US: Traders expect strong result for RGGI auction after revamp

Traders are expecting a strong result for the sale at auction of 18.5m carbon allowances on Wednesday after the Regional Greenhouse Gas Initiative (RGGI), the US oldest cap-and-trade scheme, almost halved its cap.

RGGI, which covers emissions from electricity generation in states mainly in the northeast of the US, auctioned 18.5m Vintage 2014 allowances, with the floor price being $2.00/tonne of CO2 equivalent (tCO2e). If demand exceeded the volume on offer and the price settled above $4.00/tCO2e, an additional 5m allowances from the cost containment reserve would be sold. The results are scheduled to be released on Friday.

Market participants believe allowances will likely settle in the $3.90-4.00/tCO2e range, or the range they have traded in the secondary market over the past week.

On comparison, the Air Resources Board, 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.

“It would be pretty surprising if it settled under the secondary market right now,” a trader at a trading house said. “We just had a very cold winter [in the northeast], and people are thinking about what that does to demand.”

If the auction clears above $3.51/tCO2e, it would be the highest clearing price for a RGGI auction in the six-year history of the programme. The last auction, which took place in December, cleared at $3.00/tCO2e, with only the 43% of the allowances going to compliance entities. In previous auctions, the majority of the participants were compliance entities.

Cut cap brings higher prices

Prices in the RGGI market have gradually risen this year after officials decided to tighten the cap to 91m/tCO2e, down 45% from the previous 161m/tCO2e target. As a result, prices inched up to nearly $4.00/tCO2e from the mid-$3.00/tCO2e range.

Ken Kimmell, the Massachusetts commissioner of the department of environmental protection, said the reduction in the cap was intended to raise prices and increase the subscription at auctions.

“We are on the way to making the RGGI cap a meaningful cap,” he told ICIS earlier this year. “The reaction is very much in line with what we thought would happen.”

RGGI Vintage 2014 allowances have settled in the $3.90/tCO2e to $4.00/tCO2e range over the past week on the secondary market, according to data from the InterContinental Exchange.

Traders said the market likely will pick up after the results are released. Dan X. McGraw