California raises almost $300 million in its first cap-and-trade auction

The California Air Resources Board (CARB) released the results from its first auction of greenhouse gas (GHG) allowances today.  It sold all of the approximately 23 million current allowances (2013 vintage) at $10.09.  It sold 14% of the approximately 39.5 million advance allowances (2015 vintage) at $10.00.

As I discussed last week, the unsold advance allowances will be held by CARB and offered for sale in either late 2014 or 2015 when that vintage becomes “current.”

Given the number of allowances sold, we can easily estimate the gross revenue generated by this first auction:

  • ~23.1 million current allowances * $10.09  = $233 million.  These funds are from consigned utility allowances and the revenue will be used to benefit ratepayers, as regulated by the Public Utilities Commission.
  • ~ 5.5 million advance allowances * $10.00 = $55 million

It is not surprising that advance allowances did not sell out.  Any compliance entity can use 2013 vintage allowances this year or save them for use in subsequent years.  So 2013 allowances are slightly more valuable than 2015-vintage, which as their name indicates, cannot be used until 2015 or later.  A Bloomberg News Report, which correctly anticipated that advance allowances may not sell out, suggested that many companies are unwilling to purchase allowances to cover emissions more than one or two years in advance, whereas the advance allowances would not be due until 2015.

Early market reaction has the December 2013 futures (for 2013-vintage allowances) trading between $10.75 and $11.75.  This basically means that the market anticipates that vintage-2013 allowance prices will rise from today’s auction to approximately $11.25 by December 2013.

Other points of interest from the auction results:

  • You can see the list of auction participants here.  Almost all the allowances were purchased by compliance entities.  But one or more non-compliance entities purchased about 500,000 allowances, likely hoping to get allowances cheaply to later sell as the program expands in 2015.
  • The maximum bid for a 2013 allowance was $91.13.  The median price was $12.96.
  • The index CARB uses to measure bid concentration suggests that no one bidder purchased a large concentration of allowances.  If I understand the index correctly, a single bidder purchased about 11% of all offered vintage-2013 allowances and 14% of all vintage-2015 allowances.

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Reader Comments

2 Replies to “California raises almost $300 million in its first cap-and-trade auction”

  1. Hi Rhead,

    Nice post.

    One interesting facet of the auction results that I would more strongly emphasize is the near total absence of non-compliance buyers (banks). Goldman, Meryl Lynch, BarCap and their ilk have played an important role in terms of supplying liquidity in emissions trading markets. My guess is that they are sitting on their hands while the Cal. Chamber lawsuit (and the offsets lawsuit) gets worked out. Just 3% of 2012 allowances were purchased by non-compliance buyers at the auction. This compares to between 10 and 20% in early RGGI auctions (before the allowance price fell below the auction reserve price, effectively converting RGGI from a cap-and-trade to a carbon tax).

    In a way, win or lose, Cal Chamber provided an important service to their members. If they prevail in their lawsuit, all the allowances will be allocated free of charge. But even if Cal Chamber ultimately loses, the suit’s very existence may have thinned the market of non-compliance buyers and so reduced prices for buyers that did have to participate (Cal Chamber’s membership). My sense is that many non-compliance buyers are nervous that they will be left holding the bag if various aspects of the program are successfully challenged in court (see NOx SIP Call, CAIR, CSAPR). The auction’s eve lawsuit cannot have allayed these fears and may be a partial explanation for their near total absence (Morgan Stanley excepted) and the consequent low prices.

    Best,
    Michael

  2. Hi Rhead,

    Nice post.

    One interesting facet of the auction results that I would more strongly emphasize is the near total absence of non-compliance buyers (banks). Goldman, Meryl Lynch, BarCap and their ilk have played an important role in terms of supplying liquidity in emissions trading markets. My guess is that they are sitting on their hands while the Cal. Chamber lawsuit (and the offsets lawsuit) gets worked out. Just 3% of 2012 allowances were purchased by non-compliance buyers at the auction. This compares to between 10 and 20% in early RGGI auctions (before the allowance price fell below the auction reserve price, effectively converting RGGI from a cap-and-trade to a carbon tax).

    In a way, win or lose, Cal Chamber provided an important service to their members. If they prevail in their lawsuit, all the allowances will be allocated free of charge. But even if Cal Chamber ultimately loses, the suit’s very existence may have thinned the market of non-compliance buyers and so reduced prices for buyers that did have to participate (Cal Chamber’s membership). My sense is that many non-compliance buyers are nervous that they will be left holding the bag if various aspects of the program are successfully challenged in court (see NOx SIP Call, CAIR, CSAPR). The auction’s eve lawsuit cannot have allayed these fears and may be a partial explanation for their near total absence (Morgan Stanley excepted) and the consequent low prices.

    Best,
    Michael

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