Environmental Protection

Consultant Analyzes GHG Compliance Trades

The first "Regional Greenhouse Gas Initiative (RGGI) Market Brief" analyzes the current state of the market, focusing on the recent execution of the first two compliance trades and the release of 2007 emissions numbers.

Point Carbon, a provider of independent analysis and consulting services for governments and companies in the global power, gas, and carbon markets, released the report recently.

The first two trades of RGGI allowances were announced in the past month, establishing the first ever U.S. regional carbon compliance trades. Both trades were in the range of $5 - $10 per ton —much higher than the official price estimate of $2.32 per ton. The initial price signals point to the creation of a billion-plus regional carbon market. Interestingly, investors seem to be rather bullish on a market that has yet to take shape as RGGI authorities have thus far not issued allowances, set up a registry, or put out standardized contracts.

By engaging in trading now, companies are gaining exposure to the markets and establishing themselves as market makers.

Setting the prices of these recent trades involved some guesswork and was "more art than science" according to a source close to the trades and that might well hold true throughout the beginnings of RGGI. "These early trades are helpful to everyone in establishing a value to the market," says Veronique Bugnion, managing director, Point Carbon. "The market fundamentals can be analyzed to point to bullish or bearish signals depending on one's point of view."

Emission data certainly sends a bearish signal. According to 2007 emission data recently released by the U.S. Environmental Protection Agency, emissions had increased by 6.5 percent, which is still well below the cap set for the year. This over-allocation forecast carries over into 2008 as well. Recent RGGI decisions have confirmed that there will be no re-assessment of the cap before 2012, so high supply of allowances will continue to mean little constraint on the market.

However, federal regulatory developments actually create a bullish signal for the RGGI market. If investors feel that a federal program will preempt a RGGI reassessment in 2012, prices could also be driven up or down significantly depending on how RGGI allowances are merged into a federal program.

"It's important that federal regulators monitor the regional RGGI market as they shape the federal cap-and-trade system," said Emilie Mazzacurati, senior analyst, Point Carbon. "Their decisions are going to be a driving factor in pricing RGGI allowances."

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