1ST EMISSIONS AUCTION N U.S., A VIEW OF THINGS TO COME

Looking for a market that’s holding its value? Here it is.

The Regional Greenhouse Gas Initiative Inc (RGGI, nicknamed “Reggie”) held its first emissions permits auction, the first emissions permits auction in the U.S.

The program is regarded as a trial run in anticipation of a national cap-and-trade system to be legislated under the next administration. Many assume Reggie credits will transfer to the national market when it is created.

Robert Stavins, director, Harvard Environmental Economics Program: “This is the first major successful auction in the world of CO2 allowances…More importantly, that a future U.S. federal cap- and-trade system is likely to use allowances that are at least partially auctioned off, it is important to observe RGGI's auction and learn from it.''

Reggie’s goal is to cut GhGs 10% by 2019.

Although the permits, good for the offsetting of 1 ton of carbon dioxide equivalent (CO2e) emissions in the course of generating power or otherwise conducting business, sold at auction for only $3.07, this was 65% above the $1.86 floor price, indicating buyers believe the right to emit will gain value over time.

This is considered especially good market performance because Barclays Bank, a veteran of the EU credits market, expected Reggie to be oversupplied and predicted a price of less than $2.

Annual allowances available will be ratcheted down yearly to 10% below current levels by the end of 2018. There are 2 goals: (1) To cut GhGs and (2) to drive the development of New Energy. The latter cannot happen, according to experts, until prices for emissions rise, making it more expensive to continue generating them than to invest in New Energy.

Kate Hampton, policy head, Climate Change Capital: "[The clearing price] will provide a learning opportunity...You do need a higher price than [$3.75/ton of CO2e] to provide a significant incentive for efficiency…"

Seb Walhain, head of environmental markets, Fortis Bank in Amsterdam, says utilities are unlikely to change their behavior until allowances are at least $10/ton of CO2e.

Comparison: European Union (EU) emission allowances on the Emissions Trading Scheme (ETS) were at 23 euros ($33.10)/tonne.

The futures price has jumped to $3.76 on the CCX. (click to enlarge)

First U.S. Carbon-Dioxide Permits Sell for $3.07/Ton
Jim Efstathiou Jr., September 29, 2008 (Bloomberg News)

WHO
Regional Greenhouse Gas Initiative Inc (RGGI)

WHAT
The RGGI kicked off its effort to fight global climate change through market-based greenhouse gas (GHG) emissions reductions. The first price for credit to offset one ton of carbon dioxide equivalent (CO2e) was $3.07.

click to enlarge

WHEN
- First auction was September 25 in anticipation of a trading regimen that opens January 1, 2009.
- The next auction will be Dec. 17.
- The first stage of Reggie is scheduled to run 3 years.
- Reggie is the first U.S. market for allowances.

WHERE
RGGI incorporates 10 northeastern states: New York, New Jersey, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island and Vermont.

WHY
- The first RGGI auction saw 59 bidders.
- The opening price is far lower than the price of permits on the EU ETS but 65% higher than the base rate, suggesting there is demand for them on the expectation their value will increase.
- RGGI intends to supply permits for 188 million tons of CO2e/year, 9% over 2007 emissions in the 10-state region.
- All 12.57 million permits offered were sold in the auction that received bids for 51.7+ million allowances.
- Reggie allows utilities, investors and other buyers to acquire and hold permits.
- If increased levels of GhGs are reported, it would be expected to trigger higher demand for permits.
- The auction raised $38.6 million for the states to use to cut electricity demand and build New Energy capacity.

There is a world of emissions trading waiting for the U.S. join in. (click to enlarge)

QUOTES
- Steve Schleimer, energy and environment market regulation director, Barclays Plc.: "People are probably seeing value in buying and holding… If you look at the back end of the program, it does become a short program …"
- Schleimer: "Over time, as load in the region is growing and new plants are coming on line, there's going to be a point where there are 188 million tons made available and emissions will exceed that…That's one reason to see value in it."
- Seb Walhain, head of environmental markets, Fortis: "I'm not a big fan of RGGI…"
- Pete Grannis, commissioner, New York State Department of Environmental Conservation: "The first RGGI auction has successfully used market forces to set a price on carbon and this will send a clear market signal to support the investment in clean-energy technologies…"