2010.02.24-MegawattDaily-RGGI should lower cap group says Press

MEGAWATT DAILY

WEDNESDAY, FEBRUARY 24, 2010

RGGI should lower GHG cap, group says

The Regional Greenhouse Gas Initiative should lower its greenhouse gas cap and retire unsold allowances as ways to spur higher prices and more revenue for the states involved in the carbon cap and trade program, said Environment Northeast on Tuesday. In a report card grading the cap-and-trade program’s first year, the environmental group said when the program is reviewed in 2012 — the first year of its second compliance period, the 10 Northeast states should consider retiring those allowances that do not sell above the auction reserve price of $1.86/short ton.

“Several states allow for retirement of unsold allowances but regional coordination of allowance retirement would be needed to adjust each state’s allowance supply proportionately,” ENE said.

Started in January 2009, the program revolves around quarterly auctions of allowances, with a seventh auction set for March at which the states will offer 2009, 2010 and 2013 allowances. Previous auctions held since September 2008 offered 2009 and 2012 allowances with all 2009 allowances sold and some 2012 allowances unsold in the last auction in December. Each auction has held to the $1.86/st reserve price for every vintage sold.

Clearing prices in the auctions have been falling over the past year as the economic recession and low natural gas prices tamp down allowance demand in a program already over-allocated with allowances. RGGI’s 2009 emissions were around 122 million-st, well below the program’s 188 million-st cap, which begins to tighten in 2015 to reach 10% by 2018.

The last auction held in December saw 2009 allowances clear at $2.05/st and 2012 allowances clear at $1.86/st. The Chicago Climate Futures Exchange’s December 2010 Vintage 2010 contract settled at $2.11/st on Monday, with its lowest price, $2.04/st, hit on February 1 (see graph below). The contract hit a 2009 high of $4.37/st in January and an all-time high of $4.90/st on its first day of trading in September 2008.

Considering the falling prices, ENE also recommended that states lower the program’s GHG cap in 2012. The cap was finalized in 2005 based on historic emissions and presumption of energy demand growth that is now proving inaccurate, it said. “Taking these actions ensure that the cap continues to work as intended by creating incentives for the electric sector to move toward cleaner fuels,” ENE said after noting that current prices are not spurring changes in operational behavior by generators subject to the cap.

RGGI Executive Committee Chairman David Littell, who is also commissioner of the Maine Department of Environmental Protection, said Tuesday that RGGI states are committed to looking at the issue of resetting the cap but he considers it premature at this time given the program is barely past the first year mark.

Littell said that part of the cap review would be retiring allowances. He noted that some states do allow for that as part of their RGGI regulations, while others do not. “It is certainly possible some states will do that alone,” he said, but said the preference is to act together if that can be agreed upon. “We are currently discussing it,” he added, but had no timetable for a decision on whether to do it and if so, whether to do it before 2012.

At the same time, ENE said RGGI to date has “yielded impressive results and important lessons” for future cap-and-trade programs, including that its auctions have not seen any manipulation.
ENE also gave a high mark for the states’ spending of auction revenues, which so far totals almost $500 million, on energy efficiency and other GHG-reducing aims although it did note Maryland and New York have used some funds for other aims such as budget reductions.

“RGGI states must avoid raiding RGGI funds and must implement established funding plans in order to deliver continuing consumer benefits and keep down the costs of the program,” ENE said.

ENE also gave a high mark for implementation given RGGI’s auction of 87% of allowances has had minimal impacts on consumer prices. Considering allowances last year sold for an average price of $2.91/st, that cost added about 0.9% to retail electricity prices in New England, it said.

ENE calculated that percentage by multiplying the average auction price by the New England marginal emissions rate of 1,004 pounds/MWh, leading to a price impact of $1.46/MWh factored into the average 2009 retail price for New England power of $156.40/MWh.

ENE also gave a high mark to RGGI’s offset program despite the fact that no emission reduction projects have been developed given the low price of allowances and making offsets unnecessary.
“While other regional and federal cap-and-trade systems have not yet determined whether to adopt standards-based offset methodologies, RGGI has contributed significantly to the development of an effective, scalable offset mechanism,” it said.

— Christine Cordner