Guest Author: Katie Hsia-Kiung, Former EDF High-Meadows Fellow
The holiday season is often considered a time to stop and take stock of the things that we are thankful for, and to celebrate the accomplishments of the past year. Today, California and Quebec have one more thing to celebrate: the successful completion of their first-ever joint cap-and-trade auction, which marks the last of many steps to fully harmonize the two carbon markets. Auctions are held quarterly and are opportunities for companies regulated by cap-and-trade and others to electronically bid on and purchase carbon allowances (permits to emit one metric ton of greenhouse gas emissions).
California and Quebec carefully prepare for full linkage of their programs
California and Quebec worked closely to design their cap-and-trade programs to ensure that the essential mechanisms and stringent targets were in place to allow for linkage. The jurisdictions both started their cap-and-trade programs on January 1, 2013, and formally linked their carbon markets a year later. At that point, carbon allowances originating from Quebec’s program could be purchased and used by a California company and vice versa. Until the most recent auction, the two jurisdictions held separate auctions, allowing time to update the auction system to handle bidding from multiple jurisdictions with different currencies, different time zones, and different requirements for the minimum allowable bid. This process of careful preparation culminated in a practice joint auction held at the beginning of August, which went smoothly according to reports from the California Air Resources Board (CARB), the regulatory agency responsible for overseeing the implementation of California’s cap-and-trade program.
Sustained strength of linked program reflected in results of first joint auction
The first real joint auction took place last Tuesday, after a great deal of preparation and some technical difficulties that caused a few days of delay. During this auction, companies from both California and Quebec bid together on the same collective pool of allowances, aligning allowance price over the two programs. The results of this auction were released today and revealed healthy demand in the linked market for cap-and-trade allowances. 100% of the current 2014 vintage allowances for sale in this auction were purchased by bidders at a price of $12.10, while 100% of the 2017 future vintage allowances offered were purchased at a price of $11.86.
Among the many things that may stand out from this joint auction (strong demand, stable prices, and participation by compliance entities), one thing is becoming increasingly clear – today’s positive auction results are tied to healthy market expectations for the future. First, with transportation fuels coming into the program starting in January 2015, demand for current and future credits was on the rise compared to the last auction. Second, with steadfast support for the cap-and-trade program from Governor Brown, coupled with increasing calls for longer term emission reduction targets, there likely aren’t many market participants that feel this program is going away any time soon. This was reflected in the strong demand for future credits in this auction, which can only be used beginning in 2017. Finally, with the minimum allowable bid price increasing by almost 7% at the start of 2015, market participants surely saw a benefit to securing credits today – a factor perhaps causing the price for current vintage allowances to clear at this new minimum.
In addition to a positive market response, by growing the pool of compliance options, program linkage can deliver greater regional emission reductions at lower costs than California or Quebec could achieve alone. Expanding the pool of participants by linking programs will result in more frequent trading, which reduces the chance of sudden spikes in allowance prices. An increase in market participation was already apparent in this auction, which had 83 registered bidders. This is more than the average number of bidders in the prior California-only auctions (77) and the average in the Quebec-only auctions (13). As demonstrated by the relative number of bidders from each jurisdiction, Quebec’s program is much smaller due to the relative size of the province and its corresponding emissions.
Californians believe we can have both ambitious climate policy and a strong economy
Earlier this week, California received more news that calls for celebration. The Public Policy Institute of California (PPIC) released a survey that found that the majority (72%) of respondents believe that the actions the state is taking to address climate change will result in either more jobs in the state or have no effect on jobs. In addition, 76% of Californians continue to believe that climate change is a serious threat to the state’s future economy and quality of life.
California and Quebec are off to a great start in demonstrating how to successfully link their climate change efforts, a partnership that can ultimately provide a viable model for other jurisdictions to follow.