The Stillwater C&T Auction Newsletter presents our analysis of the Cap and Trade (C&T) Auction and Program. Analysis of the data provides insight into the allowance demand and price trends. In addition to the current auction and the auction trends, we also track the California Carbon Allowances (CCA), California Carbon Offsets (CCO), and Cap at the Rack (CAR) trends. CAR is the C&T assessment of greenhouse gas (GHG) emissions from the use of fossil transportation fuels.
Quarterly Auction Summary and Trends
The 1Q2024 joint auction of allowances was held on February 14, 2024, and CARB published the auction data February 22, 2024. A total of 51,216,056 metric tons (MT) of 2024 allowances were sold at a settlement price of $41.76/MT which was up from $38.73/MT in the fourth quarter 2023 auction. In the advanced auction, 7,211,000 MT of allowances were sold at a settlement price of $41.00/MT, up from $37.40/MT in the fourth quarter. Both the current and advanced auctions were over-subscribed with all the offered allowances sold.
The settlement prices for the current and advanced CCAs were $17.71/MT and $16.96/MT above the $24.04/MT auction reserve price, respectively. The history of current and advance auction settlement prices and the auction reserve price are shown in Figure 1 below.
Figure 1: Cap & Trade Quarterly Auction Results
The allowance volumes offered in the current and advanced auctions are shown in Figures 2 and 3 along with the coverage ratio for each. The coverage ratio is the total qualified bid allowance volume divided by the allowance volume offered. The coverage ratio is an indication of the auction demand for allowances. A coverage ratio less than 1.0 indicates that the auction was not fully subscribed. The current auction coverage ratios increased in the first quarter of 2024 to 1.72, up from 1.65 in the previous quarter. The advanced auction coverage ratios increased in the first quarter of 2024 to 2.58, up from 2.27.
Figure 2: Current Auction Offered and Coverage
Figure 3: Advanced Auction Offered and Coverage
As shown in the figure below, 108 bidders qualified for the first quarter auction, a decrease from the last quarter. The percentage of allowances purchased by covered entities was 86.5% and 74.8% in the current and advanced auctions, respectively. The current auction increased from the previous quarter percentage of 80.4%, while the advanced auction decreased from 76.4%. The trends of qualified bidders and percent purchased by covered entities are shown in Figure 4.
Figure 4: Number of Qualified Bidders and Percent Purchased by Covered Entities
Figures 5 and 6 below show the bid trends for the settlement, maximum, and minimum bid prices, and the allowance-weighted median bid price for the current and advanced auctions. The current auction first quarter maximum bid price decreased from the previous quarter price of $75.01 to $72.21/MT, while the minimum bid price increased from $22.21/MT to $24.04/MT. The median bid price increased to $38.25/MT from $36.90/MT the previous quarter. The advanced auction maximum bid price increased in the first quarter to $58.00/MT up from $50.00/MT, and the median bid price increased to $36.64/MT up from $31.23/MT in the fourth quarter.
Figure 5: Current Auction Bid Price Trends
Figure 6: Advanced Auction Bid Price Trends
Figure 7 below portrays the trend of the secondary market, current auction, and auction reserve prices. This chart is posted on CARB’s website and reproduced here. The chart indicates that secondary market and auction settlement prices hovered close to the auction reserve price until mid-2021 when the values started to escalate to the current level. In the marketplace, California C&T allowances are called California Carbon Allowances (CCAs) and the California C&T offsets generated by approved offset projects are called California Carbon Offsets (CCOs).
Figure 7: Secondary Market Price Auction Prices, and Auction Reserve Prices[1]
Market Transfers
The Compliance Instrument Tracking System Service (CITSS) is a management and tracking system for accounts and compliance instruments issued through participating Western Climate Initiative (WCI) cap-and-trade programs. Aggregated data for transfers of current and advanced CCAs and CCOs by project type are reported in CARB’s Market Transfers Report (MTR) each quarter.
CARB published the fourth quarter CITSS MTR on February 1st. There were 105,262,938 MT of current vintage CCAs, 20,273,000 MT of future vintage CCAs, and 8,088,160 MT of CCOs transferred. The weighted average price of transfer was $37.64 per current CCA, $39.49 per advanced CCA, and $20.99 per CCO. These prices represent an increase for current and advanced CCAs, and a decrease for CCOs from $34.15/MT, $39.49/MT, and $21.13/MT in the third quarter, respectively.
Market transfer trends for current CCAs, advanced CCAs, and CCOs are shown in Figure 8.
Note: CARB has not included the total number of transfers since the fourth quarter of 2022 report. As such, Figure 8 shows those data points unchanged since then.
Figure 8: CITSS Transfers by Quarter
The trends of the current CCA, advanced CCA, and CCO weighted average prices are shown in Figure 9. The figure illustrates that the weighted average transaction price for current and future CCAs has increased over the last year, and CCOs’ weighted average transaction price has continued to increase.
Figure 9: Transaction Weighted Average Price
Estimated Cost of Cap at the Rack on Fossil Fuels
To account for the tailpipe GHGs emitted from vehicles, liquid fossil fuels used in transportation are assessed a C&T allowance obligation. Typically, this assessment occurs when these fuels are loaded at the product terminals into tank trucks for delivery to retail or end-user sites. Thus, this assessment is dubbed “Cap at the Rack” (CAR) and becomes the obligation of the compliance entity.
The estimated cost of CAR is a fuel-specific GHG emissions factor for the fuel multiplied by the CCA price. Figure 10 illustrates the trend of the prompt current CCA price and the resulting CAR for CARBOB and ULSD.
Figure 10: CCA Allowance Prompt Price and Cost of Cap at the Rack
Highlight Analysis: Washington C&I – Link it or Dump it?
In last quarter’s highlight, we reviewed the November 16, 2023, Joint California-Quebec Workshop on potential changes to the C&T regulation that include accelerated carbon reduction requirements. In the prior highlight, we contrasted the California C&T, Washington Cap & Invest (C&I), and Oregon Climate Protection Program (CPP) and found that while C&T and C&I are quite similar, the CPP has major structural differences. In this quarter’s highlight, we cover the political headwinds faced by the C&I program as well as potential linkage of the Washington program with those in California and Quebec.
C&I Legal Battle
Before addressing the C&I linkage question, we should recognize the serious challenge to the program posed by Initiative 2117 which seeks to repeal the C&I regulation. The initiative was signed by more than 400,000 supporters by November 2023, and in January 2024 it qualified for placement on the ballot this fall. The state legislature can either adopt the Initiative as written or reject it which would put it on the November 2024 ballot. Washington Governor Jay Inslee and a majority of state legislators oppose the Initiative, and the C&I program has increased state revenues by $1.8 billion to-date; as such, the legislature is unlikely to adopt it. For now, the political headwinds facing the program are impacting the market for C&I allowances, as shown in Figure 11 below.
Figure 11: C&I and C&T Traded Allowance Prices (May 2023-January 2024)
As can be seen in the figure above, in May 2023 (just five months into the C&I program), Washington’s allowance prices of $61/MT were double that of California’s C&T and were adding 50 cpg to the cost of E10 gasoline in Washington state. C&I program compliance was generally considered much more challenging for obligated parties compared to California’s program due to the more rapid reduction in allowed emissions. In fact, demand for allowances has significantly exceeded supply in every quarterly auction except for the inaugural one, causing the Washington Department of Ecology (hereafter Ecology) to move forward allowance volumes that were planned to be offered in later years. As can be seen in the figure above, however, demand has recently receded, likely related to the program uncertainty caused by the traction gained by Initiative 2117.
Linkage Exploration Legislation
Initiative issues notwithstanding, the Washington Legislature is pressing ahead linkage efforts. On February 12th, the Washington state Senate passed SB6058 which would empower Ecology to link the state’s C&I program with California and Quebec. On February 29th, the House also passed the linkage exploration bill, so it will now go to the Governor for signature. According to Senator Joe Nguyen, the bill’s prime sponsor, the bill “doesn’t commit us to do anything.” Instead, he says, it gives Ecology the “guardrails” to hold conversations with the other jurisdictions and bring any agreement back to the Legislature. The provisions of SB6068 will take effect January 1, 2025 if Initiative 2117 is not approved; they will be “null and void” if voters pass the ballot measure. Joel Creswell, a researcher with the Department of Ecology, speculated that the earliest the markets could merge would be late 2025.
What does this mean for Washington?
Assuming that C&I is not scrapped due to passage of Initiative 2117 in November, the program will continue to generate significant revenue for Washington state. The 7% reductions in carbon emissions required every year (compared with 2% reductions in C&T at the same stage in program development) result in strong demand for allowances that have caused Allowance Price Containment Reserve (APCR) auctions to sell out at the maximum prices allowed.
If WA joined the California/Quebec auction, however, shortfalls in allowances would be spread throughout all three jurisdictions, potentially reducing the costs added to Washington consumers. This benefit has been touted by the SB6058’s prime sponsor, Senator Nguyen: “Linking markets with California and Quebec is expected to have major benefits for Washington’s carbon market. With a larger and more stable market, it’s expected that allowance prices would be significantly lower than at the 2023 auctions, with lower impacts to the gas and energy prices for consumers.”
If WA joined the California/Quebec joint auction which uses interchangeable compliance instruments, it would also have to coordinate and harmonize any changes to the C&I with the other states, thus adding a layer of complexity to its ability to adjust the program. From the get-go, harmonizing the three programs would require revising rules in all three jurisdictions. Administration officials in Governor Inslee’s office have indicated that a merger could be completed in 2025, but industry executives find that timeline to be aspirational, predicting it could be closer to 2027.
We’ll continue tracking the progress of SB6058 and Initiative 2117, and we’ll keep you posted. Stay tuned!
