Last week on August 15th, Quebec and California of the Western Climate Initiative held the twelfth joint cap and trade auction. The auction was a success, with both current 2017 and future 2020 vintage allowances selling out completely. The success of the auction reflects that the cap and trade program is firmly cemented into the climate change policy frameworks of both California and Quebec. This is positive for Ontario, which plans to join the WCI auctions in 2018.
Cap and Trade Auction Results
All of the 63,887,833 current 2017 vintage allowances and 9,723,500 future 2020 vintage allowances were sold. The auction reserve price for both current 2017 and 2020 vintage allowances was set at $17.24 CAD ($13.57 USD). The settlement price for the current 2017 vintage was more than a dollar higher than the auction reserve price closing in at $18.74 CAD ($14.75 USD). This is the largest premium above the settlement price since the joint auctions began. The 2020 vintage settlement price was also notably higher than the reserve price at $18.49 CAD ($14.55 USD). It is the first time that 2020 future vintages have sold out since November 2015.
Also of note is the increase of the bid-to-cover-ratio for current and future vintages. The bid-to-cover-ratio is the total qualified bids divided by total allowances available for sale. The ratio for 2017 current vintages in the 12th auction is 1.79 compared to 1.23 of the 11th auction. This indicates a sharp increase in demand for emission allowances. For 2020 future allowances, the jump was even greater from 0.22 in the 11th auction to 1.84 in the 12th auction.
The latest cap and trade auction will generate an expected $640 million USD in revenue which is an all-time high. California and Quebec will spend the proceeds on initiatives that aim to reduce greenhouse gas emissions.
The Promising Future of the Cap and Trade Program
The successful cap and trade auction points to a strong future for the cap and trade program. Over the past few months, the program has received attention from politicians and the press. The fate of the program was uncertain.
SB 775, a Bill proposed by the California Senate, could have overhauled the program and cancelled the use of offset credits. Instead, another piece of legislation passed, Bill SB 398, which extended California’s cap and trade program to 2030. SB 398 gained bipartisan support by the California legislature after weeks of intense negotiations and Governor Jerry Brown signed the Bill on July 25th with support from many environmental organizations.
Furthermore, the California Supreme court refused to hear an appeal from the California Chamber of Commerce that questioned the legality of the program. The legality and future of cap and trade are no longer concerns for program participants and the program can now operate in full capacity to deliver the results it was designed for.
As Ontario joins WCI in early 2018, the program will gain more regulated emitter participants and increase the diversity of opportunities to reduce GHG emissions at a lower cost. This could potentially attract other jurisdictions that are currently considering cap and trade-based carbon pricing.
Photo Courtesy of Dave Sizer