The Northeast states’ second auction of carbon-emission permits last month showed the unpredictability of the fledging market, with allowances fetching a higher price than analysts had predicted.
At the same time, new research showing that emissions levels are falling has led observers to conclude there will likely be a glut of permits on the market over the next few years.
The Regional Greenhouse Gas Initiative (RGGI, pronounced “reggie”) is a compact between 10 Northeast states to freeze and then reduce carbon dioxide emissions from power plants by 10 percent over the next decade. For Rhode Island, that means emissions must fall from 2.6 million tons in 2014 down to 2.3 million tons in 2018.
To meet their goals, the states have created the first cap-and-trade program in North America. Utilities that generate more than 25 megawatts of electricity from fossil fuels must buy a permit for every ton of greenhouse gas they emit.
Although the cap for emissions technically went into effect on Jan. 1, there is a three-year compliance period, and so generators do not have to submit allowances to cover their 2009-2011 emissions until March 31, 2012.
The second quarterly auction of RGGI permits was held on Dec. 17, and officials said it went off without a hitch. Unlike the first auction, on Sept. 25, all 10 states took part last month, which meant the number of permits up for bid was more than double that in September.
A total of 69 organizations from the energy, financial and environmental sectors took part in the December auction, and demand for permits was 3.5 times more than the available supply of permits. The final clearing price for a permit to emit one ton of carbon was set at $3.38, up more than 10 percent from the Sept. 25 clearing price of $3.07. The auction raised about $106.5 million.
The $3.38 price surprised traders and financial analysts, according to Point Carbon, a trade publication, which said the consensus forecast had been for a permit to fetch roughly the same amount – or possibly even less – than it had in September.
Rhode Island’s proceeds from the two auctions, after administrative costs, will total almost $2.7 million. Although the money is earmarked for energy efficiency and other conservation programs, it remains unclear exactly how it will be spent.
Rhode Island is one of only two states in RGGI that have not finalized plans for spending the money. Massachusetts has already allocated the $13.3 million it received from the September auction to fund a range of energy-related initiatives.
Andrew Dzykewicz, commissioner of the R.I. Office of Energy Resources, which is responsible for administering the funds, did not return a phone call before press time requesting comment. But Sam Krasnow, a staff attorney for Environment Northeast who is a member of the R.I. Energy Efficiency and Resources Management Council, said the council has seen a rough draft for the plan.
“It’s looking good, and they’ll be done soon,” he said.
It is also unclear how successful RGGI will be in reducing carbon emissions. According to an analysis by Environment Northeast, emissions from the RGGI states’ power plants “have declined significantly” since the caps were negotiated earlier this decade. Although the group calls that “a favorable trend,” it also said it “should moderate demand for allowances and keep prices down in the near term if the trend continues.”
Point Carbon estimates emissions in the RGGI region will be 14 percent below the cap this year. Setting too high a cap has been cited as one reason why the European Union’s cap-and-trade program has faltered.
Despite the emissions trend, traders expect RGGI permits, which are traded on the secondary market in Chicago and New York, to fetch more than $4 in the new year because of the higher-than-expected auction price, according to Point Carbon. More utilities are expected to participate in upcoming auctions now that the compliance period is under way. The next auction is March 18. •
The Regional Greenhouse Gas Initiative (RGGI) is a cooperative cap-and-trade effort of 10 states in the Northeast and Mid-Atlantic regions. Its carbon-trading program is administered by RGGI Inc., a nonprofit corporation created by the 10 participating states. Additional information is available at www.rggi.org.
