Wednesday, June 12, 2013

RGGI Reform reflected in June Auction Price

As I discussed here a couple years ago, the Regional Greenhouse Gas Initiative (RGGI) was significantly overallocated.  In its first three-year compliance period (2009-11), the power plants regulated by the program emitted 377 million tons, a mere two-thirds of the total amount allowed under the cap (data generated using the RGGI CO2 Allowance Tracking System).  The oversupply of RGGI allowances resulted in very low allowance prices.  In the quarterly auctions held in 2012, allowances sold at the reserve price of $1.93 per ton, and fewer than two-thirds of available allowances were purchased (data from RGGI’s Market Monitor reports). Similar conditions prevailed at most of the quarterly auctions in 2010 and 2011.  In contrast, in the first auction of 2009, the average bid price was $3.51, and there were offers to buy more than twice the number of allowances available.

Earlier this year, RGGI was reformed to address its overallocation problem.  RGGI released an updated Model Rule that would reduce the 2014 cap from 165 to 91 million tons (the actual 2012 emissions).  As in the original rule, the cap declines by 2.5 percent each year from 2015 to 2020.  The reform was anticipated to increase allowance prices to $4 per ton in 2013 and up to $10 per ton in 2020, and it seems to be working.  In the second quarterly auctions of 2013, held on June 5, allowances sold for $3.21 and all allowances were purchased. 

RGGI deserves a fair bit of credit for reforming the program.  Getting the nine member states to agree to reduce the cap could not have been a simple task politically (though the revenue-raising potential helped, I’m sure).  Yet, it should not be left unsaid that the effectiveness of the program remains in doubt.  Given the changes in the energy sector over the last few years, the program is still not particularly ambitious.  Single-digit allowance prices will not drive an energy sector transition. 

- Lesley McAllister

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I applaud RGGI for its efforts to bolster allowance prices by ratcheting down the cap. However, the bottom line is, as Lesley suggests, that a $4 market price for credits, or even $10 or $15 isn't going to either substantially incentivize fuel switching, or more importantly, spur technological innovation. Perhaps the greatest success of RGGI to date has been investment of auction revenues in programs for energy efficiency and other measures to reduce energy consumption. While laudable, feels like nibbling around the edges in the face of looming, and potentially catastrophic tipping points, but such is what passes for climate "policy" in the United States.

Posted by: Wil Burns | Jul 3, 2013 11:26:28 AM

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