This is a post on the status of emissions and allowances in the Regional Greenhouse Gas Initiative (RGGI). It is another in a series of posts on RGGI that discusses how RGGI has fared so far and what might happen in the future. The fact is that RGGI is edging towards uncharted territory where affected sources that have to comply with the regulations are going to have to get the allowances they need for compliance from investors.
I have been involved in the RGGI program process since its inception. Before retirement from a non-regulated generating company, I was actively analyzing air quality regulations that could affect company operations and was responsible for the emissions data used for compliance. After years dealing with RGGI I worry that whether due to boredom or frustration, that there is very little dissent to the program. It may be because, contrary to EPA and State agency rulemakings, RGGI does not respond to critical comments and rebut concerns raised by stakeholders. After years of making comments that disappear into a void, industry does not seem to think there is value to making comments. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
RGGI Annual CO2 Emissions lists the total CO2 emissions from the states currently in RGGI. After pretty consistent reductions over time last year there was a six million ton increase from 2017. Stay tuned to another post that looks into the emissions data in more detail. However, note that I have previously posted on the reductions to date which suggest that further reductions will be much more difficult than in the past.
RGGI is a cap and auction program. Allowances are sold in quarterly auctions to anyone and the proceeds are supposed to be invested in programs that reduce CO2 or ratepayer impacts. RGGI states have modified the original auction allocations to reduce the number or bank of the allowances that have been purchased but not used yet because the original estimate did not account for the possibility that natural gas would supplant coal to the extent observed. Up to this point the affected sources or compliance entities have been able to purchase the allowances needed to cover emissions from auctions. This is going to change in the next couple of years.
RGGI relies on Potomac Economics to provide technical analyses. Frankly, my impression is that the purpose of those reports is to obfuscate and confuse rather than clearly show the status of the program. One of my biggest frustrations is that there is no summary status report and I have inconsistencies in my summary estimates. I have made a couple of guesses at the status of the number of allowances that are held for compliance purposes after the 2018 RGGI emissions are fully surrendered.
According to the Potomac Economics Secondary Monitoring Report for the 3rd quarter of 2018, there were 155 million allowances in circulation and 72 million were held for “compliance purposes”. According to the Potomac Economics Market Monitor Report for the fourth quarter of 2018 entities purchasing allowances for “compliance purposes” bought 77% of the 13,360,649 allowances sold. In RGGI Allowance Allocation Status End of 2018 I added the fourth quarter allowances to get 168 million allowances in circulation and 82 million allowances held for “compliance purposes”. RGGI-wide CO2 emissions were 72 million tons in 2018. Ultimately only 10 million allowances will be in the “compliance purpose” bank. In all of 2018 54 million allowances were auctioned and barring a major reduction in emissions the 10 million ton “compliance purpose” bank will be gone next year.
The Potomac numbers do not include other transfers to the allowance banks. I tried to calculate the allowance bank based on the RGGI allowance distribution reports. (Note that RGGI compliance periods are three years long.) In RGGI Compliance Period Allowance Allocations and Compliance Period Emissions I list the allowances in circulation at the end of 2017 (total allowances released less total emissions). Adding the allowances added this year gives a bank of 140.7 million. I used Potomac Economic’s estimate that 50% of allowances were for compliance purposes to get 70.4 million allowances. In 2018 CO2 emissions were 72.3 million tons so according to this approach compliance entities are already in debt to the non-compliance entities.
I cannot emphasize enough that RGGI is headed towards a situation where the affected sources will have to go to the non-compliance entities to get enough allowances to cover their emissions. If you recall the proceeds that RGGI receives from the auctions are supposed to be used to reduce emissions and provide ratepayer relief. Ideally, the added costs of this carbon tax are offset by those investments. Now, however, the investors will be able to charge whatever they want for the allowances and their profit will be covered by increased costs to the consumer. (In the interests of full disclosure I bought 11,000 allowances in 2018 and will profit from this situation.) In my opinion, affected sources should buy allowances as needed and never run without enough to cover current emissions.
If an affected source does not have enough allowances on hand to cover their current emissions they are faced with two issues. When a source bids into the market they prefer to know the price of allowances so they can price their bid appropriately but if they don’t have them they don’t know the cost. Worse would be the case where a facility assumes that they can get allowances but eventually find out none are available at any cost. In that case then they would be out of compliance and would face significant fines. The worst case scenario is that a facility does not have allowances in hand, cannot purchase what is needed and then declines to bid. While unlikely, that could lead to reliability issues because you cannot force an owner/operator to run knowing they are out of compliance without a whole lot of histrionics.
Finally, note that RGGI has closely guarded the ownership of allowances. The market monitoring reports name who has bid but does not list who owns what. Instead they list ownership by three categories:
- Compliance-oriented entities are compliance entities that appear to acquire and hold allowances primarily to satisfy their compliance obligations.
- Investors with Compliance Obligations are firms that have compliance obligations but which hold a number of allowances that exceeds their estimated compliance obligations by a margin suggesting they also buy for re-sale or some other investment purpose. These firms often transfer significant quantities of allowances to unaffiliated firms.
- Investors without Compliance Obligations are firms without any compliance obligations.
In my opinion those categories are pretty broad. In a transparent program there would be examples of which company is in which category but we are left in a position where we have to hope they got the definitions right. Finally, note that investors without compliance obligations could also include those who want to hold allowances to prevent emissions. If that is the case for a significant fraction of investors, then the market is in trouble.