Doubts are building about the survival of the only functioning US market for emissions that contribute to global warming.

Designed to limit emissions of carbon dioxide from power plants, the Northeast Regional Greenhouse Gas Initiative is facing a future already less carbon-intense than its designers envisioned, but not always for the most heartening reasons. The struggling economy and widespread uptake of cheap natural gas in recent years have both weighed on prices and trading in the market.

Carbon emissions from power plants in the 10-state region were 34% below their RGGI caps in 2009 and 27% below in 2010.

Emissions prices are so low that 70% of the allowances offered at the last auction, in June, went begging, even at the legal minimum price of $1.89 a ton of carbon. There’s an estimated 30% surplus of allowances in the market from previous auctions, allowances plant operators so far don’t need.

That sounds like a big success story for a regional cap-and-trade program, but instead there are questions about whether it will all fall apart.

New Jersey Republican Gov. Chris Christie says RGGI is a total failure and he’s pulling New Jersey out of the system at the end of 2011. Christie last week vetoed legislation that would keep the state in the system, and there do not appear to be enough votes to override the veto.

Read the full story about NJ’s quit of RGGI: Coat Gets Boot As New Jersey Exits RGGI.

The remaining nine states late last week set an agenda, going into 2012, under which they’ll review the first three years’ accomplishments and lessons, decide on new caps for 2012-14, and shape the program going forward. The states are: Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, Delaware and Maryland. The RGGI goal is reducing carbon emissions 10% by 2018, and the annual caps are phased toward that.

But there is political pressure in several states to get out of RGGI, and what was once hailed as a pioneering effort that would evolve into a national greenhouse gas cap-and-trade program may be fighting for its life.

What Went Wrong

When RGGI was created in the last decade, state officials’ chief worry was driving electricity prices too high. They designed a “safety valve” by which states could sell extra allowances if the cost of the program drove prices up beyond consumers’ comfort level in the New England, New York or mid-Atlantic electricity markets.

That worry also drove each state to try to maximize the number of allowances available. No state wanted to lose industry because of the carbon costs, and the decision to start by applying the system only to power plants, leaving out factories and other sources of greenhouse gases, reflected that concern.

High cost has not proven to be the problem. RGGI started its first three-year compliance period in 2009, as the recession skewered electricity demand. At the same time, new shale discoveries were driving down the price of natural gas. Power generators switched where they could from coal to natural gas, which is less carbon intensive.

Both proponents and opponents of RGGI cite those factors as driving down carbon emissions, not the RGGI system. RGGI “did not change behavior” of emitters, said ClearView Energy Partners’ Kevin Book.

All Markets Are Political

At the same time, RGGI came into the crosshairs of conservative groups opposed to anything called “cap and trade.” Americans for Prosperity, an advocacy group funded by the oil billionaire Koch family, has run ads in several RGGI markets claiming the system is burdening citizens with new taxes.

The auction system has raised $886.4 million to date. The original intent was for auction proceeds to help states lower emissions and cushion consumers from increased costs, and RGGI figures show 52% the auction money has gone into energy efficiency programs, 11% to aid renewables generation deployment, and 14% to aid ratepayers.

But some 17% has been diverted by states to help plug the yawning budget deficits of the last two years. The top diverter has been New Jersey’s Christie, who used nearly $60 million of the state’s $105 million share, or 56%, for budget balancing. New York used 28% and New Hampshire, 10%. In the latter state, the governor vetoed legislation taking the state out of RGGI on grounds the state needed the money.

Environmental advocates say RGGI spending is helping create new green jobs. More than 200 businesses petitioned the RGGI state governors in July to tighten caps and expand the system, citing a Brookings Institution study of economic benefits.

But ClearView’s Book says experience elsewhere shows RGGI will not succeed as a strictly regional market, and needs to be part of a national program limiting emissions if it is to function. But the only federal greenhouse gas policy is now being set by Environmental Protection Agency rules, he notes, and no cap-and-trade system is in sight.