Wind farm in the Mojave Desert. PC: Tom Brewster Photography for the Bureau of Land Management.
The latest results of the Western Climate Initiative’s quarterly auctions were announced today. All current and future vintage allowances sold, and for the second quarter in a row, settled at a record-high allowance price.
These results arrive as new data underscores the success of the program’s design and the strength of the market.
Auction quick takes:
- All 68,598,217 current vintage allowances offered were sold; this is the fifth consecutive sold out auction. This auction offered approximately 2.6 million fewer allowances than the August 2021 auction, primarily due to fewer previously unsold allowances being re-offered for sale.
- Current vintage allowances cleared at $28.26, which is $10.55 above the floor price of $17.71 and $4.96 higher than the August 2021 clearing price of $23.30. This quarter’s settlement prices beats the price record set in the previous auction and is also the largest price increase between auctions seen in the program’s history.
- All of the 8,306,250 future vintage allowances offered for sale sold, just as 100% sold in the previous four auctions. These allowances may not be used for compliance until 2024.
- Future vintage allowances sold at $34.01, $16.30 above the floor price of $17.71, and $10.32 above the $23.69 settlement price from August 2021. This tops the price record set at the previous auction and easily sets a record for the greatest price increase from one quarter to the next.
- California raised almost $1.3 billion for the Greenhouse Gas Reduction Fund, which supports myriad climate and equity initiatives. For example, the California Air Resources Board just adopted the largest-ever Clean Transportation Incentive funding plan that addresses emissions from light, medium and heavy-duty transportation as well as expanded mobility options, in large part with revenue from the cap-and-trade program.
- Quebec raised almost $300 million USD or just over $375 million CAD for their own climate investment priorities.
What these high prices could mean
Before diving into the factors behind today’s results, it’s important to remember that the measure of success of a cap-and-trade program is not the price of an allowance, but the ambition of the cap—and whether it is appropriately calibrated to ensure the participating jurisdictions are reducing emissions at the pace and scale necessary to avoid the worst impacts of climate change. This is why the level of the cap is of paramount importance, and California should be considering opportunities to drive more greenhouse gas emission reductions with a more ambitious emissions cap as it updates the Climate Change Scoping Plan.
Now back to what could be driving these high prices. This is the second consecutive auction to set a record sale price for allowances. Higher demand for allowances drives prices up, and these are a few of several potential reasons for the increased demand:
- The floor price of allowances increases each year at 5% plus the rate of inflation, and the November auction is the final opportunity to buy allowances with the current floor price. To calculate the new floor price, CARB uses the most recent 12 months of the consumer price index to determine the rate of inflation, which at the end of October was just over 6%. This means that the price floor will likely increase significantly more than seen in previous years, and businesses could be planning ahead in case of higher prices in the future.
- The emissions cap is also declining more steeply now than it was in 2020 and earlier. This means that fewer allowances are issued each year, which means fewer greenhouse gas emissions are allowed. If allowances are more scarce, this could also point to the potential for higher allowances prices in the future. Again, businesses could be planning ahead.
Additionally, today’s results reflect that prices on the secondary market have also been at record-highs recently. The secondary market is where business and investors can buy and sell allowances outside of the state-run auctions. This market plays an important role in ensuring the liquidity of the market – that is, helping ensure that whenever a company needs to buy or sell allowances there is always another buyer or seller available.
As with the auction results, expectations of the price floor and future allowance supply could be impacting trades on the secondary market, but there have also been a number of new investors entering the market. Investors often purchase allowances in the same way one might purchase stocks – to hold and sell later when hopefully the price is higher. This trend could be an important part of the explanation for higher prices. And it can further boost climate progress, as higher allowance prices can catalyze investment in near-term emission cuts. Increasing emission reductions right now decreases the cumulative emissions impact on the climate, which is key for minimizing long-term climate damage.
But at the end of the day, the key metric of a successful cap-and-trade program is not the allowance price, it’s the volume of greenhouse gas emission reductions.
In other cap-and-trade news
Today’s auction results follow on the heels of two other recent news items on California’s cap-and-trade program.
First, CARB reported that emissions covered by California’s emissions cap declined 10.4% in 2020. This drop is likely in large part due to the Covid-19 pandemic, and we already know that globally emissions have rebounded to pre-pandemic levels. While states and countries are not reducing emissions as fast as needed to avoid the most devastating consequences of climate change, California’s approach does offer a model for action. When well-designed, an economy-wide, binding limit on greenhouse gas emissions, like the one in California and now in Washington as well, provide the greatest possible certainty that pollution will decline at the pace and scale required to meet climate goals.
Second, CARB has announced that all of the companies covered by the cap-and-trade program have met their compliance obligation for the 2018-2020 compliance period. While detailed data will be released in the coming weeks, this is an important indicator of the strength of the program and its design. Businesses understand the program, understand how to comply, and all the while California continues to cut its emissions and grow its economy.
California has long been a global leader on climate action and developed an important model for turning climate pledges into climate policy. As other states look to follow suit, California must ensure that its climate policy is ambitious enough to meet the urgency of the climate crisis.