RGGI: the Hot New Investment Tip?

In last week’s auction held by the Regional Greenhouse Gas Initiative (RGGI), not only did the allowances sell at $3 — the highest clearing price in four years, other than the June auction’s $3.21 — but a majority of the allowances sold to investors, rather than the large generators of electricity whose carbon dioxide emissions are regulated under RGGI.  Fifty-seven percent of the allowances were bought by commodities firms, traders, and other third parties, marking the first time in RGGI history that an auction garnered such interest and participation from these outside entities. By comparison, 81% of the allowances sold in the first 22 RGGI auctions went to compliance entities (power generators regulated under RGGI and their affiliates).

This is the fourth auction to occur since RGGI announced significant changes to the system, including a 45% reduction in the total number of allowances for the second compliance period.  Since the announcement, clearing prices have nearly tripled from the floor prices at which they sold from 2010 through the auction in March — even though the new cap doesn’t begin operating until 2014.  The overall reduction in the cap (which was finalized in Massachusetts through final regulatory amendments issued this week) seems to be increasing confidence in the RGGI market, along with prices.  Interestingly, the RGGI Market Monitor report provides that, although 53% of the bids submitted came from compliance entities, the third parties who participated in the auction apparently valued these allowances higher than the regulated community, submitting higher bids, and ultimately winning a larger percentage of the allowances.   It seems that investors are now banking on future allowance prices going even higher.

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