Potomac Economics has released the Annual Report on the Market for RGGI CO2 Allowances for 2013. Based on the data in the report, it appears that a functioning market for CO2 allowances is finally developing. What’s the evidence?

• The share of allowances held by investors as opposed to compliance entities increased from 6% to 24% over the course of 2013.

• The volume of allowance futures trading rose from 2 million in 2012 to 76 million in 2013.

• The number of participants in the RGGI auctions increased by an average of 53% in the 2013 auctions, and the number of investors submitting bids increased from an average of one per auction to 10 per auction.

All of this is good news for the long-term viability of CO2 allowance trading as a cost-effective approach to control over CO2 emissions. Why the sudden improvement in the market? The Annual Report provides two reasons. First, the RGGI states substantially reduced the emissions cap early in 2013. Second, an increasing expectation among market participants that EPA’s imminent GHG regulations will allow use of regional cap-and-trade programs has bolstered confidence in the long-term viability of the market. Both of these seems plausible.

Whatever the reason, a healthy market for CO2 allowances in RGGI can only be a good thing. (And for those of you worried about speculators invading the market, the Annual Report states that there is no evidence of market manipulation.)