Strength in Numbers: Linked California-Quebec Market Benefits Environment and Economy

KHK pictureBigger is not always better, but a recent cap-and-trade auction in Quebec gave us one example of why it may be the case for a combined California and Quebec carbon market.

The linkage of Quebec and California’s markets has been watched by many around the world, and the start of joint auctions in November 2014 is the final step in full linkage. Last month, however, both jurisdictions were busy conducting their last solo auctions. While the results of the California-only auction were as anticipated, the Quebec-only auction yielded both expected and less expected results.

What was not a surprise was that not all (83%) allowances offered for sale were purchased. Unlike in the California program, Quebec entities do not have to surrender any allowances this coming November. With their first deadline not until November 2015, Quebec entities have been understandably slow to enter and be active in the market. Another positive and not so surprising takeaway from Quebec’s last auction is high demand for 2017 allowances, a strong sign that Quebec companies are confident in this market’s future health.

More surprising to observers in Quebec’s recent auction, however, was that a higher percentage of 2017 vintage allowances sold than 2014 vintage allowances. Current 2014 vintage allowances can be used for compliance at any time, while 2017 vintage allowances can only be used starting in 2017. This longer useful life should make 2014 allowances more valuable and thus in higher demand, but this did not appear to be the case in the recent auction.

These seemingly incongruent results may be due to the small pool of participants in Quebec’s market – this auction had only 14 registered bidders, compared to California auctions which have an average of 77 qualified entities. With such a small universe of market participants, results can be much more influenced by the bidding strategies of a few companies or even a single company.

In November and beyond, we expect the joint auctions, with a much larger pool of market participants, to yield more predictable results, which is important for businesses that must plan ahead. An expanded market means a larger portfolio of emission reduction opportunities. This allows companies to maximize cost effective strategies, which will reduce overall emission reduction costs and increase program efficiency. The increased pool of participants in the combined market is also likely to produce more frequent trading activity, which reduces the chance of sudden spikes in allowance prices with a continuous stream of buyers and sellers coming to market.

Quebec raised almost $24.5 million Canadian Dollars (CAD) from last month’s auction, which will go into the province’s Green Fund and will be used to fund its 2013-2020 Climate Change Action plan. This plan calls for investing $2.7 billion CAD into various greenhouse gas reduction initiatives, including transportation, energy, and land-use projects.

Now that California and Quebec have successfully completed their last solo auctions, the two partners are set for joint auctions, paving the way for other states, provinces, and countries to seek the benefits of collaborative climate action.

This entry was posted in Auction revenue, Cap and trade, Cap-and-trade auction results, Climate, Global Warming Solutions Act: AB 32, Linkage. Bookmark the permalink. Both comments and trackbacks are currently closed.

One Comment

  1. Maxime Alexandre
    Posted September 24, 2014 at 10:09 am | Permalink

    Dear Katie,
    You’re doing a good analysis of that last Quebec’s auction; it is an incongruent result. Current vintage is more valuable than future vintage and it should have been reflected in August 26th results. Moreover, given the facts that 1) V2014 sells out every auction in California and 2) next auction will be a joined one with a floor price elevated (+10%) from Quebec’s perspective due to currency exchange rate, V2014 should definitely have sold out. You would not see that kind of abnormal thing happen in California's auctions.

    The true reason for this incongruent result is that unfortunately, Quebec’s participants in the market are way less prepared, compared to California’s. A lot of factor comes in (cultural, legislative, respective sizes of economy, etc.) and the bottom line is that it isn’t a level playing field.

    The mouse decided to dance with the elephant, and it’s about to realize that when the elephant turns, the mouse swing all around.

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