Guest post by Ric Werme
Too long title: New Hampshire stays in, NJ probably gets out, 3rd quarter auction sells less than 18% of allowances, secondary market moribund, RGGI soldiers on.
RGGI is short for the Regional Greenhouse Gas Initiative, America’s premier Cap and Trade program serving higher electricity bills to everyone in ten northeast US states. I’ve been falling behind in my monitoring, but a few significant things means it’s time for an update.
In brief, allowances aren’t selling at the auction, allowances aren’t selling on the secondary market, and things aren’t going to get better soon. Or should that be RGGI has succeeded beyond its wildest dreams but intends to dream on? After all, RGGI will be meeting soon and may try to reduce the number of allowances available in the future.
First, New Hampshire stays in RGGI for the time being. Last spring it looked like a near certainty that we would leave. The NH House passed a bill to have us withdraw with a veto proof margin. Unfortunately, while the senate agreed, they couldn’t muster a veto proof majority, and given that Governor Lynch had already announced he would veto the bill, it was as good as defeated. Senator Bradley wrote a replacement bill that would keep us in RGGI, but would mandate that most of the auction proceeds would be distributed to ratepayers. While that would essentially emasculate the bill and stop the funding that organizations have been getting, most still supported the amendment. While that did pass with a veto-proof majority, the house refused to go along, and eventually, the Governor got a bill that he vetoed as promised.
This week, with the legislature back in session, the senate took up the veto but failed to override it, and so New Hampshire remains in RGGI.
In New Jersey, the legislature got worked into a frenzy after Governor Christie wrote a document saying he was withdrawing NJ from RGGI. This seemed to me like a great way to bypass legislation, and the legislature didn’t come up with a convincing argument that the Governor had overstepped his bounds. They were able to bring out a bill to maintain membership in RGGI, while it passed the legislature, the Governor has vetoed it, and the legislature may not be able to override. There may also be regulatory maneuvers and lawsuits, so it’s unclear whether New Jersey will be leaving RGGI at the end of the year.
The auction was held on September 7th, and the key results came out this morning. Auction 12 was seriously undersubscribed, with only 30% of the available allowances selling, a record low. I expected “it might go up a bit” this time, but only “7,487,000, or 17.75 percent, of the 42,189,685 current control period (2009-2011) CO2 allowances offered for sale by the ten participating states were sold.”
I don’t know about all the RGGI states, but I know some, like New Hampshire, had budgeted money in various contracts expecting income from the auctions. These sales may be low enough to not fund those contracts, I’ll have to talk to the folks who handle the contracts and see. I’m expecting the 4th quarter auction sales to be less than this one. Like maybe only 5% or so.
There were also a smaller number of allowances available for the next control period, and I expected producers would start buying some of them. However, “None of the future control period allowances offered in the auction was sold.”
This is either stunning, or producers are happy with the allowances they have, or they’re confident they can buy whatever they need next year and aren’t worried about commodity traders trying to force up the price.
While New Hampshire is still in RGGI, at least its bite is a lot smaller than anyone could have predicted when it went into effect. RGGI’s original goal was “Ten Northeastern and Mid-Atlantic states have capped and will reduce CO2 emissions from the power sector 10 percent by 2018.” Perhaps they should be exclaiming “We’ve succeeded beyond our wildest dreams.”
On Sept. 19th RGGI will start the review at their New York where their headquarters are. The review will:
The 2012 program review is expected to examine the Regional Greenhouse Gas Initiative’s (RGGI) successes and operations, whether it can achieve additional emission reductions, and whether it has caused higher emissions outside its 10 member states’ borders. Businesses and market participants hope the nine participating northeast US states will choose to tighten the program’s cap during its second control period, which will run from 2012 to 2014. Because of a drop in GHG emissions due to the economic recession, the electric sector carbon market is oversupplied with allowances, leading to low prices that many believe aren’t encouraging a transition to cleaner fuel sources in the region.
Hey guys, I thought natural gas was cleaner than coal. Count your blessings! Better yet, declare success and fold.
The RGGI folks have an external organization keeping an eye on the “secondary market”. After businesses buy allowances from the auction, they can trade them on a secondary market. (The “cap” is the number of allowances offered via the auction and various grants, the “trade” is this secondary market.)
Given that there are plenty of allowances available at the auctions at the floor price, there’s no reason to expect that speculators would be interested in joining the fray. Indeed, the report finds that some 98% of the outstanding CO2 allowances are owned by power companies and affliates and prices of futures contracts that did sell were close to the auction reserve.
One of their duties is to look for evidence of anticompetitive actions in the secondary market and report what they find. Not surprisingly, their synopsis is “We find no evidence of anticompetitive conduct; however, we will continue to evaluate the competitiveness of the market.”