The northeast US’s Regional Greenhouse Gas Initiative sells CO₂ allowances through quarterly auctions. The intent is that both electric power producers will buy some because they have in order to emit CO₂, and speculators will buy some in hopes of selling them later to power producers that didn’t plan well and are willing to pay a premium.

Each allowance is good for a three year “control period” and the first ends at the end of this year. Auctions have allowances available for both the current and and a much smaller number for the next control period.

I believe allowances for the current control period can’t be transferred to the next, so there’s strong impetus for power producers to bank enough of them to avoid market manipulation by speculators late in a control period, and RGGI Inc tries to look out for that. I don’t known what they’d do about it, but pretty much all the speculators have abandoned RGGI looking for something with a return.

The 12th auction was held last week and results were released yesterday. I’m no economic forecaster, but the results were pretty much inline with my expectations, basically, only 30% of the available allowances sold, the least interest of any auction to date, and setting the stage for even less interest in auctions 13 and 14.

Being financial transactions in a competitive market, only limited data is released. For example, power producers really don’t want the speculators to know how many allowances they’ll need before the end of a control period, especially in an environment where all the allowances were going to be used. Producers don’t tell people how many allowances they own or document the timing they use for when to purchase them.

However, in reading the tea leaves, a couple things stand out. (Let’s just look at the current control period.) In 2010, there was more demand than supply in the first two auctions, but that didn’t keep up in the last two auctions. In particular, the first auction had a bids::supply ratio of 2.3, i.e. if there were a million allowances offered, there were people willing to buy 2.3 million of them. In the second auction, the 1.3 ratio means there was no additional demand. For the third and fourth, some demand showed up, but it was a lot less than what was available and the allowances all sold at the auction floor price.

In 2011, a surge in demand made auction 11 oversubscribed, but note the 1.1 ratio is much lower than the 2.3 ratio a year before. It looks like some large producers have an annual budget for allowances – start buying early, stop when you have enough. Others may buy throughout the year, and some may have switched to that having realized there would be plenty allowances available.

For auction 12, a repeat of the 2010 auctions suggested that the 1.1 ratio might lead to only a 0.1 ratio for this auction. Assuming some producers are deferring purchases, the 0.3 result seems eminently reasonable to me. For the September auction it might go up a bit, but only because I don’t expect anyone is going to wait for the last auction in December, and that may well be a true bust.

While all this fits my expectations, I bet most of the RGGI beneficiaries will be shocked at this auction’s results. I think all of them have (had!) plans for nearly as much money this year as last, they may wind up with half of that.

The future control period will become more interesting in the next couple of auctions. The number of allowances made available is relatively quite small. Whereas there were 42 million allowances available for the current period, there were only 1.86 million available for the next period. This is due in part to the allowances being available for years before they’re needed, and in this auction, the allowances meant to cover New Jersey’s share have been dropped since NJ is pulling out at the end of the current period.

In one sense, the future allowances did better, with a bids::supply ratio of 0.51, but it’s still the lowest ratio of any auction to date, and the proceeds are only 7% of the total, so states won’t be getting much from it.

While I’m personally thrilled at the poor results (except for the portion that is due to the recession), RGGI proponents must be dismayed at these results and what it means for the rest of the year. When RGGI started, allowances were over $3.00 each and rose in auctions 2 and 3. What they hoped would happen is the price would be up to $7.00 to $10.00 and brisk market trading between auctions would let some people make money while power producers would be racing to make themselves more efficient before allowance prices would rise even further. (All this while manufacturers fled to cheaper regions.)

Instead, the recession reduced energy demands, other programs like requiring utilities to buy renewable energy at a premium helped keep end user costs up, new natural gas production and lower prices both lowered prices but was also more efficient. All in all, CO₂ emissions have dropped, I think to below the level that was RGGI’s primary goal.

Perhaps we can declare success, end RGGI, and go home to a candlelit celebration.

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