on Friday, equivalent to 60,000 tonnes of carbon dioxide. The Chicago Climate Exchange is owned by Climate Exchange PLC , which also owns the European Climate Exchange -- the hub of exchange-traded EU emissions permits.