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RGGI auction rules fire starting pistol on allowance price run-up

19 March, 2008

Allowance prices in the US’ first greenhouse gas market are set to ramp up, following the release of key auction details, according to a leading broker.

On 17 March, the 10 states participating in the Regional Greenhouse Gas Initiative (RGGI) announced the date and rules for the first auction of carbon dioxide (CO₂) allowances under the emissions trading scheme, whose targets come into force next year.

The first auction will take place on 10 September – not June, as previously planned – with quarterly auctions thereafter. A reserve price of $1.86/ton of CO₂ will be in place for the first auction.

That announcement was followed by the first forward trade of RGGI allowances, at $7/ton of CO₂ – considerably higher than a forecast 2009 allowance price of $2.32 modelled by consultancy ICF International.

“It was no coincidence” that the trade – between energy trader Koch Supply & Trading and environmental investment fund Texas Environmental Partners – came hard on the heels of the announcement, Andy Kruger, a New York-based director at Evolution Markets, which brokered the trade, told Carbon Finance.

“The auction [rules] had created a huge amount of uncertainty ... We’ve now got more certainty – it allowed the parties, which had been negotiating, to do the trade,” he said.

Kruger predicts that, despite analysis suggesting that RGGI may see a surplus of allowances over coming years, the price of allowances is set to rise in the next few months, as power generators rush to cover their projected emissions.

“Everyone is 0.000% short at the moment,” he said, and it is likely that all 10 states will auction all of their allowances, rather than allocate any for free. “No-one at a power company ever got into trouble for stepping up and buying into the market along the way – they get into trouble for being short, when they have to run [their plants].

“Will prices come back down to where ICF say they should be? Maybe. But in the short-term, there will be a run,” he added.

RGGI imposes caps on carbon emissions for power plants in 10 north-eastern states, initially at 188 million short tons (171 million tonnes) of CO₂. That cap is fixed until 2015, and then declines by 10% to 2019.

The auction rules include a floor price of either $1.86/ton, rising in line with inflation, or 80% of the current market price, whichever is higher. The initial auction will be conducted on a single-round, uniform-price, sealed-bid basis, although subsequent auctions may follow a different model.

Any unsold allowances will be made available in future auctions. No one organisation (including affiliates and agents) will be allowed to buy more than one quarter of the allowances offered in single auction.

The participating states also announced several service providers to RGGI, contingent upon final agreement of contract terms. These are:

• World Energy Solutions, to provide services related to the design and implementation of a regional allowance auction;
• Perrin Quarles Associates, to help develop and implement an emissions and allowance tracking system;
• ICF International, to support the implementation of the emissions offset component of the programme; and
• Greenhouse Gas Management Institute, to help develop an accreditation process for independent verifiers of offset projects.

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