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RGGI use of emissions containment reserve could lead to price erosion


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RGGI use of emissions containment reserve could lead to price erosion

The proposed use of an emissions containment reserve in the Regional Greenhouse Gas Initiative market could ultimately lead to price erosion, according to sources.

Dan McGraw, senior market strategist for North American carbon markets at ICIS, said during a webinar held Oct. 5 that while the reserve, or ECR, is a "novel" idea, it "could act as a defacto floor price depending on supply-demand and may be less effective if emissions trends continue downward."

In late August, the RGGI participating states proposed various changes to the model rule after 2020, one of which is the implementation of an ECR, which would allow states to withhold up to 10% of their annual emissions allowances in reserve.

The RGGI states that chose to use an ECR would restrict the sale of the allowances when prices fall below certain levels. Allowances withheld in this way will not be reoffered for sale. The ECR trigger price will be $6.00/ton in 2021 and will rise at 7% per year.

According to McGraw, the use of an ECR could encourage compliance entities to bid above the trigger price during the quarterly auctions due to the impact on supply. On the other hand, speculators could become more conservative bidders at the RGGI auctions as a result of an ECR.

Bids above the trigger price could skew the allowance supply–demand balance and lead to RGGI price erosion, McGraw said.

As part of the overall suggestions to strengthen the program, the RGGI states have all proposed cutting the emissions cap by an additional 30% through 2030, relative to 2020 levels. Under the proposed changes, at 75.15 million tons of CO2 in 2021, the RGGI cap would decline by 2.275 million tons of CO2 each year, yielding a total reduction of 22.75 million tons, or 30%, of the 2020 program ceiling by 2030.

Additionally, the RGGI states have suggested making additional adjustments to the cap, to be implemented from 2021 to 2025, to account for the full bank of excess allowances at the end of 2020.

Potential linkages with Virginia, New Jersey

Against the backdrop of proposed changes, in recent months, discussions have taken place between officials from RGGI and Virginia about the possibility of the state linking up, or joining, with the program.

In mid-May, Virginia Gov. Terry McAuliffe signed Executive Directive 11, which ordered the Virginia Department of Environmental Quality and the Secretary of Natural Resources to develop proposed regulations that will control or limit power plant emissions of CO2.

The proposal, to be delivered to the State Air Pollution Control Board no later than Dec. 31, must include provisions that "allow for the use of market-based mechanisms and the trading of carbon dioxide allowances through a multi-state trading program."

According to reports, Virginia officials are looking to develop a rule that is similar to RGGI's proposed model rule so the state could link to the program. However, Virginia does not intend to directly auction allowances and is instead considering allocating allowances through a consignment auction.

A consignment auction approach would allocate allowances to a generator who would then consign them to the RGGI auction. Virginia power plant owners would still purchase their compliance allowances from the RGGI auction.

If Virginia links to the RGGI, this could add a large amount of emissions to the program's allowance supply. Electric power industry emissions in Virginia totaled about 35 million tons of CO2 in 2015, according to information from the Energy Information Administration.

In 2016, the nine RGGI states emitted more than 79.2 million tons of CO2, down 8.4% from the RGGI cap, according to a September report from the Acadia Center.

Meanwhile, to date, there have been no discussions with officials from RGGI and those from New Jersey about the state potentially rejoining the program, the ICIS analysts noted.

In mid-2011, New Jersey Gov. Chris Christie said the state would leave the RGGI by the end of that year because its involvement in the program had not substantially lowered emissions and had negatively impacted economic growth.

In the ensuing years since New Jersey exited the program, a tug-of-war was waged between the governor and various legislators who introduced bills that would require the state to reenter the RGGI.

Christie's second and final term as governor ends January 2018. Gubernatorial candidates Phil Murphy, a Democrat, and Lt. Gov. Kim Guadagno, a Republican, have both indicated that if elected, they will work to have the state rejoin the RGGI.

The RGGI was the first mandatory cap-and-trade program in the U.S. to limit CO2 emissions from the power sector. Currently, RGGI includes nine states: Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire, New York, Rhode Island and Vermont.

Using a market-based program to reduce emissions from regional power plants, the RGGI participating states sell nearly all emissions allowances through auctions and invest the proceeds in energy efficiency projects in the residential, commercial and municipal sectors.

The RGGI states expect to release a final model rule with additional modeling and analyses by the end of this year. Then, the participating states will begin their individual processes to adopt the new model rule. It is hoped that all state statutory and regulatory amendments related to the updated model rule will be completed as early as January 2019, with program changes to be in place and effective by January 2021.