Mounting turmoil in the financial industry in late September may have had a positive effect on the nation’s first auction of carbon dioxide allowances — at least for consumers who stand to benefit from the relatively low winning bids.
Roughly 80 percent of the allowances acquired in the Sept. 25 bidding went to utilities and other “emission compliance entities.”
That means investment firms and other speculators that had been expected to buy up allowances in hopes of trading them to polluters later at a higher price were relatively quiet at the auction. The Wall Street firms that unexpectedly sat on the sidelines apparently had their attention on the monumental shakeup looming in the world of high finance.
“The fact that 80 percent of the allowances went to emission compliance entities could be characterized as a pleasant surprise,” said Stephen Humes, a lawyer with Hartford-based McCarter & English. “The price of $3.07 per allowance was on the low end of what people expected, and I think that’s probably good news for consumers.”
Connecticut is one of 10 New England and mid-Atlantic states that make up the Regional Greenhouse Gas Initiative, or RGGI, which conducted the Sept. 25 auction open to Connecticut and five other states in the group. RGGI plans a second auction Dec. 17 with all 10 states.
The first auction took bids on 12.5 million carbon dioxide allowances, with one allowance equaling one ton of emissions. Connecticut auctioned 1.37 million allowances and received $4.2 million, which will go mainly toward energy efficiency programs.
The auction in December will take bids on 31.5 million allowances. Connecticut will once again auction off 1.32 million.
Robust Participation
“It’s really going to be the full deployment of the auction system and it’s very exciting to see how it plays out,” said RGGI executive director Jonathan Schrag.
The results of the first auction have been analyzed by Virginia-based Potomac Economics. Hired by RGGI to independently monitor the auction, Potomac Economics released a six-page review signed by its president, David Patton, and vice president, Pallas LeeVanSchaick.
“Participation in the auction was robust with 59 separate entities submitting bids to purchase more than four times the available supply of allowances in the auction,” read the report. “This liquidity contributed to generating a clearing price that is consistent with the underlying supply and demand fundamentals governing the carbon dioxide allowance market.”
The bidders included utility companies, manufacturers and investment firms. Citing a recommendation from Potomac Economics, RGGI said it would not release the names of the bidders because doing so could lead to bidding collusion, Schrag explained.
Before the Sept. 27 auction, Humes had speculated on what might happen if a majority of the allowances ended up in the hands of investment firms that planned to speculate on their value. But stress in the U.S. and world financial markets may have “taken the wind out of the auction’s sail,” he said.
“It’s anyone’s guess what effect that had, but there seems to be some sense that it led to less participation from those who wanted to make money off of the auction,” Humes said. “That’s a good thing for compliance entities and consumers because there’s no doubt that higher costs would have been passed on eventually to consumers.”
Peter Shattuck, a research analyst for Environment Northeast, a nonprofit research and advocacy organization, said his group was pleased with the results of the auction.
“There was significant participation from compliance entities, but also a meaningful number of outside participants that created a secondary market,” Shattuck said. “The most significant aspect is not a result of the auction, but a result of the state’s desire to fund energy efficiency. It’s the most near-term and affordable way to cut down on energy demand.”
Splitting $4.2 Million
Of Connecticut’s $4.2 million profit from the first auction, 7.5 percent, or $316,025, will go to administrative costs, 23 percent, or $969,143, will go to the Clean Energy Fund, and 69.5 percent, or $2,928,498, will go to energy efficiency programs overseen by the Energy Conservation Management Board.
If the bidding for allowances had gone over $5 a ton, any extra would have been rebated to ratepayers.
“The real significance of the auction is that it went off without a hitch,” said Shattuck. “The prices and percentages didn’t really raise any eyebrows because no one had very specific numbers in mind. It was a good auction because everyone got to feel out the process and there were no issues.”
Eric Brown, associate counsel focusing on environmental issues for the Connecticut Business & Industry Association, said future auctions could impact ratepayers if more investors get involved. Brown also cautioned that the roughly $4 million headed towards energy efficiency programs must succeed in reducing energy costs as intended to make the auctions worthwhile.
