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Drop in RGGI auction price renews call for program tightening

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Drop in RGGI auction price renews call for program tightening

The nearly $1 drop in clearing prices in the Regional Greenhouse Gas Initiative's Dec. 7 CO2 allowance auction is indicative that a strengthening of the program is necessary, some market sources continue to say.

At the recent auction, 100% of the more than 14.7 million RGGI allocation year 2016 allowances on offer sold at a clearing price of $3.55/ton, tumbling 99 cents, or almost 22%, from the program's prior auction, which came in at $4.54/ton in September. The December auction clearing price was down 53% on the year and the lowest auction price since December 2013.

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"Low prices and declining emissions confirm that now is the time for RGGI states to strengthen the program and continue leading the nation on climate," Acadia Center President Daniel Sosland said in a Dec. 9 news release.

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The RGGI states are in the process of finishing a yearlong review that focused on the possible tightening of the program's emissions cap, as well as the coordination with the implementation of the U.S. EPA's Clean Power Plan.

Uncertainty surrounding the future of the Clean Power Plan, which is on hold and awaiting a ruling by the D.C. Circuit, would require states to meet individual carbon emissions rate reductions at existing power plants beginning in 2022. However, after the U.S. presidential election was held in early November, secondary market RGGI CO2 futures prices slipped amid the belief that the U.S. EPA's Clean Power Plan will not survive under President-elect Donald Trump.

"We saw a steep drop in the clearing price at the Q4 RGGI auction. This came after secondary market prices collapsed further in November, making RGGI participants less willing to enter higher bids at the auction. RGGI benchmark futures prices fell 19% to a low of $3.76/st in the week following Trump's election, and have mostly stayed below $4.00/st since then," Rachel Jiang, environmental and power markets analyst at Bloomberg New Energy Finance, told S&P Global Market Intelligence. "President-elect Trump has vowed to overturn energy sector regulations such as the Clean Power Plan, which RGGI players had looked to as a long-term framework favorable for carbon regulation and a possible incentive for RGGI administrators to further tighten the allowance supply post-2020. So Trump's election added bearish sentiment to the market, lowering futures prices which then in turn pushed down the auction clearing price."

Meanwhile, emission levels in the RGGI region continue to drop. In 2015, CO2 emissions from the power plants covered by RGGI totaled 83,201,850 tons in 2015, or 6.3% below the 2015 emissions cap of 88,725,000 tons, and 37% below emissions levels in 2008, the year before the RGGI program took effect.

"Declining RGGI prices are occurring alongside declining emissions," Jordan Stutt, policy analyst with Acadia Center, said. "Electric sector carbon emissions through the first three quarters of 2016 were 5% below the same period last year — the lowest emissions level in the program's history, and this is poised to be the eighth consecutive year in which emissions fall below the RGGI cap."

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"From what we see, the results of the auction are largely reflecting the fundamental oversupply the program has been facing, without any of the bullish inflation from a low-carbon Presidential administration," Jonathan Burnston, a partner in the Energy and Environmental Markets Group at Karbone Inc., told S&P Global Market Intelligence.

With the market oversupplied, the current program review is the right time for the participating states to make necessary market reforms. Following a comprehensive program assessment in 2013, and in an attempt to recalibrate the RGGI cap with actual emissions levels, the RGGI participating states trimmed the ceiling by 45%, to 91 million tons, starting in 2014. The RGGI emissions cap declines 2.5% each year thereafter through 2020.

While many stakeholders have clamored for a tightening of the RGGI cap by as much as 5% per year, others are worried that such a cut could cause potential harm to the economies of some RGGI member states.

During a Nov. 21 stakeholder webinar, updated draft modeling by ICF International was presented, displaying the likely effects of setting the program cap at 2.5% and 3.5% reductions per year. According to the modeling, RGGI CO2 allowance prices are likely to rise the steepest through 2031, the end of the projection period, amid a cut to the RGGI emissions cap of 3.5%. Taking into account the mass-based goals outlined under the Clean Power Plan, and not including the use of the cost containment reserve RGGI CO2 allowance prices are seen topping $25.00/ton under a cut of 2.5% to the cap and climbing above $30.00/ton under a reduction of 3.5%.

RGGI is made up of nine states: Connecticut, Delaware, Maine, Massachusetts, Maryland, New Hampshire, New York, Rhode Island and Vermont. The states use a market-based cap-and-trade program to reduce greenhouse gas emissions from regional power plants, selling nearly all emissions allowances through auctions and investing proceeds in energy efficiency projects in the residential, commercial and municipal sectors.

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