The strong results of today’s California-Quebec cap-and-trade auction once again illustrate the stability of the market as all current and future allowances sold. At the same time, we are seeing some interesting market trends.
May auction at-a-glance
- All 66,321,122 current allowances sold, clearing at $17.45, $1.83 above the floor price of $15.62. This is the highest price and highest premium on the floor price seen in a linked Western Climate Initiative (WCI) auction, and $1.72 higher than the February 2019 clearing price.
- More than 14.5 million fewer allowances were offered for sale than at the February auction because there were no previously unsold allowances from California. This is the first time an offering has not included previously unsold California allowances since August 2017.
- All of the 9,038,000 future vintage allowances offered also sold at $17.40, $1.78 above the $15.62 floor price. These allowances are not available for use until 2022.
- The auction raised over approximately $740 million for the Greenhouse Gas Reduction Fund, which California uses to support climate investments in agriculture, transportation electrification, and improving local air quality.
- Quebec raised over approximately $250 million CAD (approximately $190 million USD) to fund climate investments in the province, adding to the $3 billion CAD in revenue already generated.
So why is the price significantly above the floor price? A couple of different factors could be contributing to the clearing price in May’s auction:
– The auction did not include previously unsold California allowances. This tightened the supply of allowances available compared to previous auctions. While there were still 1.9 million previously unsold allowances from Quebec offered, this more limited supply likely contributed to the higher clearing price. Unsold allowances return to auction after two consecutive sellout auctions, but the run of sellout auctions since May 2017 means no more unsold allowances are available. As such, the market will have to get used to this smaller supply of allowances for the foreseeable future.
– Higher prices on the secondary market, that is, private trading not run through WCI auctions. Prices have been higher on the secondary market since right after the February auction when they rose almost to the expected 2021 floor price of approximately $17.88. This could be because companies anticipate even higher prices post-2020 and so are buying now, or because they anticipate auctions with tighter supply so were purchasing the allowances they need on the secondary market.
The secondary market is important for “price discovery.” Participants learn from observing the secondary market the going value for allowances and this affects bidding behavior in the auctions as well. The secondary market is also where companies can sell their excess allowances or purchase additional allowances they cannot get at auction. This is an important function to ensure market liquidity and stability.
– Greater demand in anticipation of even higher prices in the future. As California looks to the 2030 target, the emissions cap will become even more stringent. Companies could be buying now in anticipation of tighter supply in the future. Fewer allowances for sale means higher prices. Greater demand today also makes prices higher – but prices are still lower today than they will be post-2020. This early price indicator is important as it will send a signal to companies to keep working to reduce emissions now, if possible, which in turn can smooth the transition to a clean economy, making it as cost-effective as possible.
Market trends to watch:
– Oregon’s ambitious cap-and-invest program is on the move. Oregon’s cap-and-invest bill (HB 2020), a national model for climate action, passed out of its first committee Friday. If adopted, this bill would create a program that places a firm, economy-wide limit on greenhouse gas emissions and creates a strong foundation for linking with California and Quebec. While many steps remain before a potential linkage, there is interest from Oregon in eventually taking those steps. Adding another player to the WCI market would increase market liquidity and ensure there are always sufficient trading partners for all market participants, especially as Oregon could have higher demand for allowances than supply, according to analysts at CaliforniaCarbon.Info ($). For Oregon, one of the benefits of linkage with WCI would be utilizing a trading system that is already up and running smoothly, an administratively efficient solution.
– Pacific Gas & Electric is sitting out auctions, though they still consigned allowances allocated to them by the California Air Resources Board for the benefit of their ratepayers. This means that demand may be even higher in future auctions as PG&E potentially has to purchase more allowances to make up for the auctions they skipped in February and now in May. If there is higher demand for allowances, then prices will continue to increase.
– Possible good news on California transportation emissions? California has made great strides in reducing its greenhouse gas emissions, but transportation emissions have been stubborn and even ticked up slightly in recent years. However, preliminary 2018 data from the California Department of Tax and Fee Administration show that the state’s revenue from diesel and gasoline taxes was down last year – the first it has decreased since 2012. Since the amount of fuel taxes people pay corresponds to how much they drive, it is an early indication that the state’s transportation emissions may have peaked in 2017. We will be eager to see the preliminary emissions inventory come out next month to get a better picture of any progress on transportation emissions.
Today’s results show that WCI is functioning as a mature market. It is able to withstand rising prices and fluctuating supply and demand, while working smoothly with a robust secondary market, and perhaps taking on additional trading partners down the road. Speaking of road…we will be sure to report on the next set of transportation emissions data to see if this good news holds!