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$1.3 billion raised in carbon auction sellout

Today’s strong California-Quebec November 2018 carbon market auction results are the continuation of a month of good news about California’s landmark climate program. Cap-and-trade compliance is at 100% and emissions are falling, demonstrating that addressing climate change is an integral part of doing business in the Golden State.

November’s auction by the numbers

  • All 78,825,717 current allowances sold, clearing at $15.31, 78 cents above the $14.53 price floor and 26 cents above the August auction. This is the final auction before the floor price has its annual increase.
  • All of the 9,401,500 future vintage allowances offered sold at $15.33, 43 cents higher than in August. The current floor price of $14.53 will also increase for future allowances in the next auction.
  • An estimated $813,013,694 was raised for California’s Greenhouse Gas Reduction Fund, which will go to support climate investments across the state and further reduce greenhouse gas and local air pollution.

California’s market is strong & confidence is high

One critical data point showing the strength of this market is that the California Air Resources Board (CARB) reported 100% compliance from all entities covered by cap and trade for the three-year compliance period from 2015 to 2017. California businesses understand the program and know how to make it part of their business plan.

At the same time, greenhouse gas (GHG) emissions are falling, which is the key metric of program success. California’s ambitious 2030 target and the cap-and-trade program’s permitting allowances to be “banked” for later use mean businesses have an incentive to keep emissions well below the cap if possible rather than emit up to the level of the cap. This helps keeps emissions low but demand during auctions strong and steady.

The November auction results demonstrate yet again that the program has the right features to keep the market stable and drive emission reductions.

  • This is the 7th cap-and-trade auction in a row where current allowances have sold out. Despite Ontario joining (and then departing) the program the market has remained stable and demand strong.
  • Demand at this month’s auction in particular could be driven in part by anticipation of the increased price floor starting in 2019. November’s auction was the final opportunity to purchase allowances at the $14.53 floor price. In 2019 this price will increase 5% plus the rate of inflation, to approximately $15.60 floor price, so businesses might be planning ahead.
  • The short-term restriction of allowance supply due to the “24 month rule” could also have helped boost demand in November’s auction. Almost 21 million allowances that have been unsold for 24 months were transferred to the Allowance Price Containment Reserve. This has the impact of a temporary cap tightening.
  • November’s auction is the 2nd in a row where future vintage allowances have sold out, demonstrating that market participants have high confidence in the program post-2020.

California’s emissions keep falling

Earlier this month, CARB released 2017 data from businesses required to report and verify their greenhouse gas emissions in California (known as the MRR report), which shows that GHG emissions continued to drop in 2017.

Between 2016 and 2017, total reported emissions (both those covered and not covered by cap and trade) fell by about 3.5 million metric tons, or 1.4%. Though not as large as the drop reported for 2016, this represents the fifth consecutive year of emissions reductions (7.5% since 2012), and is a strong indicator that California can keep emissions declining below the 2020 emissions reduction goal.

In every year since 2012, the electricity sector is responsible for the bulk of overall reductions. According to a CARB analysis, this reflects statewide trends including a 22% increase in solar electricity and a 50% increase in hydroelectricity, and a simultaneous decrease in electricity imports, especially from fossil fuels.

The 2017 MRR report also suggests sectors that regularly increase emissions may be approaching a turning point. Transportation fuel suppliers, responsible for the largest share of emissions in the MRR, have reported a decreasing growth rate since 2013. Between 2016 and 2017 emissions from this sector increased by just 1.3 MMt CO2e, the first time emissions increased less than 1 percent. Cement plants, another group of facilities which consistently increase emissions, also appear to be successfully ratcheting down their emissions growth rate.

These trends are consistent with expectations that there would be more near-term reduction opportunities in the electricity sector while it might take longer to bend the curve of emissions downward in the transportation and energy intensive manufacturing sectors.  They also give hope that in time, all sectors of California’s economy can transition to a clean future.

California in 2017 outpaced the US on population, GDP, and employment growth.  Over the same period, California continued to reduce emissions at least as much as energy-related CO2 emissions fell in the U.S. as a whole. California is demonstrating for another year that emission reductions and a thriving economy can go hand-in-hand. California is showing that with ambitious climate policies in place, the state can grow faster while making relatively deeper cuts in emissions compared to the U.S. as a whole.

Next Steps

To maintain California’s robust market and stay on the path of reduced emissions and a thriving economy, CARB is in the process of updating the cap-and-trade regulations for 2021-2030. They are expected to adopt changes in the next couple of months. EDF will continue to watch this process closely and provide input to encourage the greatest possible climate ambition and maintain the environmental integrity of the program.