Environmental Law

RGGI Auction Results Released -- Demand High, Prices Not So Much

By Dennis Pfaff and Kevin Livingston, Editors

The nation's first auction of mandatory carbon dioxide emissions permits brought high demand from buyers but prices were less than spectacular, coming in at $3.07 per ton -- somewhat lower than they reportedly had been bringing on futures markets.

In a statement Monday, the Regional Greenhouse Gas Initiative Inc., the nonprofit that administers a partnership of 10 Northeast and Mid-Atlantic states that is putting a price tag on emissions from power plants, noted that all of the more than 12.5 million allowances were sold. The sales generated more than $38.5 million -- money that will be distributed to the six states that participated in the auction for such purposes as energy efficiency and renewable energy.

The RGGI Inc. statement also said would-be buyers had placed bids for almost 52 million of the permits, also known as allowances or credits. That was, according to Environmental Capital, the Wall Street Journal's environmental blog, "a sign of serious interest among utilities in getting their hands on the permits."

RGGI Inc. Chairman Pete Grannis, commissioner of the New York Department of Environmental Conservation, in the statement lauded the auction results: 

“The 10 RGGI states have demonstrated great leadership in coming together to offer this first carbon cap-and-trade system, and the smooth completion of the initial auction is proof that the RGGI is leading the nation in the battle against climate change. RGGI’s example shows that an open and competitive carbon market can be implemented. 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.”   

Two Thelen LLP lawyers who have been tracking the launch of the market-based system for controlling greenhouse gases, suggested that participants were taking a cautious approach to the first auction, and that they may have been making some bottom-line type decisions. Said energy attorney Michael J. Connolly, in Thelen's New Jersey office:

"Certainly the strong demand for the allowances played a role in the pricing, with demand levels indicating the attractiveness of the pricing. The demand and pricing could also reflect the strategic thinking of some that lower prices are more likely to be obtained in the beginning of the RGGI implementation process than later." 

Connolly noted that power generators do not need to buy all of their allowances in a single auction, and that they could be expected to manage their purchases in a variety of ways. Some, for instance, could seek to meet their needs early and all at once. He said others might employ "a combination of auction purchases and bilateral contracts."

Echoing that analysis was Thelen partner James K. Mitchell  (pictured), who has long represented utilities. He said the prices may have resulted from the decisions of some potential bidders to remain on the sidelines and to treat the auction as a trial run. He added:

"They still have time to purchase their allowances after they become more comfortable with the operation of the market and have the benefit of hopefully more stable economic conditions."

RGGI Inc. said 59 bidders from the energy, financial and environmental sectors took part in the auction. Environmental Capital, however, said organizers had reported that most of the allowances were bought by utilities.

Jonathan Schrag, executive director of the nonprofit, said the auction ran "flawlessly," for which he credited the two companies charged with administering and overseeing the process, World Energy Solutions Inc. and Potomac Economics.

Allowances offered in the first auction were from Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont, and it's to those states the money will go. However, the allowances bought at the auction can be used in any of the 10 states, whether or not they participated in the first sale.

Cap and trade programs such as the RGGI system work principally by setting and then tightening limits on the emissions, and putting a dollar value on them. The next RGGI auction is scheduled for Dec. 17.

--Dennis Pfaff of Thelen LLP 

Full post as published by Climate Law Update on September 29, 2008 (boomark / email).