Washington state carbon market auction prices drop sharply amid threat of CCA repeal

Washington's carbon market saw a sharp drop in prices in its latest emissions auction, state Department of Ecology data showed March 13, as the program faces repeal in the upcoming November election.

The settlement price for Auction No. 5, held March 6, was $25.76/mt, a 50.36% drop from the previous quarter and only $1.74/mt above the current floor price.

All of the 7.4 million allowances were sold, with compliance entities winning 91.31%. Ecology offered 5.2 million allowances while the other 2.2 million allowances were offered through entity consignment, Ecology data showed.

The previous auction, Auction No. 4, represented a 17.7% drop in the clearing price after the previous two auctions triggered the release of reserve allowances because of high costs.

Legislation affecting the program

The Washington Department of Ecology oversees the state's cap-and-investment trading program, which Washington's Climate Commitment Act created in 2021. The act set a statewide emissions cap with a ratcheting mechanism that aims to decarbonize the state by 2050.

An initiative will appear on ballots in November giving Washington voters an option to repeal the CCA, effectively eliminating the carbon market. Washington Initiative 2117, follows two different carbon pricing ballot initiatives in 2016 and 2018, both of which voters rejected.

While S&P Global Commodity Insights is not making a particular call on the fate of the program at this time, said Matt Williams, emissions and clean energy analyst at S&P Global, he said the initiative was the primary reason for the price downturn in the latest auction.

"If the program survives this ballot challenge, the fundamental picture is still bullish," Williams said. "Annual cap declines of 7% with no opportunity for coal-to-gas switching, hydro generation below recent averages, electric vehicles making up only 2% of the current light-duty vehicle fleet, and no linkage with California and Quebec until later in the decade, suggests supply reductions will outpace demand reductions."

Critics of the program say it drives up gasoline prices in the state, while Governor Jay Inslee, in his State of the State address, has pinned high prices on the oil and gas industry. In the speech, Inslee called for transparency and accountability from industry members.

Some state Republicans proposed a bill called the "carbon auction rebate," which would turn some of the revenue from the carbon market into checks for Washington residents. Republican authors of the bill say the checks, for about $180 per registered vehicle owner, would address high gasoline prices.

Meanwhile, state Democrats proposed changes to the program to stabilize auction prices by slowing down annual reductions in state emissions. The legislature is also considering rule changes to potentially merge the program with California's and Quebec's joint cap-and-trade program. Ecology representatives say the linkage could stabilize emissions prices.