Regional Greenhouse Gas Initiative (RGGI) CO2 allowances have hit record high prices to close the year, and updates to the power plant carbon market's rules could spur further increases in 2024.
Officials from the 11 participating RGGI states during their ongoing program review have said they are closely considering scenarios where the allowance budget declines to zero by 2035 or 2040, which would be far more ambitiousthan current rules where the cap declines by around 3pc/yr through 2030 but does not fall to zero.
Any changes to the cap trajectory or other aspects of the program will not come into force next year, but expectations of tighter supply conditions in future years could encourage more allowance banking at a time when demand is already strong ahead of a March 2024 compliance deadline. Program modeling to date forecasts relatively modest allowance prices through 2035 as federal incentives and state programs cut emissions, although some generators have expressed concern that this modeling includes overly optimistic assumptions about the pace of new renewables coming online.
Allowance price increases could be tempered by the program's cost-containment reserve, which offers more allowances if auctions clear at a high enough price, and by continued uncertainty over participating states. But the direction of travel in the RGGI market has been clear for months, with the December auction clearing price 19pc higher than the first auction of 2023.
The secondary market has followed suit. Argus assessed December 2023 allowances at $15.20/short ton on 27 December, 9pc higher than where they started the year.
It remains unclear how quickly the program review will conclude and when new rules will come into force. RGGI states have maintained that they are on track to wrap up their review by winter 2023-24, but that timeline has been delayed before. They have not decided on key policy issues, including whether to raise the cost-containment reserve trigger price and how to adjust future caps to account for a long-running allowance bank.
But in general, the next steps are clear. Once RGGI leaders agree on a "model rule," designed as a general framework that participating states can finetune, states will embark on their own respective rulemaking processes in 2024.
"Given where we are in the program review and how long it has taken thus far, my expectation would be that states would try to move quickly," said Mandy Warner, director of climate and clean air policy at the Environmental Defense Fund.
The process could be more involved in states where regulators must consider RGGI interactions with other climate programs like renewable energy mandates or potential economy-wide carbon markets. In the past, states have also adjusted the RGGI model rule to fit their own needs, with New York imposing requirements on smaller power plants than other states.
State of play
Next year could also bring more clarity on participating states. While members entering and exiting has long been a fixture of RGGI, the potential entrance of Pennsylvania — which would be by far the largest source of CO2 — and the pending withdrawal of Virginia loom particularly large.
Pennsylvania's Commonwealth Court in November struck down a CO2 trading regulation that cleared the state to enter the program, but Governor Josh Shapiro (D) has asked the Democratic-controlled state Supreme Court to review that decision. Environmental groups have also sued, saying they will make more sweeping arguments in defense of the program than the RGGI-skeptical Shapiro.
The Supreme Court already held a hearing this year to review an earlier preliminary injunction, meaning the justices have already closely considered the issue of RGGI before. A decision on the regulation's legality could come next year, at least making it possible for Pennsylvania to enter auctions.
Meanwhile, Virginia is likely to exit RGGI at the end of 2023 unless the court now hearing the case acts quickly and issues a stay. That case could take longer to resolve than those in Pennsylvania that have been working their way through courts for well over a year now, although there is still question over whether the Virginia petitioners have standing to sue.
