San Francisco Golden Gate Bridge. Photo by Juan Salamanca.
The second California-Quebec-Ontario joint greenhouse gas allowance auction has sold all current allowances, just like the inaugural tripartite auction in February 2018. There was again strong demand for future allowances, all indicating that despite political and regulatory uncertainty from a key partner, Ontario, the market is on solid ground.
May auction at-a-glance:
- All 90,587,738 current and previously-unsold allowances sold, clearing at $14.65, which is 12 cents above the $14.53 price floor. This is slightly higher than the February settlement price.
- 6,057,000 of the 12,427,950 future vintage allowances offered sold at the floor price. This is 2,519,000 million less than sold at the February auction. The decrease is likely due to ongoing uncertainty in Ontario, but as these allowances are not available for use until 2021, it is still an indicator of confidence in the Western Climate Initiative market down the road.
- An estimated $681,051,270 was raised for California’s Greenhouse Gas Reduction Fund to continue funding climate and equity priorities like urban greening, electric vehicle infrastructure, and affordable housing near public transit.
- Ontario raised approximately $369,271,300 USD for funding public transit, electric vehicle incentives and energy efficiency upgrades.
- Quebec raised approximately $151,353,660 USD to support the province’s transition to a green economy.
These results are encouraging because they show that despite ongoing political uncertainty in Ontario, the market is strong and stable. They also show the benefits of linkage to a larger market are real. All three linked jurisdictions have access to more trading partners through the Western Climate Initiative, which creates opportunities for even greater climate ambition. This kind of international cooperation shows that jurisdictions can have an outsized influence on global climate action, particularly at a time when federal leadership from the United States on climate is lacking.
Previously unsold allowances
The role of previously unsold allowances could also be impacting today’s auction results in two ways.
First, this is the third auction where held, or previously unsold allowances were offered for sale. These allowances increase the number of available allowances in the auction, which may contribute to keeping the price near the floor. This demonstrates the importance of that price floor. It is a central feature of the program that ensures stability of the market and the revenues.
Second, back in July 2017 the California Air Resources Board (CARB) adopted the so-called “24 Month Rule.” This establishes that any state-owned allowances that remain unsold for 24 months are either moved to the Allowance Price Containment Reserve (APCR) or retired. This has the effect of tightening the cap either temporarily (if prices were to unexpectedly jump) or permanently. The first significant retirement of allowances could happen after the August auction, so companies could be buying now in anticipation of decreased supply later.
Looking Forward
CARB is in the process of drafting a regulatory update for the cap-and-trade program post-2020. The program has been successful at reducing emissions, as demonstrated by current emissions being below the cap, even as California has grown to the fifth largest economy in the world. This emissions trend provides an important opportunity for California to continue driving increased ambition by setting a tighter post-2020 emissions cap, and continue showing that ambitious climate action can go hand-in-hand with strong economic growth.
Of course the biggest question in the linked carbon market right now is Ontario, which is having elections in June. Although two of the leading parties want to preserve the program, one party wants to end it, but would need to overcome a mountain of legal hurdles. The outcome of the June election could set up either increased confidence in the future of cap-and-trade in Ontario or lingering questions. But the results for both current and future vintage in this auction indicate that confidence is steady, and the California-Quebec-Ontario market remains a world leader in driving climate action.