California’s Latest Cap-and-Trade Auction Shows Staying Power, Sparks International Interest

For those following cap and trade, today is another success for California’s economy and environment. The fourth auction came and went last Friday and the results published by the California Air Resources Board (ARB) are once again decisively positive. With complete sale of current allowances, diverse bidder participation and stable clearing price, the health and staying power of the carbon market is clear.  Let's take a closer look at the results:

Results Summary

Allowance year Allowances offered Allowances sold Settlement price
2013 13,865,422 100% $12.22
2016 9,560,000 100% $11.10

Current allowances sold and settlement price: All of the current 2013 allowances offered in this auction were purchased, which indicates that the carbon market remains healthy and competitive. The price per allowance settled at $12.22. This is 13% below May’s clearing price. While this dip was expected by analysts –with one contributing factor being the possible amendment to the cap-and-trade regulation that would increase free allowances to industry and natural gas emitters in the second compliance period — there are a number of reasons why the moderate prices for allowances are good news.

Low prices actually suggest that regulated companies believe they will have lower than expected costs in complying to allow California to meet the carbon cap. And as noted in a separate EDF post, the right way to judge a carbon market is in the cap, not the prices. Another promising reason for lower prices may be the fact that regulated entities like California refineries are investing in energy efficiency projects that cost-effectively reduce both emissions and the companies’ energy bills.

Future allowances sold and settlement price: For the first time in the history of the cap-and-trade regulation, all futures sold at a clearing price of $11.10 over the floor price $10.71. This points to increased certainty in the future strength of the market. As we approach the second compliance period, participants are preparing to meet their compliance obligations. In addition, the market is responding to ARB’s continued commitment to ensuring the longevity of this program by proposing changes like additional cost containment and maintaining stringency on the transportation sector. Another reason for strong demand in the advanced auction can be seen by the fact that over 96% of future allowances were purchased by compliance entities, meaning some of the programs biggest polluters may have started buying credits for their post 2016 obligations.

Qualified Bidders: With each auction, the pool of qualified auction participants continues to diversify. This auction saw 79 qualified bidders. This diversity in participants reflects the great interest in California’s carbon market and demonstrates that there is no single company controlling the market.

Auction proceeds: This auction brought almost $140 million to the state, for a total of almost $400 million to date. California communities should look forward to Governor Brown holding up his commitment to ensure those proceeds are used to advance the goals of AB 32, directing them towards the highest priority, most effective investments for climate pollution reductions, especially in disadvantaged communities which will get at least 25%  or almost $100 million to date.

Sparking International Interest

We’re about nine months into what many have called a “grand experiment,” and far from the doomsday warnings from opponents who argue California’s climate change law will hurt consumers, jobs, and the ability of businesses to expand.

Today, we are seeing a quite different future.

In fact, those sky-is-falling messages continue to be out of sync with economic reality and public opinion in both California and around the world.

A recent PPIC survey shows a record-high majority of Californians say California should act now to reduce greenhouse gas emissions, rather than wait until the economy and job situation improves. And various other jurisdictions are following California’s lead, including other states, provinces and countries. Since California’s first cap and trade auction in November 2012, the state approved linkage with Quebec; Shenzhen, a city on the South China Sea launched the first of seven Chinese regional pilot carbon market systems with California’s top climate change official, California Air Resources Board (CARB) Chair Mary Nichols in attendance at the launch; and the Australia Government Clean Energy Regulator signed a Memorandum of Understanding with California focusing on “information-sharing” to improve our respective market base programs to reduce climate pollution.

The California carbon market continues to march forward with good news. And while a true “global” carbon market may still be a ways off, others around the world are looking to learn from the Golden State.

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