The Drop in RGGI Auction Prices: Attributable to Recession or Regulatory Uncertainty?

The Drop in RGGI Auction Prices: Attributable to Recession or Regulatory Uncertainty?

September 11, 2009 16:22
by J. Wylie Donald
By Grace Kurdian
The Regional Greenhouse Gas Initiative (RGGI) held its 5th Auction and rang in its first anniversary of holding regional auctions for carbon allowances on September 9, 2009.  Results released today indicate a marked drop in the price at which carbon emission allowances were traded. 
RGGI is the first mandatory regional cooperative in North America through which ten signatory states in the northeast have committed to cap and then reduce carbon dioxide emissions by setting carbon emission limits on the power industry.  The compliance period began in 2009. 
In Auction 5, the 2009 vintage allowances sold for a clearing price of $2.19 and the 2012 vintage allowances sold for a clearing price of $1.87.  The bids for the 2009 vintages ranged from a minimum of $1.86 to a maximum of $12, with a median bid of $2.10 and a mean bid of $2.30.  Tracing the trend of the 5 RGGI auctions held to date, the prices increased for each auction through Auction 3, which was held in March.  During the 4th and 5th auctions (held in June and September), however, the prices have decreased, with Auction 5 bringing in the lowest prices for any RGGI auction held to date.    
Some may venture that the recession is depressing the prices bidders are willing to pay for the allowances.  This response is too simplistic.  After all, we were amidst the recession even when the first auction was held in September 2008.  While the recession may explain why non-compliance entities (voluntary bidders) may be hesitant to participate or bid high prices in the auction, it does not explain the behavior of the compliance entities.  Compliance entities, whose required participation in RGGI is triggered by their size (fossil-fuel fired electric generators of 25 MW or greater), must comply with the emission caps for as long as the RGGI program is in place.  Which brings us to another suggested reason for the drop in prices: regulatory uncertainty as to the future of RGGI. 
The timing of the climate legislation working its way through Congress supports this proposition.  The Waxman-Markey bill (H.R. 2454 or the American Clean Energy and Security Act, 'ACES') was released in draft form in March, amended, then passed the House Energy and Commerce Committee in late May.  Eight other congressional committees then reviewed and endorsed ACES.  On June 26, 2009, it was sent to the House of Representatives, where it passed by a vote of 219 to 212.  Section 861 of ACES includes a 5-year moratorium, from 2012 through 2017, on state and regional cap-and-trade programs, such as RGGI.  Moreover, ACES provides for the free allocation, rather than auction, of 85% of the allowances in the early years of the national cap-and-trade scheme.  Recognizing that state and regional programs have been the laboratories for the critical elements of a cap-and-trade program, ACES provides for fair compensation and exchange for allowances issued by RGGI and other state and regional programs (section 790).  However, the moratorium, allocations of allowances, and indications that the Senate and House may not agree upon a final bill by the end of this year may have raised sufficient regulatory uncertainty to push compliance entities to take a more conservative bidding approach into the last two auctions.  The parallel timing of the release of the climate legislation and  the  fall of auction prices is otherwise too coincidental.  
If your business is subject to legislation in an increasingly carbon-constrained business environment, focusing only on your business plans and operations will not suffice.  The complex interplay of state and federal climate change policy and legislative efforts cannot be ignored if your company's financial decision-makers are to make strategic, well-informed business decisions.   

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