RGGI Considers Change in Methodology For Determining Minimum Auction Prices

ALBANY, N.Y.--The Regional Greenhouse Gas Initiative (RGGI) is considering a change in the way minimum prices are determined for the auction of carbon dioxide emissions allowances, as the cap-and-trade system reaches a new point in its maturity.

An April 8 report released by RGGI recommended that the minimum price for allowances be determined through a formula based on the closing prices from former auctions and the average futures prices from the Chicago Climate Futures Exchange.

The new minimum price would be called a current market reserve price (CMRP). RGGI has used a fixed minimum reserve price of $1.86 per allowance for its first eight auctions.

“In the short run, with allowance prices at very close to the $1.86 minimum reserve price, the CMRP is unlikely to be above $1.86 and so will not be binding,” the report said (49 DEN A-1, 3/14/11).

The report, which is open to public comments, concluded that sufficient market data are available for RGGI to transition to using a current market reserve price. It also concluded that the difference between auction prices and futures prices for RGGI allowances has been reduced significantly over the past two years.

“The high price volatility evident in early allowance trading has moderated, although allowances have continued to follow a clear downward trend as the inventory of surplus unused allowances has risen,” the report said. “In addition to the lower price variability, there has also been a degree of convergence between the auction closing prices and the contemporaneous futures price indicating an improved consensus among traders about the costs of compliance.”

The report was prepared by William Shobe, director of the Center for Economic and Policy Studies at the University of Virginia. RGGI will accept comments on the report until May 2.

Any changes in the process of setting prices requires approval by the 10 RGGI states--Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

By Gerald B. Silverman

The report is available at http://www.rggi.org/docs/Reserve_Price_Analysis_Report.pdf.