Uncertainty is a dirty word in the world of the Regional Greenhouse Gas Initiative, where 2012 carbon allowance prices have sunk over the past year as buyers and sellers wait for Congress to decide how to value them in a federal cap-and-trade scheme.
Detailing the results of the RGGI market's fifth allowance auction this month, RGGI administrators said that 2012 allowance prices were just a cent above the auction clearing price of $1.86/short ton. In comparison, the first auction of 2012 allowances, held in March, saw $3.05/st.
Market players had expected this, and not because power demand is down this year because of the economic recession. While fundamental news has kept 2009 allowance prices down, it has been the lack of certainty from Congress on how it will value 2012 allowances when the RGGI program, covering power generators in 10 Mid-Atlantic and Northeast states, is paved over by a national scheme. The year 2012 is the first year of RGGI's second compliance period.
Opening a federal scheme in 2012, the House of Representatives cap-and-trade bill (H.R. 2454) approved in June included a compensation formula for RGGI allowances issued in 2009, 2010 and 2011 but not those issued in 2012 and beyond. Specifically, "a person exchanging state allowances ...[will] receive emission allowances ... in the amount that is sufficient to compensate for the cost of obtaining and holding such state allowances," the bill says.
The Senate has yet to produce its bill language, leaving it unclear to those interested in 2012 allowances what they are truly worth down the road. Some market players say that the House bill language means owners of 2012 allowances auctioned through 2011 are compensated, while others say it provides no value for allowances used for compliance in 2012.
This uncertainty has ensured only compliance-buyer interest in the 2012 allowances, with no financial players bidding in the last auction. Nobody wants to invest money in something they don't need, when they have no idea whether it will earn them money down the road.
And that's not mentioning the annoying detail of a short ton/metric ton discrepancy on value. RGGI states have chosen to measure emissions in the US-type ton, the "short" one that is 2,000 pounds. The federal legislation measures emissions in world-type tons, the "metric" ones that are about 2,240 pounds.
So every RGGI allowance would have to be jiggered in value when (and if) a national cap-and-trade program is launched. That can certainly be done, but one might think there was enough complication already in determing RGGI allowance value.
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