RGGI: So far, so good

In the first-ever US auction of carbon allowances by the Regional Greenhouse Gas Initiative (RGGI), on 25 September, all of the 12.6 million vintage 2009 allowances offered by participating states – Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont –were sold at $3.07 each, well above the minimum of $1.86 set by the initiative.

According to data released by auction monitor Potomac Economics, demand among the 59 auction participants was almost four times supply. The top bidder bought 20% of the available allowances, well under the maximum cap of 25%.

Background

The RGGI, a cooperative effort between 10 Northeastern and Mid-Atlantic US states to reduce CO₂ emissions from power plants through a regional cap and trade programme, aims to stabilise CO₂ emissions from power plants from 2009 until 2014 and achieve emissions reductions of 2.5% in each of the following four years. The programme covers fossil-fueled power plants greater than 25 megawatts in capacity.

The initiative requires each participating state to auction off at least 25% of its share of allowances within the regional cap, with the proceeds to be used for “consumer benefit or strategic energy purposes”. Unlike the EU emissions trading scheme, RGGI allowances have no expiry date and so are bankable indefinitely. Most states have indicated they plan to auction off nearly all available allowances rather than allocate a portion to power producers at no cost.

September's internet auction was conducted in a “sealed-bid”, single round format in which participants could bid as many times as they wanted, but only at one price per bid and for no more than 25% of the allowances auctioned. The clearing price for all bids was then determined by the “marginal bid”, which is the bid (when all bids are ranked in descending order by price) that causes the cumulative demand for allowances to exceed the number of allowances available for auction. Bids ranged from $12 to the $1.86 reserve price, with a mean of $2.77.

To protect its participants’ proprietary information the RGGI did not disclose the names of its bidders.

Competitive market

80% of the 59 auction participants in September were power providers, 15% were non-compliance entities such as brokerage firms and the remaining 5% included other interested parties such as environmental organisations aiming to take allowances out of the system and sell them to the public as voluntary offsets.

The price came in reasonably close to futures signals, which prior to the auction were approximately $5.50 per ton.

Kevin Poloncarz, an environmental lawyer at Bingham McCutchen who specialises in air quality, climate change and toxics, says the auctioning platform worked well in practice.

“There was enough transparency to be assured there was no ‘gaming’ in the market,” Poloncarz says. Transparency was maintained as the platform required bidders to disclose direct and indirect corporate associations, as well as other bidding associations or concerns.

Political push

Poloncarz believes that every time emissions allowances are auctioned, the confidence of policy makers is increased. “They see that it’s not hard, it’s not expensive, it can go smoothly and it can be fair, open and competitive,” he stresses.

The success of the RGGI auction will help bolster the mood toward auctioning allowances in other regions and at the federal level, according to Poloncarz.

Under current RGGI rules, utilities will be forced to pay pollution fines to the state if their emissions exceed those allowed under their RGGI emissions permits.

Determined to reduce the number of emissions permits available to power plants, some of the auction bidders, such as the renewable energy company Village Green Energy, bought permits at the auction in order to retire them. Village Green then sold the retired credits as carbon offsets to its customers.

Poloncarz says proponents of free allocation of allowances were concerned that allowing bidders outside the list of affected power companies to participate, might result in low participation or hoarding of allowances by third parties at a low price - either for later trading or to retire large numbers from the market. The results of the auction, however, prove those fears to be unfounded, Poloncarz says.

Round two

On the heels of the September auction’s success, RGGI officials have started the bidding process for the second pre-compliance auction on 17 December, in which all 10 RGGI states will participate. More than 31.5 million vintage 2009 allowances will be available for purchase at the same reserve price of $1.86 and bidders must present financial collateral by 11 December.

Much of what happens in the next auction could depend on general economic conditions, says William Shobe, director of business and economic research at the Weldon Cooper Center for Public Service at the University of Virginia. He says prices could go down a little due to reduced demand for power with falling industrial output. However, the allowances being purchased are for future years, says Shobe, and with experts presuming an economic rebound before the end of the first three-year compliance period, the emissions allowances should not experience much price erosion.



Facts: RGGI auction and trading timeline

· Potential bidders must have submitted applications to participate in the 17 December auction no later than 30 October

· Registered bidders must submit financial collateral by 11 December in order to bid for allowances in the 17 December auction

· Second pre-compliance auction to be held 17 December

· Subsequent pre-compliance auctions to be held quarterly through 2011


Useful links:
www.rggi.org
www.potomaceconomics.com
www.villagegreenenergy.com