California-Quebec market continues to thrive

Alta Wind Energy Center, California, Photo source: Steve Boland/flickr

February’s joint California-Quebec cap-and-trade auction demonstrated again that the market is strong. Despite uncertainty over PG&E’s position in the aftermath of its bankruptcy filing last month, all current and two-thirds of future allowances sold.

February’s auction by the numbers:

• All 80,847,404 current allowances sold, including previously unsold allowances and consigned allowances from utilities like PG&E. This sale cleared at $15.73, 11 cents above the floor price of $15.62.
• 5,983,000 of the 9,038,000 future vintage allowances offered also sold at the floor price. These allowances are not available for use until 2022. This is the first auction since the floor price increased to $15.62, so businesses have three more auctions at this price floor to purchase allowances that cannot be used for three more years.
• Approximately $853,508,096 was raised for the Greenhouse Gas Reduction Fund which the state uses to support climate investments in frontline communities, improvements in local air quality, and other projects to further reduce greenhouse gas emissions.

Planning Ahead:
As with previous auctions, the steady demand indicates that businesses appear to be planning for the future. They could be doing this for at least two reasons:

1. This will be the last auction that includes previously-unsold California allowances offered for sale, though a much smaller volume of previously-unsold allowances from Quebec could be available at the next auction. But either way, this means that allowance supply will somewhat contract after this auction, which could drive allowance prices higher. Companies could be planning ahead and purchasing allowances now when they are less expensive.
2. Businesses might also be looking to post-2020 when the emissions limit declines more steeply than it has so far. As the cap becomes more stringent and the floor price continues to rise, allowances will become more valuable, and companies might be anticipating this.

These factors illustrate one of the benefits of the cap-and-trade program: the flexibility for businesses to save a small number of allowances for future use. As some might have done in this auction, companies can buy allowances today and “bank” some of them to use when the allowance price is expected to be higher. There is a clear environmental benefit to this option: an allowance purchased today and not turned in represents one ton of greenhouse gas emissions that are not emitted into the atmosphere now. This means fewer years during which that ton of pollution is damaging our climate. These reductions early in the cap-and-trade program are essential to reducing our cumulative greenhouse gas emissions and eventually meeting California’s 2030 climate target.

PG&E questions, cap-and-trade resilience
The strong results of February’s auction don’t minimize the fact that there is uncertainty around the future of PG&E after it filed for bankruptcy. But when it comes to cap-and-trade, the program is designed to be resilient and to provide more certainty. The cap-and-trade regulations specify that utilities, including PG&E, are to receive allowances directly from the California Air Resources Board. The utilities then have to turn around and sell those allowances in the quarterly auctions, as PG&E did in this case. The revenue raised from these consigned allowances has to be used to benefit ratepayers, which funds the semi-annual California Climate Credit on most utility bills.

It is also important to recognize that one of the benefits of having a large and liquid market, like California and Quebec’s, is that a single participant likely won’t have an outsized impact on the auction results because there are always a lot of trading partners. Many trading partners helps to make the market more resilient, and would be one of the benefits to another jurisdiction if they linked with California and Quebec.

Additionally, all California utilities have a legal obligation to serve their customers, which includes complying with regulations like participating in the cap-and-trade program. Because of this requirement, PG&E could not sell off allowances early to raise funds to assist in the bankruptcy proceedings. Furthermore, should PG&E ultimately be restructured, the cap-and-trade compliance obligation would transfer to any successor entities, according to a rule adopted by CARB in May 2018. The purpose of this was to guarantee the environmental integrity of the cap by ensuring all emissions are accounted for even when businesses change hands, either through sale or bankruptcy.

While there are a lot of unknowns around PG&E right now, the integrity of California’s emissions cap and the coverage of PG&E’s emissions does not seem to be among them, demonstrating an important resilience feature of the cap-and-trade program.