The Regional Greenhouse Gas Initiative (RGGI) held its first auction of greenhouse gas allowances on September 25, 2008. In the absence of Federal regulations, several regional cap-and-trade initiatives began to take shape over the last few years, including the Western Climate Initiative, and more recently, the Midwestern Climate Initiative. Among these, RGGI represents the most developed mandatory program to-date.
RGGI imposes an emissions cap on fossil fuel-fired electric power plants 25 megawatts or greater in size, operating in ten northeastern states (Connecticut, Delaware, Massachusetts, Maryland, Maine, New Hampshire, New Jersey, New York, Rhode Island, and Vermont). These power plants (about 225 in total) are responsible for more than 25% of emissions in the region.
The system sets a stabilization target of 188 million tons of CO2 annually for 2009-2014, then imposes annual reductions of 2.5% per year through 2018. The result is a 10% reduction in emissions over 2009 levels by 2018. Companies subject to the regulations will be able to purchase allowances to account for their emissions at the end of each 3-year compliance period.
These allowances may be purchased either through the quarterly auction process or via the secondary market. RGGI is unique in that it requires the majority of allowances to be auctioned rather than being given away to emitting entities from the governing agency. In contrast, the first phase of the European Union Emissions Trading Program was criticized for giving away too many allowances and thus lowering the value of the carbon traded.
The results of RGGI’s first auction indicated a strong demand for the allowances, with 59 participants (ranging from the energy, financial, and environmental sectors) placing bids for four times the available supply. Since only 6 of the 10 states participated, the 12.6 million allowances which were auctioned represented only 45% of what bidders can expect to purchase in future auctions.
While details were not released regarding who purchased the allowances, Potomac Economics (RGGI’s independent market monitor) noted that regulated entities or their affiliates purchased most of the allowances. The clearing price was $3.07 per allowance, yielding $38,575,783 in proceeds which will be distributed to the participating states (Connecticut, Maine, Maryland, Maine, Massachusetts, Rhode Island, and Vermont) in accordance to their share of regional emissions allowances. These revenues will be used to promote a shift toward a clean energy economy in the region, by supporting investment in energy efficiency and renewable energy.
For example, in Massachusetts, Governor Deval Patrick is directing the state’s $13.3 million share of revenues toward helping municipalities and individuals fight high winter energy costs in 2008-2009. As specified in the Green Communities Act, signed this past July, all RGGI proceeds will go to the Green Communities program ($5 million from this round), to support other energy efficiency and demand response programs ($3.5 million for utility-administered programs and $4.3 million for additional efforts this winter), and to reimburse the state for administrative costs associated with the cap-and-trade program ($500,000). The Green Communities program will provide grants and technical assistance to communities for efficiency and renewable energy efforts.
By establishing a price on carbon, RGGI will create a market signal to power generators, forcing them to incorporate the compliance cost of GHG emissions into their balance sheets, and deterring further investment in fossil-fuel intensive technologies. While costs may be carried over to the consumer through price increases, the revenues from auctions are designed to alleviate the burden on end-users through energy efficiency and/or alternative generation approaches.
The clearing price for allowances during this first auction may not, however, be indicative of future prices for several reasons. As mentioned earlier, this auction represented less than half of the full pool of allowances since some states were not ready to participate. Also, since RGGI is based on 3-year compliance periods, and the first few years are dedicated to stabilizing rather than cutting emissions, allowance prices may be lower at the beginning of the program, increasing as the cap gets tighter.
Some have criticized the program for setting the cap too high, which would suggest that allowance prices would further decrease due to lack of demand. Participating states do have the ability to alter the cap after the first compliance period, so there may be means to address price volatility as the program evolves. Regardless of what happens with allowance pricing, RGGI will provide much needed insight into the cap-and-trade process and will help to inform future efforts to develop an effective Federal carbon trading program.
Contributed by the Sustainability Services Team