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Calif. carbon allowance prices advance to close out May

Over-the-counter prices for California carbon allowances advanced during the week ended May 31, on the heels of the most recent Western Climate Initiative greenhouse gas auction.

According to broker data as of May 31, the June 2017 vintage 2017 contract was marked in a bid-and-offer range of $14.08/tonne to $14.14/tonne, increasing 6 cents from prior weekly assessments. The May 2017 vintage 2017 contract closed out its run on May 25 in a bid-and-ask spread of $14.04/tonne to $14.08/tonne, flat on the week but down 9 cents from the start of May.

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As of May 31, the benchmark December 2017 vintage 2017 California carbon allowance futures contract seen at a level from $14.25/tonne to $14.31/tonne, rising 7 cents week over week.

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In the latest quarterly greenhouse gas allowance auction held May 16 by California and Quebec, 100% of the more than 75,311,960 current vintage allowances were sold at US$13.80/tonne.

Results issued May 24 by the California Air Resources Board showed the current vintage auction included almost 11,000,000 vintage 2017 allowances that were consigned to prior auctions but had not been sold. Additionally, 2,117,000 of the more than 9,723,500 vintage 2020 carbon allowances were purchased at the market reserve price of US$13.57/tonne.

In the prior WCI auction held in February, more than 11.67 million of the 65,104,273 current vintage allowances, or roughly 18%, were scooped up at US$13.57/tonne. Also, 701,000, or about 7%, of the more than 9,723,500 vintage 2020 carbon allowances on offer in the February auction were bought at US$13.57/tonne.

"With the auction #11 result now behind us, the key take away is that despite the regulatory uncertainty, the market design is robust and compliance entities need to be ready to comply with the system by November 2018. As pointed out previously, the supply and demand of the market is currently tight. The reason for this is that most of the oversupply (143 Mt) is now sitting with the ARB in a reserve that will be reintroduced only after 2 auctions in a row are fully subscribed. We therefore expect the market to remain tight in the coming months, and this means that the August auction should again sell out above the floor before more volume from the reserve gets reintroduced," according to a May 26 report from ClearBlue Markets.

Several market sources attributed the increased demand in the most recent auction, in part, to renewed confidence in the market following a recent court decision upholding the California cap-and-trade program.

Although the California Chamber of Commerce has filed a petition with the state Supreme Court, the California Third District Court of Appeal on April 6 affirmed a lower court ruling in the lawsuit challenging the program, brought by the Chamber and Morning Star Packing Co., a food processor. The Sacramento Superior Court ruled in favor of the California Air Resources Board at the end of 2013. The petitioners appealed.

The parties claimed the program was not authorized by Assembly Bill 32, which set the greenhouse gas emissions standard in California. Opponents of the cap-and-trade program argued that the program constitutes an illegal tax because it was never approved by a two-thirds vote as required by the 1978 voter initiative known as Proposition 13.

Several weeks ago, California carbon allowance prices had retreated after California Sen. Bob Wieckowski, a democrat, proposed legislation to overhaul the California cap-and-trade program. SB 775 would implement a price floor and ceiling during the quarterly auctions with annual compliance obligations as opposed to three-year periods. The bill would also prohibit the use of carbon offsets for compliance.

Gov. Jerry Brown will only sign a bill to extend California's carbon cap-and-trade program if at least two-thirds of the Legislature approves it, according to recent reports.

Market prices and included industry data are current as of the time of publication and are subject to change. For more detailed market data, including power and natural gas index prices, as well as forwards and futures, visit our Commodities pages.