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Prices take a sharp dip in fifth RGGI auction

NEW YORK -- One year since the launch of the nation's only government-mandated cap-and-trade program, prices for greenhouse gas emission allowances slid sharply in an auction held this week in the face of tepid demand and a glut of allowances in the market.

This morning, administrators of the Regional Greenhouse Gas Initiative, or RGGI, announced that 2009 carbon dioxide-equivalent emission allowances sold in Wednesday's auction at a clearing price of $2.19 per short ton. The same allowances sold at an auction held in June for $3.23 per ton of CO2e -- a drop of more than 30 percent in the price over three months.

RGGI allowance futures prices similarly suffered, sliding from $2.06 in the June sale to $1.87 on Wednesday. Prices have now fallen twice in a row after enjoying a bump in the third RGGI auction, which was held in March.

Analysts had predicted weaker clearing prices in this auction. Even before the program was launched, it was widely recognized that the RGGI states were repeating the early blunder seen in the European Union's Emission Trading System by allocating more allowances than there was demand for. The sharp national recession also saw demand for electricity fall in the Northeast, and weaker natural gas prices also encouraged power generators to switch to the cleaner-burning fuel, pushing overall emissions levels lower still.

The market tracking firm Point Carbon predicted lower prices in this round, and analysts there expect RGGI prices to stay weak at least until 2014, by which time the market should see a tighter supply of emissions allowances as the program becomes more stringent.

"The implication of this forecast is that prices in RGGI are likely to remain low, as the market should be able to settle each year's compliance without undertaking carbon price driven abatement," Point Carbon analysts said in a recent note. "We expect prices to fall closer to or at the reserve price in the short to medium term."

Experts note that the 10 states participating in RGGI could improve the pricing environment by tightening the supply of allowances in future auctions. But this is seen as unlikely, as a program review and revision are not scheduled to occur until 2012.

A federal cap-and-trade program, if passed by Congress, could also potentially boost prices if it were to sweep aside RGGI. Higher prices for allowances and credits in the carbon markets are generally seen as more favorable, as they provide the only incentive for power generators to physically cut the volume of greenhouse gas pollution they emit in order to avoid purchasing expensive allowances or offsets.

A total of 28.4 million 2009 vintage allowances and about 2.2 million 2012 vintage allowances were sold in Wednesday's auction, garnering more than $66 million in revenues for the 10 RGGI states. By contrast, more than $104 million was generated from the fourth RGGI auction, while $117 million was pulled in from the auction held in March.

Despite the sharp drop, RGGI authorities and regional environmental regulators again hailed this week's sale and the one-year run of the regional cap-and-trade effort as a success.

"Trading volumes on national, regulated exchanges now match volumes in other established carbon markets, such as the Kyoto Clean Development Mechanism," RGGI's executive office in New York said in a release.

Since the start of RGGI one year ago, the allowance auctions have generated almost $433 million for state coffers. RGGI officials report that to date, more than 100 bidders have participated in the sales, and every major power plant in the Northeast is now reporting its CO2 emissions on a quarterly basis to the program.

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