In addition to joining in the Regional Greenhouse Gas Initiative (RGGI) in 2007, the state of Massachusetts also implemented an intrastate cap-and-trade program to limit greenhouse gas emissions from regulated electricity generators in January 2018. This program, the Massachusetts Limits on Emissions from Electricity Generators system, is administered by the Massachusetts Department of Environmental Protection (MassDEP). Covered compliance entities and emissions are consistent with the RGGI regulation. Massachusetts’s program is “complimentary” to the RGGI program, meaning covered Massachusetts entities must comply with both RGGI allowances as well as allowances from the statewide program, thus facing an additive carbon tax.
The program’s annual caps are calculated to meet the legal commitments passed by the state, and affirmed by the state’s Supreme Court in 2016, to reduce greenhouse gas emissions by 45% by 2030 and 80% by 2050, using 1990 as the baseline. Cap measurements are in metric tons of CO2 equivalents (mtCO2e), as compared to the short ton measurement used in the RGGI program.
Massachusetts’s annual cap was set at 9,149,979 mtCO2e for 2018, the first year of program implementation. The annual cap fell to:
The annual cap declines by 223,876 mtCO2e in each subsequent year, eventually reaching the targeted goal of 1,791,019 mtCO2e by 2050.
All the 2018 allowances in the program were freely allocated, not auctioned, directly to individual generators. Starting with the 2019 compliance year, the MassDEP began to transition from allocating allowances to using auctions as the primary mechanism for distributing allowances. For the 2019 and 2020 compliance years, the MassDEP distributed 75% and 50%, respectively, of the cap allowances through direct allocation, with the remainder through auctions. Beginning in the 2021 compliance year and moving forward into subsequent years, the MassDEP no longer distributed any allowances by direct allocation, but instead only offers allowances through auctions.
The MassDEP now distributes allowances through four quarterly auctions, starting in December of the previous calendar year for the subsequent compliance year and then three more auctions in March, June, and September of the actual compliance year. Only owners and operators of covered facilities may participate in the quarterly auctions. Currently, this includes 23 covered facilities in the state. Auction proceeds in Massachusetts are used to fund mitigation, clean energy, and vehicle electrification projects, as well as adaptation programs or projects involving communities adversely impacted by air pollution. On March 1st of each year, every generating facility’s account is required to hold sufficient allowances to satisfy obligations from the prior calendar year.
The four auctions for 2021 allowances cleared at:
Given the large surplus of allowances relative to 2021 emissions, the September prices in 2021 were likely driven by expectations of tighter conditions in subsequent years. However, in December 2021, the first auction of 2022 allowances sold out at a clearing price of $9.75 mtCO2e, a slight dip from the $10.00 price in September’s auction.
Questions? Contact our team for more information: environmental@aegis-hedging.com
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