California & Quebec Carbon Cap and Trade Report - August 2022

To quickly access the page content, please click on the links below. 

• News Update
• Offsets Update
• Offsets Pricing
• ARB Schedule
• California Carbon Allowances (CCA)
• Market Update 
• Figure 1. Open Interest on the Intercontinental Exchanges (ICE) - Vintages 2017-2023
• Figure 2. CCA Daily Transactions (Spot Contract - January 2013 to Present)
• Figure 3. CCA Daily Transactions (Spot Contract - January 2020 to Present)

News Update

• California – Quebec GHG market slows down in Q2. CARB reports drop in WCI cap and trade activity during Q2 2022. Transfers reached 74.9 mn tons of carbon offsets and allowances which is around 6.7% less than in Q2 2021. That was mainly caused by the drop in offset transactions – only 108 unique transfers of 5.7 mn tons total, dropping by 47.2% QoQ. However, the weighted average price of the offset increased by 25.3% to $16.95/t. CCO transfers exceeded Quebec sourced offsets and forest projects continue to be the most popular ones. There were 291 unique allowance transactions which totaled to 69.2 mn tons – similar volume of 69.4 mn tons in Q2 2021. Weighted average credit price increased by nearly 49.2% to $29.73/t compared to the second quarter of 2021.

• California hydropower output declined in 2021. Hydro resources electricity production dropped by approx. 23% to 25,656 GWh in 2021 compared to 2020. Consequently, natural gas – fired units helped fill the void, potentially increasing greenhouse gas emissions. Natural gas generation rose by around 4.3% to 105,356 GWh. In 2021, natural gas remained the main fuel for the California’s in-state and imported generation resulting in 37.9% of the total production (277,764 GWh) for the state grid by the utility – scale resources. Hydro, wind and solar accounted for 9.2%, 11.4% and 14.2% respectively. Lower hydro output was caused by the drought that has not left California for the last three years.

• CARB expands the program scope to harbor vessels. Currently, CARB’s zero-emission equipment program subsidizes off-road zero emission battery-powered equipment like forklifts, railcar movers and tractors. The facility that gets a voucher can purchase zero-emission equipment and is not required to give up equipment that uses fossil fuels. $125 million from state’s cap and trade program fund is allocated for voucher project. Nonprofit organization CALSTAR that is responsible for the program stated that there is no information on which type of vessel equipment would be subsidized yet. However, CARB will require commercial harbor vessels to use renewable diesel starting from next year. These type of renewable diesel projects (R99) are expected to decrease NOx emissions by 30% and PM emissions by 10%.

• CCA traders take bearish position before the auction. According to CFTC, speculative CCA traders took short position ahead of the WCI upcoming auction on 17 August. By the week ending 26 July, there were 32,035 short positions and 2,475 long positions in the current auction CCA futures. However, hedgers were net long with 31,825 long positions and 2,265 short positions. Total open interest in the current auction contract – 34,700 contracts. On 17 August auction, California & Quebec will offer above 56.9 mn vintage 2022 allowances at the reserve price of $19.70/t.

• California’s offset pool threatened by wildfires. Wildfires are the main reason for California tree cover loss, and it is expected to get worse with the climate change which would lead to the exhaust of the state’s forest offset buffer pool.  Large portion of California Carbon Offsets (CCOs) are generated by the forestry protocols and 31.7 million of those CCOs are currently located in the buffer pool to safeguard against reversals like wildfires. Since 1985, wildfires are already responsible for 7.4% of tree cover area loss. The increase in fire occurrence and burn areas is expected due to the higher temperatures. Some researchers conclude that the set asides offsets may not be enough to cover for fire losses. On the other hand, tree loss is worse in the southern part of the state, but majority of forestry projects are developed in the north side which is rainier and more temperate. Furthermore, research also does not consider increase in projects and growth in issued offsets.

• Focus on EJ concerns in 2022 report discussion. The California Independent Emissions Market Advisory Committee (IEMAC) discussed three main areas of the 2022 annual report: Environmental Justice Advisory Committee’s (EJAC’s) recommendations for the Scoping plan, post-2030 cap-and-trade market design and GHG accounting in extended day-ahead market (EDAM). Other engaged topics beyond the report scope: non-compliance entities in the carbon market, changes in cap-and-trade program, results of the 2022 Scoping Plan, the cap-and-trade program interaction with LCFS and RPS, CO2 removal incentives. Vice Chair Danny Cullenward emphasized that final version of the new Scoping Plan might be delayed into 2023. Furthermore, it was suggested that the leading facilities in the state should create a voluntary market for developing technologies like carbon capture and storage (CCS) and direct air capture (DAC) as it is eligible for 45Q tax incentives. Idea of ARB regulating entities to acquire CO2 removals (CDR) as a part of compliance was mentioned.

Offsets Update

• ARB has issued an overall 506,768 carbon offsets in July 2022
• 84,400 issued on July 12^th
• 422,368 issued on July 26^th
• 75,576 of the CCOs issued are listed as DEBs
• 34 mln offsets have been issued since inception by ARB and Quebec
• 1,303,934 Quebec offsets have been issued in total; 251,534 credits issued in July 2022

California:

Quebec:

Offsets Pricing

Offset Pricing as of August 9^th, 2022:

• California Carbon Offset (CCO3) - (3 years of Buyer Liability) $17.75
• Golden California Carbon Offset (CCOs) – Spot Delivery $18.35
• California Carbon Offset (CCO3 - DEB) - (3 years of Buyer Liability) $19.25
• Golden California Carbon Offset (CCOs- DEB) – Spot Delivery $19.75

ARB Schedule

• 08/17/2022 WCI quarterly allowance auction
• 08/24/2022 Auction Summary results released
• 08/24/2022 California Carbon Offsets issued
• 09/14/2022 Auction proceeds distributed; allowances transferred to CITSS accounts
• 09/14/2022 California Carbon Offsets issued
• 11/16/2022 WCI quarterly allowance auction

California Carbon Allowances (CCA)         

• Allowance pricing as of August 9^th, 2022: $31.82– Vintage 2022, August 2022 Delivery 
• The average daily price in July 2022: $28.67 – Vintage 2022

Market Update

• Average daily price in July 2022 was $28.67 which was a 7.5% decrease compared to the average price of $30.82 in June 2022. Prices rebounded from a low of $27.52 on July 25^th to $31.82 on August 9^th.
  
  
• On August 5^th, open interest in the ICE for vintage 2022 CCA was equal to 259,019 contracts. Average July vintage 2022 CCA open interest was 257,521 contracts.
  
  
• KraneShares Carbon ETFs (both ETFs) held 18.76 million carbon allowance on August 4^th which was a 6.3% increase from 17.65 million on July 6^th. Furthermore, it surpassed the all-time high of 18.5 million California allowances as of February 2022 by 1.4%.
  
  
• Offsets remain being traded at ~60% and ~65% of the allowance value for Guaranteed NONDEBs and Guaranteed DEBs respectively provides a mechanism to reduce cost of compliance for entities.

Figure 1. Open Interest on the Intercontinental Exchanges (ICE) - Vintages 2017-2023

Figure 2. CCA Daily Transactions (Spot Contract - January 2013 to Present)

Figure 3. CCA Daily Transactions (Spot Contract - January 2021 to Present)

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