In the wake of the Regional Greenhouse Gas Initiative's proposed changes to the regional cap-and-trade program, over-the-counter prices for carbon allowances should remain supported in the longer term.
Among other things, the RGGI states have suggested cutting the program's emissions cap by an additional 30% through 2030, relative to 2020 levels.
"The program changes will have an impact on [allowance] prices. [The changes] should help to increase the amount of revenue the states bring in for re-investment and will get us a little bit closer to a more accurate accounting for the cost of carbon emissions. The impacts [to prices] will be modest. These changes don't go into effect until 2021, so we have a little time to see how the market responds before then," Jordan Stutt, policy analyst with Acadia Center, a nonprofit research and advocacy organization, said in a Sept. 14 phone interview.
While the particulars of the suggested changes came as no shock following a lengthy review, the timing of the announcement surprised many market participants and spiked secondary RGGI allowance prices above $4.50/ton, as many had expected the participating states would issue a proposal later in the fall.
Other recommended changes to the RGGI program post 2020 include the implementation of an emissions containment reserve, or ECR, which would allow states to withhold up to 10% of their annual emissions allowances in reserve, restricting the sale of the allowances when prices fall below certain levels.
"One factor in the price jump may [have been] the details surrounding the ECR, which is designed to support allowances prices. The proposed rule sets a trigger price of $6.00 a ton, which rises 7% per year. And at 10% of the total allocation, the size of the ECR equates to roughly 7 million tons. I believe this trigger price was higher than anticipated, and based on current fundamentals, it would be hard to say that the RGGI price will not drift to $6.00 by the beginning of 2021," according to a report from Evolution Markets.
Shortly after the RGGI states announced the proposal, the program held its third quarterly auction for the year on Sept. 6, during which 100% of the 14,371,585 carbon dioxide allowances on offer were purchased at a clearing price of $4.35/ton. This was up a massive $1.82, or almost 72%, from the prior auction price of $2.53/ton, which was the lowest auction price since December 2012.
Since 2008, a year before its launch, the RGGI states have cut carbon emissions from the electricity sector by about 40%, according to statistics from the Acadia Center. In 2015, RGGI emissions were 6.3% below the program cap.
"We expect that the trends we have seen — emissions falling faster than projected at lower costs — to continue. It is really a question of whether these program reforms can keep up with the reductions we are already seeing," Stutt said.
Coming in at about 75.15 million tons of CO2 in 2021, under the proposal, the RGGI cap would decline by 2.275 million tons of CO2, or about 3%, each year through 2030, yielding a total reduction of 22.75 million tons, or 30% of the 2020 program ceiling. The RGGI states are also proposing additional adjustments to the RGGI cap, to be implemented from 2021 to 2025, to account for the full bank of excess allowances at the end of 2020.
"Based on historic and estimated emissions (2016: around 80 million tons; 2017: estimated between 70-75 million tons) and the program design of a full bank adjustment over five years, it seems the RGGI market will go flat by 2025. The five-year average adjusted allocation for 2021–2025 is approximately 70 million tons. If actual emissions average 70 million tons per year, the bank will be depleted by 2025. If actual emission are greater than 70 million tons, then it is reasonable to assume that the bank will be depleted prior to 2025," Evolution Markets wrote. "For example, if actual emissions are 63 million, then theoretically the lower demand would prompt lower prices and the ECR would kick in to remove up to approximately 7 million allowances. If actual emissions are lower than 63 million, then the bank will not be depleted until later than 2025."
Also included as part of the proposed changes, the RGGI states clarified details about the cost containment reserve, or CCR. The proposed CCR size from 2021 through 2030 will be 10% of the regional cap.
The reserve is a fixed supply of additional CO2 allowances that is only accessed if the interim clearing price exceeds the reserve trigger price for a particular year. The CCR trigger price will be $13.00/ton in 2021 and will rise by 7% per year.
"In summary, it's reasonable to assume the RGGI price will trend to the ECR trigger price of $6.00 in late 2020. Actual emissions year-to-year will be the ultimate determining factor, and the price could move higher than the ECR trigger price and toward the CCR price if higher emission rates cause the bank to be depleted earlier than expected, putting more demand into the market," Evolution Markets added.
The RGGI states will seek stakeholder comment on the draft program changes at a public meeting to be held Sept. 25. A revised model rule will then be issued, followed by implementation of the rule by each participating state.
"We are certainly happy to see that this broad group of states was able to come together to agree to a pathway that will ensure emissions reductions after 2020. That said, we think they could have gone even further. There was a lot of support for more ambitious emissions reductions than what they proposed here, not only from the environmental community but from businesses and health professionals. There is still an opportunity to do more, and we are hopeful the states will build on the momentum that they have through RGGI and will take some of the lessons learned and apply them to other sectors, like transportation," Stutt added.
