The US Carbon markets continue to be highly unpredictable, with the programs under review and a volatile economic environment. After California and Washington, the next on the list is the RGGI. The main takeaway from the auction – Investors are back in the RGGI market,  Investors purchased 37% of the available allowances, and Investors including those with compliance obligations purchased 50% of available allowances. So what’s driving this interest in a market that seems to be losing states and economy-wide Cap-and-invests are moving the RGGI to play second fiddle in the decarbonization of the East Coast.

The interest seems to come down to the program review which is expected to be decided on by the end of this year. There is hope in the market that RGGI will tighten the Cap from 2025 onwards, and remove the Cost-containment reserve (CCR). An opinion poll conducted by IETA and PwC points to a similar upward price expectation. This is likely to have led to 9 pure investors purchasing more than a million allowances each, and 5 compliance-oriented entities purchasing more than a million. The opinion poll does not imply or mean the price of allowance is to be at that level – it’s a sentiment analysis and should be treated as such.

Compliance entities drag the prices at the auction, Virginia regulators voted to advance Republican Gov. Glenn Youngkin’s plan to withdraw from RGGI and Pennsylvania still seems to be stuck in court cases, though we are optimistic. The low bid ratio signifies lower participation by compliance entities.

Our modeling shows that the current RGGI market is abundantly supplied and the continuation of the current market does not sustain either the current prices or the upward moment seen in the last month and at this auction.

The Regional Greenhouse Initiative (RGGI) released the results of its 60th auction. The price for the auction was $12.73 per MtC02, a gain of 23 cents from the last auction. The bid-to-cover ratio was 1.9, down from 2.4  The Cost Containment Reserve (CCR) remained untouched for this year. Bids were submitted by 54 entities, 2 lower than the last quarter. Compliance entities purchased 63% of available allowances, down from 82% last auction. Investors bought allowances are 37%, from 18% in the last auction.

Compliance Entities win 63% of the auctioned allowance

Investors purchased (including investors with compliance obligations) half of the available allowances:

1. Upcoming program review (Possibility of Cap reduction in 2025 and removal of ceiling CCR price)
2. Lowering inflation has made investors slightly less risk-averse – pushing investor participation to 2021 levels.
3. The position of Pennsylvania and Virginia continues to remain uncertain in the RGGI program – lowering compliance purchases.
4. New York’s push towards its own cap-and-invest market has increased the likelihood of RGGI playing second fiddle in the state.
5.  

Rise in Auction price, after four auction decline 

The 60th Auction settled at $12.73, 1.85% higher than the last auction, and 13.50% lower than the Cost Containment Reserve (CCR) price of $14.7. Revenue declined by 4.10%  to $280 million.

The market will see a rising bank 2025 onwards if no  tightening of Cap

A supply-demand view of the market shows that the excess bank will rise from 2025 onwards, after decreasing to 62 million. The power sector emissions are expected to decline at a quicker pace than the cap. Also, 2025 will see an end of the third bank adjustment and a less fourth bank adjustment. This will increase the supply of allowances from 2025 onwards. Overall, the market has sufficient allowances, and supply is not expected to drive prices upwards.

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Analyst Contact:

• Craig Rocha (cmrocha@ckinetics.com)
• Megha Jha (mjha@ckinetics.com)