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Cap and Trade: Nation’s First Carbon Auction Underway

August 15, 2008

The Northeastern states’ Regional Greenhouse Gas Initiative (RGGI) is officially open for business. Applications to participate in the multi-state carbon dioxide (CO2) auction were due on August 8, 2008, with the first auction scheduled for September 25, 2008. The auction will culminate five years of planning and policymaking, and will be the first government-administered auction of greenhouse gas emission permits in the United States. Six of the 10 states participating in the RGGI cap-and-trade program will auction a total of 12.5 million allowances (i.e., 12.5 million tons) of CO2 in 1,000-ton lots.[1] This figure represents only a fraction of the 2009 emission allowances allocated for electric power producers in Connecticut, Maine, Maryland, Massachusetts, Rhode Island and Vermont, with the auction of the remaining allowances to take place in a series of quarterly auctions in the future.[2] The auction of allowances from Delaware, New Hampshire, New Jersey and New York will also take place at subsequent auctions, once those states have completed necessary state-level rulemakings. Regulated entities in any of the RGGI states may bid in the September auction, as may any other entities that qualify - including emissions brokers and traders.


RGGI is auctioning carbon dioxide allowances in order to comply with RGGI’s innovative CO2 emission reduction program, which requires power plants operating in the 10-state region to achieve CO2 emission reductions of 10% below 2005 levels by 2020. The emission reduction goals of the RGGI cap-and-trade program are to hold regional emissions steady at the current level of 188 million tons CO2 per year over the period 2009-2012, then achieve reductions of 2.5% per year over the period 2014-2018. Allowances may be banked for future use. For example, a 2009 “vintage” allowance purchased in September could be used for compliance in the 2009-2012 period or a later year. Regulated facilities must have acquired a quantity of allowances equal to their 2009-2012 CO2 annual average emissions by March 2012, the initial RGGI compliance date. The RGGI states have agreed to auction 100% of available allowances, rather than allocate a portion of them to regulated facilities free of charge. Therefore, the September auction represents electrical utilities’ first chance to acquire the allowances they will need for compliance. The auction also allows non-regulated entities to purchase the allowances for investment purposes. For additional background on RGGI, please see RGGI Sets First Auction of CO2 Emission Allowances for September 2008, Marten Law Group Environmental News (Apr. 2, 2008).

CO2 Allowance Auction 1

The September auction will be the first major trial for participating states and Regional Greenhouse Gas Initiative, Inc., the non-profit organization set up by RGGI states to provide administrative and technical support. Auction participants were required to submit a Qualification Application and Intent to Bid form to RGGI, Inc. by August 8, 2008. Applicants were also required to register for an account in the online registry, RGGI CO2 Allowance Tracking System (COATS) by August 8. Applicants will be notified of their qualification status and provided with usernames and passwords to access the online auction system by September 10. Prospective participants must then post financial security equal to the bid amount in the form of a bond, cash, or letter of credit by September 18. The total dollar value of a participant’s bid may not exceed their posted financial security. Participants posting financial security will receive notification no later than September 22 that they have been approved to participate in the auction.

The initial auction will take place from 9:00 a.m. to 12:00 p.m. EDT on September 25, 2008 on an Internet-based platform, and will consist of a uniform-price, single-round auction. Participants will place sealed bids online, entering a price per ton of CO2 and quantity bid (e.g., 10,000 tons at $7/ton) on the bid entry screen. Allowances will be auctioned in 1,000 ton lots, so bid quantities must be multiples of 1,000. A participant may enter multiple bids, although only one bid may be submitted at any given price and no single entity is allowed to place bids for more than 25% of the 12.5 million allowances subject to this first auction. RGGI will announce the auction results the week of September 29, 2008.


RGGI has set the reserve (i.e., minimum) price at $1.86 per ton, but higher clearing (i.e., sale) prices are expected to result from the auction. The auction will be a “uniform-price” auction, so successful bidders will all pay the same clearing price per ton regardless of their original bid. For example, if a participant places an order for 10,000 tons CO2 (10 1,000-ton lots) at $7/ton and the clearing price is $5, then that bidder will receive 10,000 tons CO2 at a total cost of $50,000, while someone bidding $3/ton will not receive any allowances. If the auction is oversubscribed, meaning that there is greater demand for allowances than there is supply, then the clearing price will be equal to the bid price at which the cumulative demand exceeds the number of allowances being auctioned. All bids at or above this so-called “marginal bid” will have their orders filled at the same clearing price. The marginal bidder, that is, the one who bid the lowest price per ton of all successful bidders, will have its order only partially filled. If more than one entity bid at the marginal price, then they will each have some portion of their orders filled according to a lottery system. If the auction is undersubscribed, i.e., participants’ demand is less than the 12.5 million tons on offer, then all allowances will sell for $1.86 – the reserve price established by RGGI – regardless of bid prices. Auction confirmations and transfers of allowances to participants’ RGGI COATS accounts will begin October 8, 2008.

One unanswered question concerning the auction is what will the clearing price be? The $1.86 reserve price was set with advice from ICF International, a consultancy that valued RGGI allowances at $2.32 per ton across the 10 states. A number of brokered CO2 allowance trades billed as “pre-auction, pre-compliance” RGGI trades have taken place in recent months, and those trades may suggest the likely clearing price range for the September auction. Connecticut-based EcoSys Capital Advisors claimed the first pre-compliance RGGI trade in February 2008, at a price between $5 and $10 for December 2009 and 2010 call options. In March 2008, Koch Supply & Trading and Texas Environmental Partners announced a forward trade of 5,000 vintage 2009 RGGI allowances at $7 per ton; the trade was brokered by Evolution Markets. Allowance prices on the voluntary Chicago Climate Exchange (CCX) may also provide a gauge and are currently around $4 per metric ton, although CCX Carbon Financial Instruments traded at an all-time high of $7.40 across all vintages on June 2, 2008, before dropping to their current levels.

Prospective bidders may also get a better sense of what range of prices to expect as soon as August 25, when the New York Mercantile Exchange (NYMEX) Green Exchange launches futures contracts for RGGI CO2 allowances. NYMEX will offer the futures contracts in lots of 1,000 tons CO2 to match the RGGI auction. According to NYMEX officials, physical delivery will be administered by RGGI COATS. The price on near-month RGGI futures contracts could foreshadow the expected auction clearing price. The Green Exchange is currently the only financial exchange to offer derivatives on RGGI contracts.

RGGI auction participants are likely to take a host of factors into account when placing their bids, including their own expected compliance needs if they are regulated entities and the fact that additional 2009 vintage CO2 allowances will be available in a subsequent auction. Recent power sector emissions were below the established baseline level in 2007, which has led some commentators to suspect that the RGGI system is “overallocated,” and prices will be low to reflect excess allowance supply. The next auction, scheduled for December 17, 2008, will also include 5% of the allowances to be auctioned for the 2012-2015 compliance period. A third auction is scheduled to be held on March 18, 2009.

Climate change policymakers and participants in the Western Climate Initiative (WCI), which is developing a cap-and-trade program for a number of Western states, Canadian provinces, and Mexican states, will closely follow RGGI’s initial operational experiences and auction results. The WCI recently released an updated draft scoping plan that includes preliminary designs for an emission auction system. The July WCI draft did not state the percentage of allowances that would be auctioned, but previous statements have indicated that between 25 and 75% could go up for auction, while the remainder would be allocated. For more information on the WCI’s scoping plan and cap-and-trade program, please see It’s Getting Hot in Here – Western Climate Initiative Updates Scoping, Reporting Rules, Marten Law Group Environmental News (July 30, 2008).

Federal legislators and regulators will also closely watch the RGGI auction. The vast majority of federal-level climate change legislation proposed this year featured auction-based allocation schemes, the revenues from which would have funded a diverse set of initiatives from energy efficiency and renewable energy development to healthcare and pay-down of the federal deficit. RGGI’s September auction will be the first glimpse at what carbon prices might be in the United States under a mandatory cap-and-trade program, and will surely influence future policy design from the federal level all the way down to the regional and local levels.

For more information on carbon trading, please contact any member of Marten Law Group’s Climate Change and Sustainability Practice Group.

[1] RGGI, CO2 Allowance Auction Notice for CO2 Allowance Auction 1 on September 25, 2008 (July 24, 2008).

[2] Charles Holt, et al. Auction Design for Selling CO2 Emission Allowances Under the Regional Greenhouse Gas Initiative – Final Report. October 26, 2007.

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