CLIMATE

Carbon price climbs in third RGGI auction

NEW YORK -- More than 30 million allowance credits for carbon dioxide emissions were sold in the nation's third carbon auction Wednesday, netting 10 state governments $117.2 million for energy efficiency and renewable energy programs.

The final clearing price for 31.5 million allowances sold under the Northeastern states' Regional Greenhouse Gas Initiative (RGGI) for the 2009 compliance period was $3.51 per short ton of CO2 emissions. About 2.1 million allowances for the period starting in 2012 were also auctioned off Wednesday for $3.05 per ton.

The 2009 allowance price was 3.8 percent higher than the $3.38 per allowance settled at the last auction in December, a sign that carbon market players are growing more confident that RGGI allowances will be grandfathered into any federal cap-and-trade program.

"The states are very pleased with the results from the latest RGGI auction," said Pete Grannis, chairman of the initiative's board of directors, in a statement. "Our continued success provides further support for President Obama's position that a national cap-and-trade program with allowance auctions is the right policy for the country."

Companies, primarily energy suppliers required to participate in the regional cap-and-trade program under state laws, purchased 78 percent of the 2009 allowances and 93 percent of those for 2012, according to Potomac Economics, the company charged with monitoring and auditing auction results.

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The remaining portion of credits was picked up mostly by investors betting that RGGI allowance prices will go up as energy prices stabilize and lawmakers inch closer to a nationwide emission control program.

An excess of credits

Although carbon prices globally have tanked along with the world economy, many analysts speculate that RGGI credits could prove a good investment in the future. Bullish investors are attracted by forecasts that carbon allowances under a future national program will trade at about $15 per ton, potentially offering huge profits to those who buy in at today's prices.

Some analysts warn that RGGI is becoming seriously oversupplied with carbon credits, though, as the national recession has sharply reduced industrial activity and energy demand, sending actual CO2 emissions to their lowest levels in a decade.

Enthusiasm for RGGI credit trading in the secondary market grew in the December auction following President Obama's election victory.

Daily trading volume on the secondary market, driven by financial institutions, averaged 300,000 tons in December and January and 250,000 in February. Activity ahead of this latest auction nearly tripled to 945,000 tons per day in the first half of March in trading on the Chicago Climate Futures Exchange.

But the RGGI system is flooded with a glut of allowances, as CO2 emissions in the 10 participating states fell much more sharply last year than regulators expected when designing the program.

U.S. EPA data suggests that the 10 states' emissions fell by about 10 percent in 2008 compared to 2007 levels. The carbon market analysis firm Point Carbon estimates that this means 2008 CO2 output fell 32.2 million tons, or 17 percent, below the regionwide program cap of 188 million tons.

While the economic slump contributed the most to the 10 percent slide in emission levels last year, Point Carbon analysts speculate that CO2 output was also likely cut by power companies switching from coal- and oil-fired generation to cleaner-burning natural gas. Aggressive energy efficiency programs in states such as New York and Maryland may also have had an impact.

Under RGGI rules, the 10 states must stabilize emissions at the 188 million tons per year cap between 2009 and 2014. Levels should then decline by 2.5 percent per year to 2018, targeting a total 10 percent reduction in CO2 below 2009 levels.

The fourth RGGI allowance auction is scheduled for June 17.

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