Early RGGI trades reflect confidence in market: observers
Washington DC Mar 20 2008
The first batch of RGGI trades to emerge in the $5-$10 range this week is a signal of confidence in the nascent northeast carbon market, according to market participants and observers.
"The brokers have been shopping deals and stirring up excitement for a bit now. Now we have the first real actual allowance trades -- I think that will probably get people's attention," said Steve Schleimer, director of energy and environmental market regulation at Barclays Capital.
On Wednesday, Energy trading firm Koch Supply & Trading and Texas Environmental Partners announced they completed the first forward trade of RGGI carbon allowances at $7 per short ton. That deal of 5,000 credits for the 2009 vintage was brokered by Evolution Markets.
The forward trade deal came on the heels of the 14 February announcement by Ecosys Capital Advisors and energy trader Vitol that they completed the first publicly-announced compliance trade of carbon dioxide emissions allowances for RGGI. That deal, arranged by environmental brokerage firm Icap, included four traded options of "several thousand tonnes each" trading in the range of $5 to $10.
"I think that in most of these markets you see pre-market activity going on beforehand. How deep is it going to be will be something we have to look at," said Schleimer. "People are increasingly confident that this market will work."
Thaddeus Huetteman, a co-chair of the Environmental Markets Association and president of Power and Energy Analytic Resources (Pear), said that the $7 per ton allowance price reflects a risk premium in the value of RGGI allowances. And that risk stems from the uncertainty attached to the decision by most participating RGGI states to auction off nearly 100 per cent of allowances instead of allocating allowances for free.
"That price doesn't surprise me given the perceived risks associated with auction," said Huetteman, pointing out that Pear's estimates of RGGI allowances were well-below the $7 per-ton price.
He said that early experimental trades transacted before a compliance market officially begins generally fetch higher prices. Huetteman expects the price to go down as the date of the first auction approaches.
Emilie Mazzacurati, a senior analyst at Point Carbon, said she was encouraged by seeing trades come in over $5, especially given the fact that RGGI announced the minimum bid price for the first regional auction on 10 September to be $1.86.
"These are the best price signals so far. Now we are getting a repeated signal that prices will be over five dollars per short ton," said Mazzacurati.
Market players will be looking at emissions data for RGGI states for 2007, she said.
A Point Carbon study published last summer indicated that RGGI's market would be long, as the region's emissions had fallen due to favourable weather conditions and fuel-switching from oil to natural gas in 2006.
Mazzacurati reckons prices are likely to retain their current value, because the RGGI is likely to be overtaken by a federal system before its planned end-date of 2019.
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