Western Climate Initiative Cap-And-Trade Auction Nets Record Sales, But Raises Long-Term Concerns

Today the California Air Resources Board released results for the California-Quebec-Ontario-linked cap-and-trade program’s first quarterly joint auction of carbon allowances for 2018. This statement summarizes allocation demand, supply, prices, and revenue, and is attributable to Energy Innovation Director of Research Chris Busch.

A record-breaking 98.2 million current vintage allowances sold in the February 2018 Western Climate Initiative (WCI) cap-and-trade auction, at $14.61 per ton, slightly above the $14.53 price floor.  This surpasses the previous record of 89.3 million allowances sold, set in November 2017, and will raise nearly $1.6 billion for the three jurisdictions, with an estimated $725 million going to the California Greenhouse Gas Reduction Fund.

This successful sellout is a strong start for the newly invigorated WCI, which welcomed Ontario as a full auction participant for the first time after linking with California and Quebec on January 1st 2018. This is the most significant example of international climate cooperation in years and is remarkable given political uncertainty in Ontario – testament to newfound confidence in the program’s longevity thanks to California’s AB 398.

But ironically, this record-breaking auction heightens long-term market concerns about an existing oversupply of allowances in the market.  This auction reinjected 14 million previously unsold 2016 allowances into the market, suggesting current demand is high enough to snap up previously unsold allowances at today’s low prices in anticipation of much higher prices in the future.

This suggests polluters are building up a cushion of banked allowances to use in future years when CARB counts on the cap-and-trade program to deliver larger emissions reductions to help meet California’s 2030 climate goal. A surplus permit purchased today means an emissions reduction that may not happen down the road.

CARB staff have been quoted as saying, “we’re not seeing this behavior in the marketplace,” but February’s auction selling all of a record number of allowances offered would suggest otherwise.