Law and the Environment : Environmental Lawyer & Attorney : Foley Hoag Law Firm : Boston, Washington D.C.

The nine states still participating in the Regional Greenhouse Gas Initiative are getting ready for the first auction of RGGI's second compliance period, scheduled for March 14th.  In the auction notice released last week, they announced 4 changes to the program, and analysts are predicting there are far more significant changes to come -- namely adjustments to the total emissions cap. 

The first change: which we knew was coming; New Jersey is officially out.  The second:  the reserve price, the lowest price at which allowances may sell, has been increased by 4 cents to $1.93, in line with the Consumer Price Index.  The third:  although RGGI usually offers allowances from two different compliance periods for sale at each auction, March's auction will offer only 2012 allowances, raising some questions about RGGI's own view of its future past this compliance period's end in 2014.  The fourth change:  the participating states announced that they will retire 87 million of the allowances that went unsold during the 2009-2011 auctions, a move that may indicate the states' willingness to set the cap for 2012 below the earlier levels, to avoid such over-allocation of allowances in future years.

The original plan for the RGGI program, when it was introduced in 2008, was to set the emissions cap on large power plants in the Northeast at 188 million tons (estimated 2005 levels) through 2014, then lower the cap by 2.5% per year over the next four years, for a net change of 10%.  But in the intervening years, emissions in the Northeast have declined significantly due to decreasing generation from higher-carbon dioxide sources such as fuel oil and coal, increasing generation from natural gas and renewable, carbon-free sources, and expanded energy efficiency programs -- many of which were paid for by funds collected by the states through the RGGI auctions.  As a result, emissions are now far below the planned reductions already -- 2011 emissions were 34% below the cap, according to Environment Northeast's analysis released last week.  As these changes in emissions are expected to be permanent, the RGGI cap would have to be lowered by a significant amount before the cap-and-trade program became the driving factor in carbon reductions.  

The participating states are currently working on a planned comprehensive review of the RGGI program, with the most recent topics of discussion including evaluating the use of offsets and other cost-containment mechanisms in the future.  While the participating states' willingness to retire the unsold allowances from the first compliance period may be a signal of their intentions to re-set the cap for the 2012-2014 compliance period as well, it remains to be seen whether the states will merely adjust the cap to reflect observed emission trends or try to create even further cuts in emissions. 

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The 10th auction in the Regional Greenhouse Gas Initiative (RGGI) was held on December 1st.  In honor of this significant round number, I give you the top 10 interesting facts about the 10th RGGI Auction, all of which are based on today's market monitor report:

10)  In the Auction, 24,755,000 allowances from the 2009-2011 compliance period sold for $1.86 each (the floor price);

9)  That amount is only 57% of the 2009-2011 allowances offered for sale, the lowest yield from a current compliance period auction;

8)  38 entities bid on these current compliance period allowances, down from 45 in September and 51 in March;

7)  The generators subject to RGGI compliance and their affiliates (collectively "compliance entities") purchased 97% of the current compliance period allowances sold;

6)  1,172,000 allowances from the second compliance period (2012-2014) were also sold at $1.86 (the floor price);

5)  That amount is 57% of the 2012-2014 allowances offered for sale -- the lowest yield to date for this vintage of allowances -- and 100% of them were bought by just 4 compliance entities;

4)  In the 10 RGGI auctions, taken together, compliance entities have purchased 85% of all allowances sold;

3)  Due to trading on the secondary market, after the 10th auction purchases are settled, compliance entities will hold 95% of all RGGI allowances in circulation;

2)  All together, the 10 RGGI auctions have brought in more than $777.5 million for the 10 RGGI states;

and

1)  The RGGI states have collectively invested about 80% of the RGGI funds in strategic energy programs, most of which involve energy efficiency improvements in homes and businesses.   RGGI has created a website compiling the states' announcements on the success stories from these investments.

The next RGGI auction will be held March 9, 2011.  

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The Regional Greenhouse Gas Initiative (RGGI) auction program celebrated its second birthday this week by holding the 9th regional auction of CO₂ allowances.  As today's report highlights, the auction brought a bittersweet first for the 10-state program: unsold allowances from both the current and future regulatory periods.  Bidders bought only 75% of the 45.6 million 2010-vintage allowances offered and just 61% of the 2013-vintage allowances, with both auctions closing at the mandatory floor price of $1.86.   Not surprisingly, given these results, participation in the auction was down -- the 2010 auction garnered bids from 45 entities, 92% of whom were regulated generators or their affiliates, down from March's relatively robust participation of 51 bidders.   According to today's report, regulated entities have purchased 84% of all allowances sold in Auctions 1-9, and through trading on the secondary market, will hold 95% of the allowances in circulation, once the allowances sold in Auction 9 are distributed.

Under the RGGI rules, the leftover allowances from this week's auctions may be sold at a future date, or a state may choose to retire them.  Since many people believe RGGI allowances to be over-subscribed, retiring some or all of these leftover allowances might be one way for the RGGI states to re-balance the market and encourage further reductions in emissions. 

Even at the floor price, the RGGI proceeds keep growing.  In the last 2 years, the auctions have brought in $729, 281,959 for the 10 states, who are collectively investing 80% of the funds in state-based energy programs: 60% in energy efficiency programs, 10% to accelerate deployment of renewable energy technologies, and 10% to direct consumer benefit programs, such as assistance to low-income ratepayers.  RGGI, Inc. noted in its press release accompanying the market monitor report the hopes that this "auction and invest" design will be a model for a national program as well as other regional programs like the Western Climate Initiative and the Midwest Greenhouse Gas Reduction Accord. Since regional programs are likely to be the model for the foreseeable future, this certainly seems like a possibility.

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In the Regional Greenhouse Gas Initiative's (RGGI) eighth auction of CO₂ credits on June 9th, the clearing prices were the lowest yet – $1.88 for 2009-2011 credits and the auction floor of $1.86 for 2012-2014 allowances.  Despite these low prices, the auctions still brought in some $80 million.  In total, cumulative RGGI proceeds to be used by the 10 participating states for renewable energy, energy efficiency and low-income energy assistance programs now total $662.8 million.

RGGI's announcement of the auction results highlights some of the specific programs in which the states have invested, and the returns we are already seeing from these investments.  For example, in Connecticut, electric and gas energy efficiency programs, funded in part by RGGI proceeds, are producing more than $4 for every $1 invested.  New York reports a return greater than 8 to 1 for its investments in renewable energy systems.  And the predictions are even larger:  Massachusetts reports that energy efficiency programs, funded in part by RGGI, will generate roughly $6 billion in consumer energy savings in Massachusetts over the next 3 years. 

On the whole, the RGGI states are investing around 60% of the proceeds from the auctions in energy efficiency.  Energy efficiency measures such as building retrofits, heating system replacements and appliance upgrades are predicted to shave 20 to 30% off consumers' utility bills over the next few years. States are also investing in large-scale renewable energy development as well as programs to deploy distributed generation, such as solar energy and hot water systems on  homes, schools, and businesses.

Although participation and prices were both down for this second auction of 2010, all 2010 vintage and 2013 vintage allowances available for purchase were sold – a change from the previous two auctions, in which supply for allowances to be used in the 2012-2014 compliance period outpaced demand.   Perhaps due to the drop in the number of entities participating, electric generators subject to RGGI purchased 92% of the 2010 vintage allowances – up from 85% in March's auction – and 100% of the 2013 vintage allowances.

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Despite the relatively low clearing prices in the Regional Greenhouse Gas Initiative’s (RGGI) seventh auction of CO₂ credits on March 10^th -- $2.07 for 2009-2011 allowances, and the auction floor price of $1.86 for 2012-2014 allowances – cumulative RGGI proceeds to be used by the 10 participating states for renewable energy, energy efficiency and low-income energy assistance programs now total $582.3 million.

As reported in today’s announcement of the auction results, this half billion dollars is being funneled into state-run programs that make investments in energy efficiency, accelerate the deployment of renewable energy, and, at the bottom line, create thousands of jobs. In the report, RGGI highlights success stories from regional companies in sectors such as energy audits and weatherization, and the US Department of Energy’s statistic that every million dollars invested in building weatherization creates more than 50 jobs in installation and another 10 to 20 jobs in the production of energy efficient building materials.  Also notable for Massachusetts is DOER Commissioner Phil Guidice’s statement that energy efficiency programs funded in part by RGGI are expected to create or maintain nearly 4,000 jobs in Massachusetts in the coming three years.

This auction was RGGI’s first in 2010, and the first to offer new years’ allowances for sale. Participation increased in both auctions, perhaps as a result of the green shoots of the new economic recovery. 

Participation in the auction of 2010 vintage allowances, which may be used to cover CO₂ emissions from power plants in the first compliance period of 2009-2011, was robust, with 51 entities submitting bids to purchase 2.3 times the available supply of 40.6 million allowances. The clearing price of $2.07 is up from December’s low of $2.05, even though this auction offered 40.6 million allowances for sale, a significant increase from the prior two auctions offerings of roughly 28.5 million each. Eighty-five percent of the 2010 vintage allowances were purchased by entities regulated under RGGI or their affiliates.

Participation also increased in the auction of allowances to be used in RGGI’s second control period (2012-2014). Although Wednesday’s auction marked the second time that supply outpaced demand for these allowances, the quantity of allowances for which bids were submitted increased 31% from December’s Auction 6 of 2012 vintage allowances. Ninety-eight percent of the 2.1 million 2013 vintage allowances offered for sale sold to nine generators regulated under RGGI at the $1.86 mandated auction floor price. As with the unsold allowances from December, the additional allowances may be sold at future auctions, or a state may choose to retire them. 

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The states participating in the Regional Greenhouse Gas Initiative (RGGI) announced the results of their 6^th quarterly auction, held on December 2^nd, which brought in the lowest prices for carbon dioxide (CO₂) allowances yet. Wednesday’s auction also marks the first time that RGGI allowances offered for sale outnumbered demand. Only 1.6 million of the roughly 2.1 million allowances for the 2012 vintage sold at RGGI’s required price floor of $1.86. Depending on each state’s regulations, these unsold allowances may be sold in future auctions, or a state may choose to retire them.  Although retirement this early in the game is a somewhat remote possibility, it will be interesting to see whether this will have an impact in RGGI's second compliance period, 2012-2015. 

Prices for the nearly 28.6 million 2009 vintage allowances sold fell from the September auction’s clearing price of $2.19 to $2.05, down significantly from June’s clearing price of $3.23. Despite these low prices, the number of participants in the 2009 vintage auction actually increased significantly: 62 entities, compared to 46 who participated in September’s auction. 

In the 2012 vintage offering, however, the quantity of allowances for which bids were submitted decreased 32% from September, resulting in bids for only 74% of the supply of 2012 allowances offered for sale. As in September’s auction, no non-compliance entities (businesses or persons not regulated under RGGI) participated in the 2012 vintage auction.  In comparison, non-compliance entities submitted 38% of the bids for 2012 allowances in the 4^th RGGI auction, back in June. 

The range of bid prices in the 6^th auction, not surprisingly, was also the lowest that RGGI, Inc. has reported. Bid prices for the 2009 vintage allowances ranged from the minimum clearing price of $1.86 to just $5.00, down from a high of $12.00 in the June and September auctions,  while bid prices for the 2012 vintage allowances topped out at $2.41, down significantly from March’s high bid price of $4.40.

As we said after prices fell in September’s auctions, the national (and international) efforts toward developing carbon regulation that would preempt RGGI are likely having an impact on bidders’ perceptions of RGGI’s future. Combined with additional reports that the RGGI allowance pool is over-funded, these low prices are not too surprising, and will likely continue. 

Nonetheless, RGGI is still bringing in a lot of money. The report highlights that the RGGI program has brought in more than $494.4 million over the last 15 months of auctions for investment in a state-specific programs that are targeted to reducing emissions, building the clean energy economy, and saving consumers money. If you’re interested in where the funds are going in your state, check out RGGI’s convenient summary.

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The Regional Greenhouse Gas Initiative (RGGI) has released the clearing prices from its 5th quarterly auction of CO₂ allowances, held on September 9, 2009.  Prices for the 28.4 million 2009 vintage allowances sold fell sharply from the June auction's clearing price of $3.23 to $2.19, and the 2.1 million 2012 vintage allowances sold for only $1.87, just one cent above the market floor of $1.86, and well below the $3.05 that they earned at the March 2009 auction, which was the first at which these later vintage allowances were offered for sale. 

Interestingly, while the number of participants in the 2009 vintage auction remained relatively steady, no non-compliance entities (persons not regulated under RGGI) participated in the 2012 vintage auction.  These participants had amounted to 38% of the bids for 2012 allowances in the June auction. 

RGGI, Inc. has also released the range of bid prices in the 5th auction, allowing some insight into how the players value these allowances.  Bid prices for the 2009 vintage allowances ranged from the minimum clearing price of $1.86 to $12.00, the same as in the 4th auction, while bid prices for the 2012 auction ranged from $1.86 to just $3.00, down from June's high bid price of $3.84 and March's high bid price of $4.40.

Wednesday's auction was the first since the passage of ACES by the House in late June.  ACES provides for an even exchange of RGGI allowances for national allowances, something that could increase the value of RGGI allowances going forward, as it removes some uncertainty.  Nonetheless, pundits had predicted lower prices from this auction for a number of reasons, including doubt about the likelihood that the Senate will pass a national cap-and-trade program

The decrease in prices and lack of participation in the 2012 auction is also interesting given a report released on Wednesday by Point Carbon which predicts that actual emissions from the RGGI-regulated northeastern power plants will already be much lower than the RGGI cap, set at 188 million allowances per year.  According to Climate Wire, the report notes that the economic downturn, combined with a cool summer and warm winter reduced the amount of fuel for electricity used in the 10-state region. Falling natural gas prices have also prompted generators to switch away from more carbon-intensive fuels like coal and oil to natural gas.  The report predicts that the CO₂ emissions from the 233 power plants regulated under RGGI will emit 155 million tons this year, well below the cap.

Although the RGGI cap will begin decreasing by 2.5% each year in 2015, the years until then may provide an opportunity for regulated generators and other interested bidders to stockpile  allowances.  Given that RGGI allowances may be banked for future use without restriction, such a large number of allowances being banked could keep prices depressed for some time.

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At the fourth auction of CO₂ allowances under the Regional Greenhouse Gas Initiative (RGGI) on June 17, participation was certified as robust by market monitor Potomac Economics, but auction prices decreased. Last week’s clearing price for 2009 vintage CO₂ allowances was $3.23 per allowance, only slightly above the clearing price of $3.07 at RGGI's initial auction in September 2008, and below March’s clearing price of $3.51.  The 2.1 million 2012 vintage allowances offered for sale in last week’s action sold for $2.06, almost one-third below the $3.05 price that they earned at the March auction, which was the first at which these later vintage allowances were offered for sale.  

RGGI, Inc. has released the range of bid prices from the fourth auction, allowing some insight into how CO₂ is valued by the players in these auctions.  Bid prices for the 2009 vintage allowances ranged from $1.86 (the minimum clearing price) to $12.00, up $2 from the maximum bid in the March auction, while bids for the 2012 vintage allowances ranged from $1.86 to $3.84, down from March’s high bid price of $4.40. Participation in the 2009 vintage offering remained high at 54 entities, while participation in the 2012 vintage auction was down from March’s 20 entities to only 13.

Interestingly, the share of non-compliance entities (persons not regulated under RGGI) who participated in the 2012 vintage auction rose this time, with only 62% of the bids submitted in that auction coming from compliance entities (power plants regulated under RGGI).  Even so, regulated generators and their affiliates continued the trend from previous auctions of winning the vast majority of the allowances – 85% of 2009 allowances and 81% of 2012.

The difference in the clearing price for the 2009 vintage and the 2012 vintage is not surprising. RGGI allowances may be banked without limitation and used in future years, making the 2009 allowances more valuable than later vintages.  What is notable is the drop in both participation in the 2012 vintage allowance and the clearing price (nearly 33% less than it was only 3 months ago). It seems that many market participants are uncertain about the value of the 2012 allowances, given the possibility that RGGI may be replaced by a national cap-and-trade program whose provisions are not yet known. 

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For those of you looking for a cogent and concise economic analysis of the current debate regarding the distribution of allowances in the Waxman-Markey bill, take a look at this post from Rob Stavins.  Rob makes several important points, but I think that two are most fundamental.  First, with some caveats, how allowances are distributed does not affect the environmental results attained by the program.  Second, the allocation proposed in the Waxman-Markey bill is by no means a “give-away” to industrial interests. 

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Congressmen Waxman and Markey today released their proposal for allocating allowances under a cap-and-trade program. At least 15 different categories of entities will receive a piece of the allowance pie. Here’s the list:

Local Distribution Companies –                           30%

Merchant Coal and PPAs –                                      5%    

Natural Gas Distribution Companies –                   9%

States (for home heating oil users) –                     1.5%

Low/moderate income households –                   15%

Energy intensive / trade-exposed industries –    15%

Domestic oil refiners –                                          2%                                                     

Carbon capture / sequestration –                          2%    

Renewable Energy / energy efficiency –             10%

Advanced automobile technology –                       3%

Research and development –                                1%

Tropical deforestation / offsets –                         5%

Domestic adaption –                                             2%

International adaptation/technology transfer –    2%

Worker assistance / job training –                        0.5%

If you think that this adds to more than 100%, you are correct, though it is also true that these numbers vary over time. Most significantly, the first four items above would phase out in the period from 2026.

What’s notable here? The total amount of allowances allocated to LDCs and merchant generators is about what was expected, but of that 35%, the merchant generators may have expected to get more than they did.  We’ll see how the coal industry responds to this proposal. 

The phase-out period is almost certainly more generous than environmentalists expected or hoped for, and is evidence that the vote counters did not believe that the votes would be there for the bill otherwise.  For allowances to utilities and power producers not to begin to phase out until 2026 would be a major victory for the industry.

Obviously, this is not the end; we’ll see over the next few days how the Waxman-Markey proposal is received. The bill itself is scheduled for release later today.

(If the percentages in the columns aren't justified, blame our blog host; I just couldn't make it work and still get this done this century.)

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Based on the current pace of developments, weekly updates on climate change legislation seem to be about the right frequency. This week’s forecast is bullish on more free allowances.

The news this week has centered on the delay in scheduling a mark-up on the Waxman Markey bill in the house. It has been widely reported that the mark-up has been delayed because the sponsors don’t yet have enough votes to pass the bill in committee. I wouldn’t read too much into the difficulty at this point. It doesn’t mean that a bill won’t get out of committee or won’t get passed. It just means that these are difficult issues, which we already knew. As Senator Reid said: “Health care is easier than this global warming stuff.” Now that’s a quote likely to chill an environmentalist’s heart.

In terms of getting a sense where the substantive terms of the bill are headed, I thought that the most revealing quote was from Representative Gene Green (D-Texas), who apparently told reporters that the mark-up has to wait for another hearing, and that that hearing should take place after the bill’s sponsors fill in the blanks on how allowances will be allocated. This remains the $64,000 question – or perhaps it’s more like the $64,000,000,000 question (that’s a lot of zeros to type). 

We previously reported that the administration has pretty much acknowledged that some allowances would be allocated for free, at least initially, and it is looking more and more as though that will be the case. As each day passes, my prediction regarding the number of allowances that will be allocated for free to existing generators increases.  

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Now that the initial euphoria following the introduction of the Waxman-Markey climate change bill  has passed, this past week may have reminded supporters of climate change legislation just how difficult it will be and what sort of compromises may be necessary to get it done. First, Greenwire reported again on the difficulty that senators and representatives from coal states will have supporting climate legislation that would increase electricity rates. This was consistent with the recent Senate action that seemingly put the final nail in the coffin on the idea of using the budget process as a vehicle for climate legislation in the Senate (in order to avoid the threat of a filibuster).

Last Thursday, the Obama Administration seemed to acknowledge this reality. White House spokesman Benjamin LaBolt, while stating that the Administration’s goal remains a cap-and-trade program in which all allowances are auctioned, rather than simply allocated to existing emitters, noted that Congress was looking at a number of options and stated that the Administration “will be flexible” in order to get a bill passed. Another White House aide, Joseph Aldy also did not rule compromise on the auction issue.

Part of the Administration’s concern has to be placating the so-called Gang of 16, a group of moderate Senators. It is difficult to imagine climate change legislation being enacted without the support of this group, which includes several senators most people would think of as reliable votes for the Democratic leadership.

The Administration faces a difficult balancing act on this issue. If it signals too early and too strongly a willingness to compromise, that could be perceived as a sign of weakness and the debate could shift too far—from the Administration’s perspective—toward allocating allowances, rather than auctioning them. On the other hand, if the Administration sticks too firmly to the auction approach, it risks losing credibility and influence, as Congress may simply develop legislation without regard to the White House. If I were a betting man, I’d still assume that climate legislation will include an auction, but the percentages may start out relatively low (perhaps with a mechanism to increase that percentage over time).

This post also appeared on the Environmental Protection website, an organization that provides pollution and waste treatment solutions for environmental professionals.

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 As we mentioned yesterday, the discussion draft of the Waxman-Markey “American Clean Energy and Security Act of 2009” which was released on Tuesday is notable both for what it includes and the significant portions it leaves to be decided at a later date. 

In summary, the bill contains four titles:

1) a “clean energy” title, which promotes renewable energy through a portfolio standard of 6% in 2012 rising to 25% by 2025, additional funding for carbon capture and sequestration, a low-carbon transportation fuel standard, and authorization for federal agencies to enter into long-term contracts with renewable energy providers;

2) an “energy efficiency” title, which calls for a nationwide building efficiency code, and directs EPA to set emission standards for locomotives, marine vessels and non-road sources;

3) a “global warming” title, which specifies that greenhouse gases are not to be treated as criteria pollutants or regulated in new source review under the Clean Air Act (the authorities currently viewed to be EPA’s best tools in regulating greenhouse gases), lays out up to 83% cuts in greenhouse gas emissions from 2005 levels by 2050 and creates the framework for a cap-and-trade auction system to be overseen in part by FERC, but does not specify how allowances would be allocated or auctioned, nor how auction proceeds would be spent, other than giving a portion to preventing international deforestation; and

4) a “transitioning” title which establishes a new council within NOAA to prepare an adaptation plan and fund, but does not provide details on where the funds come from, and lays out various programs creating release valves to be triggered by increasing prices, but again withholds critical details, such as how the programs will provide assistance to consumers.

After the jump, we provide more detail about Title 3, the Global Warming section.

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I finally found time to review the 648-page “discussion draft” of the “American Clean Energy and Security Act of 2009” released by Representatives Waxman and Markey this week. It is fair to way that, though release of the draft may be an important way-station on the road to a climate change bill, there remains a lot of work to do. While the draft includes some important markers that are likely to set boundaries on what might be included in the final bill, it is at least as notable for what is omitted than for what is included. Here are some highlights of Title III of the bill, which addresses climate change: (We hope to post soon about the energy titles as well.)

·  No surprise here – the bill would create a cap and trade program requiring facilities with emissions of more than 25,000 tons per year of CO₂ equivalents to have allowances in order to continue such emissions.

·  Allowances would be allocated so that emissions would decrease 20% from 2005 levels by 2020 and 83% from 2005 levels by 2050

·  The bill contains a framework for an auction system, but it does not specify what percentage of allowances will be auctioned or what will happen to the proceeds.

·  There are several measures designed to address concerns about multiple, conflicting, or inefficient regulatory programs:

o  The President is directed to “harmonize” “to the extent practicable” DOT fuel efficiency standards, EPA regulations, and California regulations regarding motor vehicle emissions

o  Other than regulations implementing the act, EPA is precluded from using existing authority to regulate greenhouse gases as hazardous air pollutants or under NSR rules (unless they have non-climate change related impacts) and precludes listing of greenhouse gases as criteria air pollutants based on their impact on climate change

o  State cap and trade programs would be preempted, at least from 2012 through 2017. It appears as though allowances already issued under RGGI will be folded into the federal program

Overall, this looks like a measured approach designed to win support from both sides. Environmentalists will be pleased by firm caps, including a 2020 cap more stringent than some have proposed. Regulated industries will be pleased by the attempts to harmonize standards on motor vehicles, preclude Clean Air Act regulation of greenhouse gases, and to preempt state or regional cap and trade programs.

If I had to guess, I’d say that this bill marks the death knell for regulation of greenhouse gases under existing Clean Air Act authority (assuming that a bill gets passed; if Congress fails to act, then EPA certainly will use existing authority); it is probably also the beginning of the end of state and regional programs.  On both of these issues, If Representatives Waxman and Markey are already staking out this position, then it seems difficult to imagine a final bill that doesn’t incorporate these elements of the draft bill.  As to the rest, time will tell.

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RGGI, Inc. the operators of the Regional Greenhouse Gas Initiative (RGGI) today announced the results of its third auction of CO₂ allowances, held on March 18, 2009.  The auction offered allowances from all ten states participating in RGGI -- Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. 

 As we noted earlier, new for RGGI’s third auction was that the states offered just under 2.2 million allowances for the 2012 vintage, providing a first-look at future market prices for RGGI allowances. These 2012 allowances sold at a clearing price of $3.05, while the 31.5 million 2009 vintage allowances offered sold at a clearing price of $3.51 per allowance, up nearly 4% from the December 17^th auction’s clearing price of $3.38 and significantly above the initial auction’s clearing price of $3.07. This increase seems particularly notable given current economic conditions.

For the first time, RGGI, Inc. also released the range of bid prices, allowing some insight into how CO₂ is valued by the players in these auctions. Bid prices for the 2009 vintage allowances ranged from $1.86 (the minimum clearing price) to $10.00, while bids for the 2012 vintage allowances ranged from $1.86 to $4.40. Regulated generators and their affiliates continued the trend from the first two auctions of winning the vast majority of the allowances – 78% of 2009 and 93% of 2012.

It is interesting, though not surprising, that 2009 vintage allowances raked in higher bids than the 2012 vintage allowances. Given that RGGI allowances may be banked without limitation and used in future years, the 2009 vintage allowances are arguably more valuable. Even so, the fact that the 2012 vintage allowances sold for $3.05, lower even than the first RGGI auction’s clearing price of $3.07, indicates some lack of confidence in those allowances’ future value. The 2012 allowances are the first to fall within RGGI’s second three-year compliance period (2012-2015), which is significant because 2015 is the first year that the RGGI cap begins its annual process of ratcheting down 2.5%. One might think that this feature would make the allowances more valuable.  However, there remains significant uncertainty regarding what the carbon emission market will look like in 2012, whether there will be a national cap-and-trade system, and whether RGGI will still exist. Given that uncertainty, this relatively low price is understandable.

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As the New York Times reported on Friday, New York Governor David Paterson may increase the number of carbon allowances that New York gives to power plants for free, creating a significant policy departure from New York's earlier approach to RGGI.   New York, together with seven other RGGI states, had earlier committed to auction nearly 100% of its allowances.  As such, New York gave away only a small portion of its allowances this year (1.5 million out of 62 million) through a program designed to lessen the impact of RGGI on the price of electricity. Paterson's proposed adjustment would increase that number four-fold, giving away 6 million allowances to regulated power plants, at an estimated value of $21.9 million per year.  That money could have otherwise been used by the state to fund energy efficiency programs.  

If New York were to change its allocation structure, the state would have to reopen its regulations, and any change would require notice and public comment.  As a result, any changes would not impact the next auction, scheduled for March 18th, or, apparently, the following two in June and September.  Although New York controls 31% of the allowances in the RGGI program, this potential shift would not affect overall carbon emissions from power plants.  Both the amount of allowances allocated to New York and the total number of allowances in the RGGI program are capped. 

Regardless of the number of allowances now to be allocated, the change is potentially politically significant. The statement from the Governor's office is framed in neutral language -- "we have an obligation to monitor how a program is working and advance any needed changes to make the program more effective."  Nonetheless, one wonders whether the lawsuit filed last month by Indeck against New York, alleging that the state agencies did not have the authority from the New York legislature to implement the program, played any part in the Governor's decision.  That lawsuit and this potential change in New York's allocation structure are both underpinned by the idea that New York's implementation of RGGI adversely affects against electric generators that are bound by long-term fixed-price contracts, and cannot pass the added price of allowances on to consumers. 

New York's shift might also make it more difficult for the other RGGI states to stick with their 100% auction, in face of pressure from industry groups to increase allocation, though, as ClimateWire reports, some state leaders have discounted the potential impact. It also remains to be seen what effect this will have on the national debate.  As we noted last week, the debate over how a cap-and-trade or carbon tax would operate is beginning to heat up.  Since RGGI is the nation's first CO2 cap-and-trade system to be implemented, experiences with RGGI are likely to have a significant impact on national legislation.

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As we noted last week, President Obama’s budget includes revenue from auctioning 100% of allowances under a cap-and-trade system. ClimateWire today reports two competing versions of the prospects for a 100% auction approach. First, the Southern Alliance for Clean Energy signed up a number of economists, including Franklin Fisher of MIT, in support of the President’s plan to auction all allowances from the get-go. Part of the argument reflects environmental justice concerns, stemming from the recognition that a cap-and-trade program will increase utility costs. The Southern Alliance is expecting that some of the auction proceeds would be rebated back to low-income consumers, thus cushioning that blow.

As ClimateWire notes, the U.S. Climate Action Partnership, which includes the NRDC, EDF, and the Nature Conservancy, has already lined up behind a plan that would allocate up to 40% of allowances to industry at the beginning of the program, with the amount of allocated allowances decreasing to zero over time.

In the same issue, ClimateWire reported that Abyd Karmali, the head of carbon emissions for Merrill Lynch, has concluded that the President’s proposal won’t fly in today’s economy.  Mr. Karmali predicts that not more than 30% - 50% of allowances will be auctioned initially.

Will the President get his way or is Mr. Karmali correct?  Over the past year, people have underestimated President Obama at their peril.  At the same time, it’s hard to argue with Mr. Karmali’s assessment of the current political climate.  Unless we get some prompt political climate change, I’d guess that a 100% auction approach remains some years away.

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RGGI, Inc., the operators of the Regional Greenhouse Gas Initiative (RGGI) announced today that the second auction has proceeded smoothly and as planned.  All 31,505,898 allowances offered for sale at Auction 2 on December 17 were purchased at a clearing price of $3.38 per allowance.  This price is above the first RGGI auction's clearing price of $3.07, and in line with recent prices for RGGI futures on the Chicago Climate Futures Exchange, which traded Monday at the same price. Auction 2 was the first to feature allowances from Delaware, New Hampshire, New Jersey, and New York, a factor which might have caused the increase in price.

RGGI's market monitor Potomac Economics noted that the majority of winning bidders were compliance entities or their affiliates, as in the first auction.  So far, it seems like the concerns about market manipulation and entities taking advantage of RGGI's 100% auction structure remain unfounded.

RGGI will release more data January 6th, including the names of the "potential bidders" who qualified and filed an intent to bid in Auction 2 (whether or not they actually bid). 

Meanwhile, Governor Patrick's office has announced that Massachusetts will spend its $14.8 million share of Auction 2's $106.5 million total proceeds as set forth in the Green Communities Act, or more specifically:

• $2.4 million for 2008 utility-administered energy efficiency programs
• $5 million for start-up funds for the Green Communities program
• $2 million for heating system replacements for low-income households
• $400,000 for administrative and vendor costs for the RGGI auction
• $5 million for a new program, Energy Efficiency Skills and Innovation Institute providing job training for energy auditors and seed grants for innovative delivery methods of efficiency

RGGI compliance obligations for fuel-fired generators over 25 MW begin January 1, 2009.  The next auction will be March 18, 2009.

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