The results of California and Quebec’s carbon market auction released today show that the market can operate as designed and continue sailing along.
Participants in the Feb. 17th auction, California and Quebec’s 6th joint auction, had an opportunity to bid on over 81 million carbon allowances. Of those:
- 71.5 million of those allowances were current vintage allowances (2016 and earlier), which regulated businesses can use this year or in any future year for compliance. 95% of current vintage allowances sold at the minimum floor price of $12.73. In the November 2015 auction, prices anticipated the 2016 floor price and sold at $12.73 although the floor price was about 60 cents less.
- Just over 10 million of those allowances are only available for use in 2019 and after. 93% of the 2019 vintage allowances sold at the floor price of $12.73.
These results show steady prices and average participation by regulated businesses. It is somewhat unusual that some current allowances did not sell at this auction. However, these auction results demonstrate an important feature of the California-Quebec market that safeguards against large price swings like those seen in other commodity markets: a minimum price floor in every auction that increases steadily each year. Therefore, although not all allowances sold, the price for allowances sold at this auction was exactly the same as that paid for allowances in November 2015, no price dip. The unsold allowances will be recycled back into the state auction account and will be offered for sale next time prices rise above the floor price. In other words, the carbon market’s design is working.
There is every reason to believe that California’s market will continue to see mostly smooth sailing ahead.
In the early days of the California market steady prices and solid demand for allowances indicated that businesses were ready to comply with their new obligations. Those early indications proved accurate when close to 100% of businesses met their allowance surrender obligations in 2014 and 2015 for the first compliance period.
Now with the carbon market maturing, steady prices and solid demand are important indicators about the long-term outlook for the carbon market. California’s cap-and-trade program only has a carbon budget set through 2020, although the Air Resources Board has indicated they plan to extend that this year. The demand for allowances and prices we’ve seen today is not remarkably low, but we could see an uptick – when ARB extends the cap-and-trade regulation beyond 2020 and the market gains certainty about future reductions.
As California’s auctions settle into a mature pattern, EDF will be watching how the market continues to react to California’s efforts to reduce emissions post-2020 and to how auction proceed investments are benefiting Californians.