W18: RGGI Price Graph

The RGGI V23 Future Dec-23 contract settled at USD 13.30/st this Thursday (4 May). This is a 1.29% week-on-week increase from last Thursday’s (27 Apr) settlement price of USD 13.13/st. The USD 0.17 increase in the benchmark contract comes as comments from 29 March public hearings – a part of the Third Program Review – were published, showing strong support by stakeholders for a more ambitious regional carbon market.

 published on Thursday (27 Apr) from the Third Program Review’s March meetings, show wide-scale agreement for more stringent regulations to strengthen the RGGI program. The comments show support for more ambitious allowance cap reductions, updates to the supply of banked allowances, and changes to the Emissions Containment Reserve (ECR) and Cost Containment Reserve (CCR). For the ECR, participants back an increase in the trigger price, a restructuring of the Reserve volume, and greater efforts to pressure New Hampshire and Maine to participate in the system. Similar sentiments are shared for the CCR – calling to raise the price and to restructure it so that the trigger price needs to be hit consecutively at auctions for supply to be added (to ensure that a high auction clearing price is not a one-off event). The CCR would also release less than 10% of the regional CO2 budget (the current regulation) if triggered. The release of the public comments had a bullish impact on the market as it reignited confidence in the market and its future updates.

In the updated FY23-24 budget for the state of New York presented on Monday (1 May), there was no language regarding the design and details of the economy-wide cap-and-invest program. New York Governor Hochul (D) had announced plans to implement the program as soon as 2025 but has faced disagreement from the Assembly and Senate regarding the structure and feasibility of the carbon market. The FY budget was meant to be approved by 1 April and the governor had intended to include language pertaining to the design of the cap-and-invest program. After negotiations among the governor, Assembly, and Senate, the budget presented this week only outlines the distribution of funds from the program. Program revenue is set to be allocated to three separate accounts within the Climate Action Fund: The Climate Investment Account (67%), The Consumer Action Fund (30%), and The Industrial Small Businesses Account (3%). These accounts are intended to help fund the green transition in the state, reduce the costs of goods and services that may be affected by the program, and protect small business, all while giving prioritization to disadvantaged communities. Although specifications for the cap-and-invest program are not included in the FY23-24 budget, it does not mean that plans for an economy-wide carbon market have been stymied. It is now up to state regulators to take separate legislative action to get the program up and running. Despite a hit to the program’s momentum, there has been no short-term impact on the RGGI market.

 on Tuesday (2 May). The report highlighted a 19 million allowance reduction to the allowance surplus in 2022 compared to 2021 (87 to 68 million allowances). The reduction can be attributed, in large, to the interim adjustment for banked allowances after the last program review. The report also shows that by the end of last year, compliance-oriented entities currently had 92% of the allowances they need to meet their compliance obligations by the end of this year. The fifth control period ends this year and compliance entities must have allowances for 100% of their emissions from January 2021 – December 2023.

Emissions in the RGGI member states for Q1 of 2023 were reported at 21.8 MT CO2, down 17% year-on-year. The 4.45 Mt CO2 drop from 2022’s Q1 emissions (26.25 Mt CO2) comes as a result of the unseasonably warm winter in the Northeast that reduced demand for heating. Despite an anticipated bearish market impact (as allowance demand is thought to be low due to warmer weather conditions), the low-emission data came as the benchmark contract steadily increased throughout the week.

The benchmark contract will likely trade lower in the coming week as macroeconomic sentiment remains weak. A 0.25% increase in interest rates by the Federal Reserve earlier this week, in tandem with continued unease in the banking sector, will lead to increased risk-off behavior by financials – mitigating any notable increase in the contract price. Although the optimism over impending regulatory updates to RGGI has been bullish for contract prices in the short-term, it is likely that sentiment will begin to cool in the coming weeks as clarity regarding what these updates will be and when they will be implemented will come in the long-term.

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Week 18: RGGI front-December contract strengthens despite setback in New York’s cap-and-invest plans

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