NEW YORK -- The nation's only government-mandated carbon market continues to suffer from weak pricing for emission allowances, a condition that analysts say could persist through the program's lifetime.
Prices slid again in the Regional Greenhouse Gas Initiative's (RGGI) sixth auction for 2009 emissions allowances to $2.05 per short ton of carbon dioxide equivalent, the Northeast pact announced here today. The previous auction netted $2.19 per ton in September.
But 2012 allowances fell slightly in the Wednesday auction, to $1.86 per ton, from $1.87 in September.
"There's way too much supply, and there is no demand," said Tim Cheung, an analyst with New Energy Finance. "You're going to have these excess allowances that will continue to carry over to future years, which is why we think that prices will remain depressed going forward."
About 31 million allowances were sold this week, mostly to energy producers facing RGGI compliance rules and secondary market traders. Participants bought 28.5 million 2009 allowances and just under 2.2 million 2012 allowance futures, with cash-strapped state governments garnering $61.6 million.
To date, the auctions have generated $500 million for the 10 RGGI states. Almost 100 percent of emission allowances are distributed through auctions in the nascent carbon-trading scheme, but the steep, recession-spurred drop in industrial activity has caused RGGI administrators to issue far more allowances than necessary, resulting in very weak demand and some of the lowest prices of any carbon-linked tradable instrument.
Lower industrial output in the Northeast has translated to weaker demand for energy, causing the region's coal- and gas-fired power plants to run at lower capacity and generate far less greenhouse gas emissions than what officials had anticipated.
In the June auction, 2009 allowances sold for $3.23 per ton CO2 equivalent, meaning RGGI allowances have slid by more than 36 percent at this week's price. RGGI allowances settled at $2.06 in spot trading yesterday on the Chicago Climate Futures Exchange.
"I'm very confident in saying that there will be oversupply going through the first, maybe even the second compliance period," Cheung said. "Since they have unlimited banking, there's no reason why these allowances won't be used in future years."
The 10 RGGI state governments are supposed to use auction proceeds to fund renewable energy or energy efficiency initiatives, but governments are using that cash to plug holes in their budgets.
Earlier this week, the research firm Point Carbon pointed to New York as the latest state to tap auction funds, with Albany passing a bill Wednesday that will allow it to borrow $90 million of RGGI auction proceeds to help fill its $5 billion budget shortfall. Today, New York's Department of Environmental Conservation said the state drew $25.4 million in Wednesday's auction.
Maryland last April put $70 million from RGGI into a rebate program designed to help low-income residents pay electricity bills.
RGGI officials point out that the compact’s memorandum of understanding authorizes states to divert as much as 25 percent of auction proceeds to programs that help consumers. Maryland is meeting this requirement, they say.
The seventh RGGI auction is scheduled for March 10, 2010.
Correction: An earlier version of this story contained incorrect information. It was corrected at 3:55 p.m. EST.