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Secondary market for RGGI credits crashes

The carbon credits issued under the northeast’s regional cap and trade program aren’t trading very much since New Jersey announced its withdrawal from the program. A report on the secondary market for the Regional Greenhouse Gas Initiative (RGGI) shows that trading of RGGI futures in down 55% from a year ago, showing that markets have less faith in the future of the program.

The report, prepared by Potomac Associates for RGGI Inc, tracks activity on the Chicago Climate Futures Exchange (CCFE). The ten RGGI states auction off the right to emit carbon dioxide from fossil fuel power plants four times a year, and covered plants have until next spring to acquire enough credits to cover emissions from the last three years. If these companies don’t purchase enough RGGI credits at auction, they would need to go to the secondary market to make up the difference. But the Potomac report shows that other than a sell-off following the New Jersey announcement, RGGI credit trading isn’t all that robust.

The next quarterly RGGI auction is tomorrow. The ten states have put 44 million CO2 credits out to bid, which would generate more than $83 million at the lowest reserve price if all the credits are sold. RGGI prices can not fall below a reserve price of $1.89. If there aren’t enough buyers for the available credits at that price, the RGGI credits go unsold. Auction prices have hovered at the reserve price since September of 2009. But demand plummeted in the June quarterly auction when 70% of the offered allowances went unsold, leaving future RGGI revenues in question.

The Potomac report shows little movement in the RGGI closing price on the CCFE, which has traded between $1.85 and $1.94. The price averaged $1.90 prior to New Jersey’s decision to leave the ten-state compact at the end of the year, and $1.87 after the announcement. The report found little interest in RGGI credits outside of the power companies that must produce them. Those companies hold 98% of all RGGI credits as of the end of the last quarter, leaving little room for a secondary market. Further, there has been only a single trade of RGGI options contracts since August of 2010.

Investors are also staying away from RGGI allowances in future years. The current compliance period ends on December 31, 2011. The second year compliance period runs through 2014. The price of 2014 RGGI allowances has also fallen to the reserve price, and secondary market trading fell 55% from 4.7 million allowances in the first quarter to 2.1 million in the second. Just 8.3 million allowances were traded between firms not covered under RGGI, and 86% of those trades came after New Jersey’s withdrawal in June.

The New Hampshire Senate convenes tomorrow afternoon to consider a number of bills vetoed by Governor John Lynch. That includes SB 154, which would pull New Hampshire out of RGGI. RGGI opponents are currently one vote short of overriding that veto.