US: RGGI auction sells out, clears at highest price ever

Dan X. Mcgraw

07-Mar-2014

The Regional Greenhouse Gas Initiative (RGGI), the recently-revamped US cap-and-trade programme, sold all the allowances it auctioned this week at the highest price in the scheme’s six-year history, sending a bullish signal to the secondary market.

RGGI, which covers emissions from electricity generation, sold all 18.5m Vintage 2014 allowances at $4.00/tonnes of CO2 equivalent (tCO2e), the upper end of traders expectations.

An additional 5m allowances from the cost containment reserve (CCR) were also sold as demand and the clearing price were above the thresholds necessary to tap the additional supply. As a result, future RGGI auctions will not have any additional allowance available from the CCR.

The result surprised traders. “It is a lot stronger than I thought it would clear at,” said a trader at a trading house. “It is very bullish.” Another trader from a trading house said he was surprised that the entire CCR was sold in the auction.

Market participants said the cold weather in the northeast could have drove demand.

According to data from RGGI, 45 bidders took part in the auction and 45% of the allowances went to compliance entities, slightly up from the 43% in the December RGGI auction.

Prior to the auction, traders told ICIS that they expected the price to clear in the $3.90-4.00/tCO2e range, or where allowances have traded on the secondary market over the past week ( see EDCM 5 March 2014 ).

For comparison, the Air Resources Board (ARB), the governing body of California’s cap-and-trade programme, recently sold 19.5m Vintage 2014 allowances for $11.48/tCO2e and 9.3m Vintage 2017 allowances for $11.38/tCO2e.

Traders and brokers said the RGGI market is bullish in the wake of the results as the March contract traded at $4.30/tCO2e Friday morning, a rise of $0.20/tCO2e from a day earlier. Compliance entities and speculators who missed out in the auction are expected to continue to buy following the strong result.

Prices in the RGGI market have been gradually rising this year after officials decided to tighten the cap to 91m tonnes of CO2 equivalent, down 45% from the previous 161m tCO2e target. As a result, price has risen from the mid-$3.00/tCO2e range to $4.00/tCO2e.

Ken Kimmell, the Massachusetts commissioner of the department of environmental protection, told ICIS in January that the reduction in the cap was intended to raise prices and increase the subscription at auctions. Dan X. McGraw

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