Climate Solutions Group

What does the May 16th WCI auction mean for Ontario?

WCI Auction Results

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May 2017

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Strong results of the 11th Joint Auction between California and Quebec of the Western Climate Initiative (WCI) were announced by regulators on May 24th, 2017. The auction, held on May 16th, 2017, sold out current vintage allowances for the first time since November 2015. The WCI auction results are good news for Ontario. Why? The results of the auction show that participants have a growing level of confidence in cap and trade systems and carbon markets.

The WCI Auction Results

The bid-to-cover-ratio was 1.23, meaning that demand exceeded supply and the auction sold out completely. As a result of higher demand, the clearing price for emission allowances was USD $13.80 which is $0.23 above the floor price. The auction for 2020 vintage allowances also performed well selling 22% of the total offering at an auction reserve price of $13.57. An estimated $1 billion was raised in the auction. About half will help finance California’s Greenhouse Gas Reduction Fund (GGRF) and the other half will be split between utilities in the WCI and Quebec’s Green Fund.

The increased demand can be partly attributed to the recent decision by the California Court of Appeal to uphold the cap and trade system. The Court of Appeals decision created a renewed demand for allowances as capped emitters gained certainty of the continuation of the cap and trade program. Another reason for the increased demand is that regulated emitters have been lying low as shown by the undersubscription of recent auctions and are now need to participate in auctions to cover compliance obligations.

What it means for Ontario

The strong participation in the Joint Auction from capped emitters in California and Quebec highlights that cap and trade is a viable strategy for reducing GHG emissions. There is a growing confidence and entrenchment of industry support for cap and trade systems. This is important for Ontario because political support for cap and trade is not ubiquitous across provincial political party lines.

When politicians create certainty around cap and trade, industry may be encouraged to respond by participating in auctions. Capped emitters will develop carbon reduction programs and strategies to reduce emissions in order to minimize compliance costs. The success of the auction will likely increase the resolve of Ontario’s politicians to link with California and Quebec in the WCI.

Carbon market resilience despite questions and uncertainties

There are significant political factors that have created some questions about the future of cap and trade in California. One of these factors is the California Senate’s SB 775 bill proposal which would overhaul California’s cap and trade program, making it more like a tax, and adversely affect the likelihood of Ontario’s future linkage with the WCI. Another factor is that the California Chamber of Commerce has decided to appeal the Court of Appeal’s recent decision to uphold California’s cap and trade system.

Despite these ongoing questions, the success of the auction validates the cap and trade system and shows that carbon markets have, and are perhaps are gaining traction. California legislators will soon decide whether to extend the cap and trade program in a manner that can withstand legal challenge and finalize other post 2020 designs decisions. Decisions favouring the continuation of cap and trade will support an increase in demand in auctions and likely result in a higher price for emission allowances. Higher prices for emission allowances will improve the economic feasibility of offset projects and lead to further reductions of GHGs.

Ontario’s ability to meet its climate commitments will only be enhanced when joining the WCI in 2018. The results of the May 16th WCI auction are a clear indication that there is support for cap and trade in California and Quebec. We will see if Ontario’s next auction on June 6th follows the strong results of the previous March 22nd auction in Ontario and the May 16th WCI auction.

Photo Courtesy of Nick Youngson

 

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