The RGGI era dawns
The long-awaited Regional Greenhouse Gas House Initiative carbon emissions offsets auction takes place Sept. 25, to great fanfare and under the cover of secrecy.With the registration deadline passed, RGGI officials are proclaiming participation is “robust” but they won’t say who is participating, or even how many participants there are.The few New Hampshire companies who actually need such credits are not saying if they are going to bother to bid at this stage. The state of New Hampshire itself won’t participate in the first auction, preferring to wait until the next one in December. In fact, some experts said – thanks to a declining economy and emissions reductions – power producers won’t need as many of the “allowances” being auctioned off to emit carbon dioxide.Indeed, the price of those allowances on the future market is falling rapidly.This could mean that the price of electricity won’t go up as much as was feared, but the pot of money available for conservation will be smaller than originally hoped.“Everybody is waiting to see what will happen,” said Dick Henry, executive director of the Concord-based Jordan Institute, a non-advocacy environmental organization. “Everyone is feeling each other out. Is there going to be more credit than there is demand? Who knows? It will take two or three cycles in the auction before we get an idea of where the price is going.”Under RGGI, a market-based system is being created in an effort to control carbon dioxide emissions from power producers in 10 northeastern states by capping those emissions at current levels – about 188 million tons a year through 2014. By 2018, that cap is slated to be reduced by 10 percent.Under the initiative, New Hampshire’s annual carbon budget is 8.6 million tons, which translates into 8.6 million allowances that must be auctioned each year, in quarterly auctions.No hurryNew Hampshire lawmakers passed RGGI into law last spring, but the state is still hammering out final rules so it won’t be taking part in the first auction on Sept. 25. Neither will New York, New Jersey and Delaware.But that doesn’t mean that New Hampshire power producers don’t have any interest in the September auction of some 12.5 million allowances. An allowance is an allowance, no matter which state is issuing it.Operators of two gas plants required to obtain RGGI allowances didn’t return phone calls. That leaves the largest producer, Public Service of New Hampshire, whose plants emit some 5 million tons of carbon dioxide a year.Thanks to a deal cut in the Legislature, PSNH will actually only need about half as many credits, since they are being given credit for 2.5 million allowances a year for at least the first three years, primarily because the utility converted one of its three coal burners at Schiller Station in Portsmouth to a wood burning-plant. It also is being credited for installing a more efficient turbine at a hydroelectric plant in Berlin.But PSNH – or any utility, for that matter – is not in any desperate hurry to buy up allowances during the first auction. For one, the utilities don’t have to settle up for another three years. In that time, they might be able to come up with other efficiencies to reduce their emissions, or they may be able to buy certified allowance offsets from companies that can show they are doing something to reduce greenhouse gas emissions, either by capturing and recycling landfill gas from a landfill or by planting trees, for instance.And even when PSNH finds out how many allowances it needs, it won’t necessarily have to buy them at an auction. It could obtain them from a broker who bought them at auction.“We don’t have to buy them in September,” said spokesperson Martin Murray. “We have to decide how to best meet our compliance requirements at the lowest price.”Going down?So what will the price of an allowance be at auction, and will that price will go up or down?If you look at the futures market, the price is going down. Like any futures market, brokers who sell futures in RGGI are selling a promise to provide a certain amount of RGGI allowances, counting on the actual price being below what the broker is paying for it.When the Chicago Climate Exchange started selling futures on Aug. 15, they were going for $6 a credit. But on Sept. 4, as the auction approached, the market closed at $4.63.The reason? Demand for electricity is down because of the economy, and emissions in 2007 were about 9 percent below the 188 million cap. They may decrease further in 2008. This of course could drive down the price still further.How low could the price go? The auction itself set a floor, or a “reserve price” of $1.86 per emission credit. If there isn’t enough demand in that auction to buy up the credits, than that reserve price could become the “clearinghouse price,” which is the price that everybody would get the credits for no matter what they actually bid.If this were the case, states would receive a lot less money for conservation than they had hoped for. New Hampshire won’t get any money from the September auction, since it isn’t participating, but if that $1.86 floor is maintained and New Hampshire sold all its credits, the state would receive $16 million a year for conservation — much more than the state has had previously, but much less than the amount anticipated.RGGI officials have said that if they can’t sell enough allowances above the reserve price they might actually retire them, which in effect would lower the cap and drive up prices in the future. (Simply decreasing the cap officially would take at least three years.) But this scenario is a far cry from the concerns of power producers when RGGI was first passed.At the time, business groups, and utilities, were concerned that speculators and environmental groups would squirrel away credits, driving up the price so much that they would have to increase electric rates. Most states passed various safeguards spelling out what to do if the price of an allowance rose above a certain amount. In New Hampshire, the threshold was $6 a credit. The money after that threshold was reached would be rebated back to customers. New Hampshire couldn’t spend more than $50 million in conservation money a year, and at that point the money would be desperately needed for rate relief.But for now it appears likely that $6 threshold won’t be reached.While no one can say what brokers will do, it appears unlikely that environmental groups are going to be buying up and retiring credits in order to lower emissions.Seth Kaplan, vice president of climate advocacy at the Conservation Law Foundation in Boston, said the whole idea environmentalist would horde allowances could be “best described as a scare tactic.”First, multiple auctions make it hard to really lock up allowances.Second, when the biggest national environmental groups “looked at their entire budget, it was the cost of allowances of one coal plant,” Kaplan said, meaning “the idea that there are millions and millions of dollars out there to buy up allowances and retire them greatly overrates the financial strength of environmental organizations.”Third, he said, it doesn’t make sense to market the allowances, as some groups now do for carbon credits, because while someone might pay to feel good in financing the planting of trees or building windmills, nobody would feel good retiring allowances that power plants might not need anyway.
Bob Sanders can be reached at email@example.com.