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RGGI Allowances Sell for Record Price Of $4 in First Auction After Cap Lowered

Monday, March 10, 2014

By Gerald B. Silverman  

March 7 --The Regional Greenhouse Gas Initiative announced March 7 that carbon dioxide allowances sold for a record high price of $4 in its recent auction, the first since the nine RGGI states lowered their regional cap on carbon dioxide emissions.

The $4 clearing price for allowances was 33 percent higher than the $3 price in RGGI's last auction in December 2013 and the highest price by far since the cap-and-trade program held its first auction in 2008.

In December, New York became the last state to adopt changes in the program that had been proposed earlier in the year, including lowering the regional cap on emissions by 45 percent.

A total of $93.9 million was raised from the latest auction March 5. Most of the proceeds will be used by the nine Northeastern and Mid-Atlantic states in RGGI--Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont--for energy conservation, renewable energy, and direct bill assistance programs.

Each RGGI allowance allows the holder to emit one ton of carbon dioxide. RGGI's next auction will be held June 4.

Commodities Firms, Traders Active

The majority of allowances--55 percent--were purchased by commodities firms, traders, and other non-electricity companies. It was the second consecutive auction in which electricity companies and their affiliates purchased less than half of the total allowances offered for sale.

Among the firms eligible to bid at the auction were Consolidated Edison Company, Hess Energy Marketing, Koch Supply and Trading, Morgan Stanley Capital Group, National Grid, and Shell Energy North America.

The auction was the first to include a new mechanism called the cost containment reserve (CCR), which is designed to keep allowance prices from rising above a certain level. The CCR allowances are only offered for sale if prices hit $4 each this year, $6 in 2015, $8 in 2016 or $10 in 2017.

There were 18.4 million allowances sold at the auction, plus 5 million cost containment reserve allowances.

“To my knowledge, this is the first time that a cost containment reserve has ever been used in any emissions trading program,’’ William M. Shobe, director of the Center for Economic & Policy Studies at the University of Virginia, told Bloomberg BNA in an e-mail message.

“The innovative design of the RGGI CCR has worked to keep prices from spiking, just as intended, while still giving generators substantial incentive to keep reducing their emissions,’’ he said.

Shobe said the $4 price of allowances from the cost containment reserve “may seem like a relative bargain, given the expected future tightening of the cap and the resulting higher prices.’’ He pointed out that the cost-containment reserve price will be $10 in just three years.

“ Holding allowances is probably a lot better deal right now than many other possible investments. And it is worth remembering that the investment in cheaper allowances now will serve to moderate price increases later on,’’ Shobe said.

RGGI Chief: 'Results What We Expected.'

In a statement, RGGI Chairman Kenneth Kimmell said, “The results are what we expected--there was an increase in the allowance price, all the allowances we offered were sold, and the CCR operated as intended.’’

Kimmell, who also is commissioner of the Massachusetts Department of Environmental Protection, added, “These early results demonstrate RGGI is on track to reduce carbon emissions by 80-90 million tons through 2020 while helping states fund clean energy investments.’’

Michael B. Gerrard, director of the Center for Climate Change Law at Columbia Law School, told Bloomberg BNA the $4 clearing price “is more than double what the price had been for most of the period between September 2009 and December 2012.’’

“This shows that the reduction in the number of allowances sold is having a positive effect on price, as was the hope,’’ he said in an e-mail message. “It's probably still not high enough to have a major impact on emitter behavior, but it generates a great deal of revenue for clean energy programs and it's movement in the right direction.’’

 

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y. at gsilverman@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com


More information on the RGGI auction March 5 is available at http://www.rggi.org/docs/Auctions/23/PR030714_Auction23.pdf.

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