Washington state’s second cap-and-invest auction shows strong demand

Photo Credit: Wendy Olsen Photography

Blog co-authored by Kjellen Belcher, Manager, U.S. Climate

Today’s results from Washington’s second cap-and-invest auction – most notably selling 100% of allowances – continue to signal strong demand for allowances and confidence in the program, bringing significant revenue for the state to reinvest in Washington communities. This is only the second auction held for the cap-and-invest program, following on a strong debut auction which also sold-out and raised almost $300 million in revenue which will be put towards efforts to further decrease Washington’s climate pollution and increase resilience to climate change.

May Auction Results

At the auction, administered by the Department of Ecology (Ecology), participating facilities submitted their bids for allowances. All of Washington’s major emitters are required to hold one allowance for every ton of greenhouse gas that they emit – with the total number of allowances available declining each year, requiring Washington’s businesses to reduce their climate pollution in line with the state’s climate targets. Here are the results, released today:

• All 8,585,000 current vintage allowances were sold.
• All 2,450,000 advance auction vintages were sold.
• The settlement price for current vintages was $56.01, which is $33.81 above the $22.20 floor price. This was well below the price ceiling of $81.47. With a settlement price of $56.01, this auction exceeded the Tier 1 trigger price of $51.90 for Washington’s Allowance Price Containment Reserve (APCR).
• Ecology has announced that revenue results will be released on June 28th. We’ll update this blog accordingly when that information is out.

The Allowance Price Containment Reserve: What it means

This auction demonstrated some of the key program features that were designed to keep allowance prices stable and predictable. Namely, this auction triggered the Allowance Price Containment Reserve, or APCR. The APCR functions as a soft price ceiling, wherein if a certain price level is reached (in this case, $51.90 at the first tier), a number of allowances set aside specifically for this scenario become available at a separate auction, which Ecology has scheduled for August 9th. More information about the APCR auction will be posted on the Ecology website on June 9th.

Critically, these allowances available at the reserve auction are still a part of the overall allowance budget set by Ecology to keep Washington on track to meet its climate targets. Even though triggering the APCR means that some more allowances are made available at auction, these allowances were budgeted out ahead of time for this exact purpose and do not put Washington over its planned emissions budget. As one of many price-stabilizing features of Washington’s cap-and-invest program, the APCR helps to keep prices predictable and ensures the long-term smooth operation of Washington’s program.

Other carbon markets, including the joint California-Quebec carbon market, utilize a similar approach to cost containment via a reserve of allowances that are only made available if a certain price is reached. A similar cost containment mechanism was triggered in the Regional Greenhouse Gas Initiative’s December 2022 auction. Opening the auction up to the allowances held in the APCR alleviates some of the pressure on the market, while still utilizing allowances from the program’s planned emissions budget – which is important for keeping Washington on track to achieve its climate goals.

Though it’s difficult to pinpoint exact causes, a number of external factors could contribute to strong demand for allowances, including greater fossil fuel consumption and uncertainty in the global energy market. Regulated businesses are actively planning their strategies to comply with the program’s declining limit on greenhouse gas pollution by reducing their own emissions or securing emissions allowances, and auction participants were eager to out-bid each other and claim allowances at an early opportunity.

A key tool for bringing prices down: program linkage

One important strategy for Washington to continue securing cost-effective pollution reductions is program linkage with the joint California-Quebec carbon market. Ecology recently concluded a public comment period on the question of whether or not to pursue linkage with the WCI, and is expected to make a decision this summer. Many organizations and individuals submitted comments in support of linkage, including EDF.

Linking markets would bring about significant advantages for all participating markets, including bringing down and stabilizing the prices of allowances for covered polluters and business in Washington while also enabling deeper cuts in climate pollution.

In a linked market, the common carbon price across linked systems broadens allowance trading partnerships and reduces price fluctuations, leading to a more efficient system with a bigger pool of emission reduction opportunities. This means more savings are available across the board. As we saw when Quebec and California linked their markets, linkage was able to deliver more regional emission reductions at lower costs than either jurisdiction would have achieved alone. Washington’s Department of Ecology published economic modeling on the expected impacts of linkage, which indicated that linkage with the WCI could cause a significant drop in the prices of allowances in a new system like Washington’s. In the most recent California-Quebec allowance auction, held in May, the current allowance settlement price topped out at $30.33. In a linked market, we could expect Washington’s prices to trend closer to that shared price point.

What’s next

This program is still in its very early days, and we will learn more about the trajectory of the market as trends in auction results develop over time – especially as the entities regulated by this program start to face their compliance deadlines and implement emissions reduction strategies. In the meantime, the next milestone to look forward to will be the auction of APCR allowances, which is currently scheduled for August 9th. The next regularly scheduled allowance auction will follow shortly thereafter on August 30th. For more in-depth analysis on Washington’s auctions, stay tuned to this blog series for quarterly auction updates from EDF.