12th quarterly RGGI auction a bust? It sure wasn’t a boom.

The northeast US’s Regional Greenhouse Gas Initiative sells CO₂ allowances through quarterly auctions. The intent is that both electric power producers will buy some because they have in order to emit CO₂, and speculators will buy some in hopes of selling them later to power producers that didn’t plan well and are willing to pay a premium.

Each allowance is good for a three year “control period” and the first ends at the end of this year. Auctions have allowances available for both the current and and a much smaller number for the next control period.

I believe allowances for the current control period can’t be transferred to the next, so there’s strong impetus for power producers to bank enough of them to avoid market manipulation by speculators late in a control period, and RGGI Inc tries to look out for that. I don’t known what they’d do about it, but pretty much all the speculators have abandoned RGGI looking for something with a return.

RGGI Auction Summary

RGGI Auction Summary
The bids::supply ratio offers insight to the interest in the current and future auctions.

The 12th auction was held last week and results were released yesterday. I’m no economic forecaster, but the results were pretty much inline with my expectations, basically, only 30% of the available allowances sold, the least interest of any auction to date, and setting the stage for even less interest in auctions 13 and 14.

Being financial transactions in a competitive market, only limited data is released. For example, power producers really don’t want the speculators to know how many allowances they’ll need before the end of a control period, especially in an environment where all the allowances were going to be used. Producers don’t tell people how many allowances they own or document the timing they use for when to purchase them.

However, in reading the tea leaves, a couple things stand out. (Let’s just look at the current control period.) In 2010, there was more demand than supply in the first two auctions, but that didn’t keep up in the last two auctions. In particular, the first auction had a bids::supply ratio of 2.3, i.e. if there were a million allowances offered, there were people willing to buy 2.3 million of them. In the second auction, the 1.3 ratio means there was no additional demand. For the third and fourth, some demand showed up, but it was a lot less than what was available and the allowances all sold at the auction floor price.

In 2011, a surge in demand made auction 11 oversubscribed, but note the 1.1 ratio is much lower than the 2.3 ratio a year before. It looks like some large producers have an annual budget for allowances – start buying early, stop when you have enough. Others may buy throughout the year, and some may have switched to that having realized there would be plenty allowances available.

For auction 12, a repeat of the 2010 auctions suggested that the 1.1 ratio might lead to only a 0.1 ratio for this auction. Assuming some producers are deferring purchases, the 0.3 result seems eminently reasonable to me. For the September auction it might go up a bit, but only because I don’t expect anyone is going to wait for the last auction in December, and that may well be a true bust.

While all this fits my expectations, I bet most of the RGGI beneficiaries will be shocked at this auction’s results. I think all of them have (had!) plans for nearly as much money this year as last, they may wind up with half of that.

The future control period will become more interesting in the next couple of auctions. The number of allowances made available is relatively quite small. Whereas there were 42 million allowances available for the current period, there were only 1.86 million available for the next period. This is due in part to the allowances being available for years before they’re needed, and in this auction, the allowances meant to cover New Jersey’s share have been dropped since NJ is pulling out at the end of the current period.

In one sense, the future allowances did better, with a bids::supply ratio of 0.51, but it’s still the lowest ratio of any auction to date, and the proceeds are only 7% of the total, so states won’t be getting much from it.

While I’m personally thrilled at the poor results (except for the portion that is due to the recession), RGGI proponents must be dismayed at these results and what it means for the rest of the year. When RGGI started, allowances were over $3.00 each and rose in auctions 2 and 3. What they hoped would happen is the price would be up to $7.00 to $10.00 and brisk market trading between auctions would let some people make money while power producers would be racing to make themselves more efficient before allowance prices would rise even further. (All this while manufacturers fled to cheaper regions.)

Instead, the recession reduced energy demands, other programs like requiring utilities to buy renewable energy at a premium helped keep end user costs up, new natural gas production and lower prices both lowered prices but was also more efficient. All in all, CO₂ emissions have dropped, I think to below the level that was RGGI’s primary goal.

Perhaps we can declare success, end RGGI, and go home to a candlelit celebration.

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About Ric Werme

I'm a software engineer with roots that go back to PDP-10s and the ARPAnet (and WWW references to those days). I also like most anything scientific and am active in the climate skeptic community.
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23 Responses to 12th quarterly RGGI auction a bust? It sure wasn’t a boom.

  1. Theo Goodwin says:

    Excellent post. Thanks much.

  2. Dave says:

    I am truly shocked about the near collapse of that noble save the planet RGGI. Surly those starry eye green Eco-fanatics would be falling all over themselves to over subscribe and naturally overpay for the honor and pleasure of helping the planet and the poor overpaid millionaire management group and government bureaucrats and scammer’s that put this ripe of scheme in place .
    But the truth always shows the greens up for what they really are = dead beat rent-seekers The Greens only love to take and use other peoples money and never use their own. Especially the high flying morally superior Hollywood types, that constantly demand to little people sacrifice all and any pleasure but never themselves, I think the apt term for these rats is HYPOCRITES!
    RGGI I will dance on your grave when your crooked scheme dies down to it’s last 1 cent deal.

  3. kadaka (KD Knoebel) says:

    Ah come one, we know it’s all RGGI’d.

  4. David, UK says:

    I can get exactly the same for free: direct from a bull’s arse.

  5. Steve in SC says:

    The originators of this scam should be hanged.

  6. tom s says:

    And how much did this cool the earth?

  7. Lionsden says:

    Of cours it has collapsed. There is no underlying ‘gold standard’ underpinning the price of these indulgences, so realization of reality is followed by price collapse

  8. u.k.(us) says:

    From the RGGI website:

    Welcome

    The Regional Greenhouse Gas Initiative (RGGI) is the first market-based regulatory program in the United States to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states have capped and will reduce CO2 emissions from the power sector 10 percent by 2018.

    States sell nearly all emission allowances through auctions and invest proceeds in consumer benefits: energy efficiency, renewable energy, and other clean energy technologies. RGGI is spurring innovation in the clean energy economy and creating green jobs in each state.
    ==========
    OK, now show me stats to back up your claims, I dare you.

  9. kadaka (KD Knoebel) says:

    Re previous post:

    Whoops, spelling error the spell checker couldn’t catch. And while I want to blame the new tiny comment box text instead of my own haste… It was obviously the fault of the cat running in front of the keyboard who distracted me. Of course.

    Speaking of which, when are the Greens going to demand carbon credits to be required for pet ownership? The pet food consumed, additional hot water for cleaning and laundry (pet hair on everything)… The methane releases, including the decomposition of the “end product”… What is the carbon footprint of cat litter?

  10. John Cooper says:

    Let me ask a dumb question: Are the utilities required to buy this crap?

    [Ric: Yes, if they are in the RGGI region, burn fossil fuel, and generate more than 25 Mw. Or something close to that. CO2 emitters that burn wood or cocoa shells (Lindt Chocolate has a factory in New Hampshire) don't need to buy allowances.]

  11. Brian Hall says:

    The only fair way to price green energy is to make it available at premium prices to the Believers. When they’ve used up all the clean stuff, they’d have to supplement with the cheap dirty power, but they’d be able to make sure all the high-cost producers made money, by paying for it directly!

  12. jonjermey says:

    Nothing is quite to fatal to delusionary behaviour as a free market.

    @Brian: “The only fair way to price green energy is to make it available at premium prices to the Believers.”

    But why stop there? Let there be a voluntary Carbon Tax: governments can work out how much they think we should pay, and anyone who believes in AGW can chip in their proportion. That way no innocents suffer, and the alarmists get a Giant Economy Size warm fuzzy feeling from their contribution to saving the planet.

  13. 1DandyTroll says:

    So, essentially, these states volunteered to enforce a socialist trading system and are failing to get positive economic and environmental results but still wants to continue the “program”.

    Come again, but why did the Soviet Union collapse.

  14. Buzz Belleville says:

    I’m not sure I understand the point of this article. Yes, this was the third straight auction where allowances cleared at the min reserve price. And this does reflect an oversupply of allowances for the 2009-2011 control period. The planners intentionally set the initial cap above actual 2009 emissions … combine that with reduced demand due to the recession and the reserve price was virtually guaranteed (low demand + high supply). This phased approach with modest initial reductions was intentional, to provide predictable market signals and allow for easy planning.
    The current auctions are also selling allowances for the 2012-2014 control period … though those also cleared at the reserve price, there will be less allowances available for that period, and less still after that until they get to 10% below 2009 levels by 2018. So one would expect prices to go up as supply ratchets done and the recession ebbs (demand rises). But, regardless whether it does or doesn’t, I’m having a hard time figuring out how this last auction somehow shows a failure of the RGGI system.

  15. rbateman says:

    KD: What is the carbon footprint of cat litter?

    There is no such thing as a carbon footprint in a carbon-based lifeform dominated Planet, as it is currently portrayed as the evil element.
    99.999% of life on Earth uses carbon, so there is such a thing as competition amonst the species of fauna.
    Species of flora compete likewise amongt thier own.
    There are also food chains.
    Carbon is merely a resource, not a toxic footprint.
    Nature wastes not, wants not. You aren’t goint to eat those? Nature has a lifeform that will.
    Now, the cat definately has a pawprint.

  16. Dave says:

    Buzz Belleville says:
    June 11, 2011 at 6:35 pm

    I’m not sure I understand the point of this article. But, regardless whether it does or doesn’t, I’m having a hard time figuring out how this last auction somehow shows a failure of the RGGI system.

    Hi Buzz.
    It’s very simple and basic economics at work here, the US economy is going down the tube, the RGGI system is becoming a luxury NO Country, State ,Town, City or Person can afford, The US is in big trouble and it’s doubtful she will recover certainly within the next 10 years. All the Carbon market’s Worldwide are in a shambles and in a state of collapse.
    The last auction does shows a definite failure of the RGGI system.
    When the wildest dream price of $1.86 to $3.07 and the bid price is 1 to 4 cents. That’s a catastrophic failure a sign the system is in free fall, soon to be followed by imminent collapse as other States jump the shark out of the wheelers and dealers slimy hands,
    Unless there is real money moving through State governments and the slimy wall-street type crowd’s hands they will lose interest and move onto easier money, It’s the way the system has always worked, easy money or nothing.
    The RGGI system will be defunct long before any industry will have to meet the 2009 emissions set point and the so called allowances availability for that period, so will Obama along with a job and economy destroying defanged EPA, that doesn’t give a rats arse about the people ability to survive, just the as long as the progressive agenda is met .

  17. Gary Hladik says:

    jonjermey says (June 11, 2011 at 5:17 pm): “But why stop there? Let there be a voluntary Carbon Tax: governments can work out how much they think we should pay, and anyone who believes in AGW can chip in their proportion.”

    No tax necessary. A relatively free market can provide whatever one’s little conscience desires (though I suppose the gov gets its cut through sales taxes):

    http://www.terrapass.com/

  18. Ric Werme says:

    Buzz Belleville says:
    June 11, 2011 at 6:35 pm (Edit)

    I’m not sure I understand the point of this article.

    It’s primarily a status report – there have been several RGGI articles and given that auctions are important event (especially given the little activity in the allowance trading market), I deemed it worthwhile to report on it.

    Yes, this was the third straight auction where allowances cleared at the min reserve price. And this does reflect an oversupply of allowances for the 2009-2011 control period. The planners intentionally set the initial cap above actual 2009 emissions … combine that with reduced demand due to the recession and the reserve price was virtually guaranteed (low demand + high supply).

    Not quite true. While they did start with a higher than current demand, that was to accomodate growth before power companies’ investments began to pay off. The RGGI supporters niether expect a deep recession or the influx of cheap, efficient natural gas.

    This phased approach with modest initial reductions was intentional, to provide predictable market signals and allow for easy planning.

    So why weren’t all CO2 allowances for the 2009-2011 control period sold at the auction floor price?

    The current auctions are also selling allowances for the 2012-2014 control period … though those also cleared at the reserve price, there will be less allowances available for that period, and less still after that until they get to 10% below 2009 levels by 2018.

    According to http://www.eia.gov/environment/emissions/ghg_report/, greenhouse gas emissions dropped 7.1% in 2009 over 2008 when RGGI began. “The result is primarily from three factors: an economy in recession, a particularly hard-hit energy-intensive industries sector, and a large drop in the price of natural gas that caused fuel switching away from coal to natural gas in the electric power sector.”

    So one would expect prices to go up as supply ratchets done and the recession ebbs (demand rises). But, regardless whether it does or doesn’t, I’m having a hard time figuring out how this last auction somehow shows a failure of the RGGI system.

    Your use of the word “failure” is the first reference here so far. I called it (sarcastically, to be sure), a success. As a New Hampshire ratepayer, I’d call rate increases due to RGGI a “fail.”

  19. KnR says:

    Over the years there have been many times people have got rich from effectively selling rubbish or even nothing , but this may be the first time people hopped to get very rich through selling ‘hot air’. Bottom line if you power company you pass the price for the ‘need’ of these CO₂ allowances on to the customer , if you can’t and cannot make a profit you just shut down , which has been seen before.
    Worse part of this story is although the vast sums they hopped to make never happened , there are some people that have made a great deal of cash out of selling 21st centenary snake oil and there not at all nice people whose life styles make St Gore look like a CO2 Trappist monk .

  20. Tom in Florida says:

    I believe that New Jersey has opted out of this scheme. Perhaps that accounts for the drop in interest.

    [Ric: New Jersey will be in until the end of the year and their power producers still need allowances until then.]

  21. Roger Caiazza says:

    I offer one correction and one comment. The correction is that allowances from the first control period can be banked and used in subsequent control periods. My comment is my response to RGGI supporters that call this a cap and trade program. While I originally thought it should be called cap and auction the results you show more appropriately describe a cap and tax scam. As it stands now the electric generators buy the allowances they need to cover their emissions at close to the lowest price allowed, the money goes either to all the green programs you can imagine or are tapped by state governments (e.g., NY) who put the money in the general fund. So under the guise of cap and trade we have a thinly disguised tax on CO2 emissions that inevitably raise the cost of power.

  22. Ric Werme says:

    I turned on the radio this morning and the first sentence I hear included “RGGI”.

    The program was living on earth’s Who’s Running Down RGGI?. I like listening to them in part to see what that side is up to and once in a while they do something like interview Richard Lindzen and annoy all their loyal listeners.

    Their site doesn’t accept comments, so I Emailed them:

    I went into the kitchen to make coffee, flipped on the radio and
    the first sentence I heard was said RGGI. Good timing!

    One significant error, though.

    Your transcript says “The bill to pull New Hampshire out passed the state
    House but was rejected by the Senate.” The bill passed both chambers,
    251-108 in the house, 15-9 in the senate. The problem is 15-9 is not
    enough to override Governor Lynch’s promised veto.

    The claims about how well RGGI is working, e.g. “YOUNG: ReGGI’s [RGGI!] most
    lasting contribution could be the efficiency investments it makes possible.”
    In the cases most touted as RGGI successes, I’m convinced money should have
    been available elsewhere. If the physical plant at the David H. Koch
    Institute is saving $450,000, Koch himself could have leant the money to build
    it and make a handsome profit.

    You may be interested in:

    http://wattsupwiththat.com/2011/06/11/12th-quarterly-rggi-auction-a-bust-it-sure-wasnt-a-boom/
    My summary on the most recent RGGI auction, states expecting a RGGI windfall
    are going to be disappointed.

    http://wermenh.com/rggiwatch/index.html
    My eye on RGGI and the various repeal efforts.

    “They’ve already done better than the 10 percent cut ReGGI aimed to achieve by
    the year 2018.”

    >From http://wermenh.com/rggiwatch/enr_testimony.html and
    http://www.eia.gov/environment/emissions/ghg_report/ :

    According to data recently released by the U.S. Energy Information
    Administration, greenhouse gas emissions dropped 7.1% in 2009 over 2008 when
    RGGI began. The result is primarily from three factors: an economy in
    recession, a particularly hard-hit energy-intensive industries sector, and a
    large drop in the price of natural gas that caused fuel switching away from
    coal to natural gas in the electric power sector. RGGI’s last year of
    emissions data was 2008, so I can’t check our region, but in just one year,
    the entire country achieved 2/3rds of RGGI’s primary goal. If we’ve
    maintained that pace, we can declare success, end RGGI, and go home to a
    candlelight celebration.

    -Ric Werme

  23. oeman50 says:

    RGGI has not resulted in any decreases in CO2 emissions. I know this because I follow RGGI as part of my job. When the allowances are selling at the floor price, there is no incentive to operate any differently or invest in any equipment to reduce emissions. So it basically has become a tax that CO2 emitters must pay for compliance. It will not get better, either. The new tsunami of regulations from the EPA is causing all users of coal to ponder wheather it is economic to use the fuel. Coal plant shutdowns have already been announced all over the U.S. and in the RGGI area, further reducing the need for allowances. Natural gas is taking up the slack. With its CO2 emissions per MWHr that are 1-to-2 or even less, it will reduce the need for allowances. The ironic thing, though, is that even natural gas will not meet the CO2 reduction goals that have been proposed.

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