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Calif. carbon allowance prices extend slide before next auction

California carbon allowances at the secondary market continued to ease during the week ended Aug. 12, as prices continued to unwind ahead of the upcoming Western Climate Initiative, or WCI, auction.

Broker data showed the August 2019 vintage 2019 California carbon allowance contract was down 16 cents from prior assessments made July 30, seen most recently in a bid-and-offer range of $17.17/tonne to $17.24/tonne. As of Aug. 12, the benchmark December 2019 vintage 2019 contract was pegged in a bid-and-offer spread of $17.40/tonne to $17.45/tonne, losing 14 cents from July 30.

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Thin trading due to tepid buying interest ahead of the Aug. 20 quarterly allowance auction has kept pressure on Calif. carbon allowances in the over-the-counter market heading into mid-August.

The upcoming auction will offer more than 66 million current vintage allowances, which will be comprised of 2016, 2017 and 2019 vintages, and more than 9 million future vintage 2022 allowances. Results will be released Aug. 27 by the California Air Resources Board.

In the WCI's May auction, 100% of the more than 66 million current vintage allowances sold at a record high of $17.45/tonne, up $1.72 from the previous auction price of $15.73/tonne in February. Additionally, at the May auction, 100% of the more than 9 million vintage 2022 allowances were purchased at $17.40/tonne, increasing $1.78 from February.

In the May auction, compliance entities bought 86.1% of the current vintage allowances, which were comprised of almost two million vintage 2016 allowances and more than 64 million vintage 2019 allowances, and purchased 84.9% of the future vintage 2022 allowances.

For the first time since 2017, the May allowance auction did not include previously unsold California allowances. As a result, about 14.5 million fewer allowances were offered than in the February auction. After the May auction, worries of tightening supply sparked active buying in the California carbon allowance secondary market before activity slowed down in mid-June.

Market sources anticipate that August auction prices could reach new highs due to active buying interest. Entities will likely to be looking beyond 2020 when the emissions cap becomes more stringent and the market floor price continues to rise.

California's cap-and-trade system covers emissions from utility and industrial facilities that emit more than 25,000 tonnes of carbon each year and from entities that opted-in to the program. Those facilities must purchase either carbon allowances or offsets to account for their annual emissions under the yearly emissions cap. The California and Quebec cap-and-trade programs were joined under the WCI at the start of 2014.

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