Regional Greenhouse Gas Initiative (RGGI): What Investors Need To Know and How To Get Involved

SustainFi September 7, 2021

  • RGGI is a carbon emissions trading scheme covering 11 states in the Eastern U.S.
  • Carbon prices under the scheme increased by nearly 40% over the past year
  • Although there is no way for individuals to invest in RGGI carbon credits directly, you can still participate through buying KRBN, an ETF that invests in carbon credits including RGGI allowances

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What are carbon credits?

Carbon credits are government-issued allowances to emit polluting greenhouse gases. Each carbon allowance permits its owner to emit one ton of CO2.

Polluting businesses like power plants are given or must buy allowances each year. The total amount is reduced over time. Industries must transition to greener technologies or buy allowances from others. Those that decarbonize quicker can make money selling allowances.

There are many regional markets for carbon credits. The European Union (EU) is the oldest, but there are also markets in China, the U.K., and New Zealand. The U.S. has two carbon markets, in California and the Eastern U.S.

🔔 Learn about EU carbon credits and how you can trade them.

An introduction to the Regional Greenhouse Gas Initiative (RGGI)

Launched in 2009, RGGI is an effort by 11 states in the Eastern U.S. to cap and reduce CO2 emissions from the power sector. It is the first emissions trading scheme in the U.S.

RGGI states require power plants to buy “permissions to pollute.” The amount of available permits shrinks by about 3% each year (between 2021 and 2030). This encourages power plants to reduce emissions.

RGGI participating states include:

  • Connecticut
  • Delaware
  • Maine
  • Maryland
  • Massachusetts
  • New Hampshire
  • New Jersey
  • New York
  • Rhode Island
  • Vermont
  • Virginia

Pennsylvania is considering joining RGGI.

RGGI participants aim to reduce carbon emissions by 30% between 2020 and 2030, the equivalent of taking 28 million cars off the roads for a year. Since its inception, RGGI has successfully reduced CO2 emissions from power plants by 40%. At the same time, electricity rates in participating states have fallen by 3.4% on average.

RGGI carbon prices are going up

RGGI carbon prices are up nearly 40% over the past year (through August 2021), and have more than doubled since the first auction in 2008, which cleared at $3.07.

Source: ICE

The latest auction, in June 2021, cleared at $7.97 per ton, and secondary market prices after that hovered at $8.25-$8.50. In September, future prices exceed $9.

The scheme includes a price support mechanism. If prices drop too low (to $6 in 2021, growing by 7% each year after that), most RGGI states can reduce the amount of allowances so that prices rise. This is clearly good news for investors.

However, RGGI can sell extra allowances if prices exceed predetermined levels, such as $13 in 2021. These “reserve” prices grow at 7% each year. But current prices of around $9 are still low relative to the reserve price.

RGGI prices are still much lower than prices in California ($23.3 at the August auction) and the European Union (€61 for December 2021 futures.) (All prices are calculated per ton of greenhouse gas emissions.) Some traders believe that regional carbon prices should converge over time.

How you can get involved

There is no easy way for individuals to invest in RGGI carbon allowances directly, but you can still participate by buying an ETF. KraneShares Global Carbon ETF (KRBN) is the only ETF on the market that invests in RGGI carbon credits.

RGGI credits are roughly 7.5% of the fund, and the remainder of the fund invests in larger carbon allowance markets in the EU and California. (China may be added in the future.)

🔔 Learn more about KRBN here.

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