California & Quebec Carbon Cap and Trade Report - December 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 2020 to Present)

News Update

• US will support extension of Diablo Canyon nuclear plant with $1.1 billion investment. The power plant was expected to be shut down in 2025, however an investment from the Department of Energy may extend its life. The 2,200 MW plant provides 17% of California’s zero-carbon electricity and shutting it down would likely increase the demand for fossil fuel resources like natural gas.

• CARB issues over 100k offsets in November. The majority of the CCOs, or California Carbon Offsets, were issued for livestock projects which capture biogas from dairy waste. About 218 million CCOs have been issued by ARB over the life of the program, with 85% of those going to forestry projects. Issuances of CCOs have been lower this year than in 2021, coming in at 11.1 million in 2022 compared to 17 million at this time last year.

• California strengthens climate goals. CARB released the final version of its newest scoping plan on November 16. The plan projects a 48% reduction of emissions in 2030 and provides a roadmap for an 85% reduction of emissions by 2045, to reach net zero. If the plan is successfully implemented California’s demand for fossil fuels would fall by 86%. The scoping plan also calls for the decarbonization of several industries such as shipping, rail, and aviation in addition to the use of carbon capture and storage.

• WCI cap and trade market activity falls 23% in Q3. Transfer volumes fell by more than 31 million tons compared to the third quarter of 2021. However, market activity has increased by 41% or 31 million tons from the second quarter of 2022. The weighted average price of these transactions was $27.16/t, which is 10% higher than the average price from Q3 2021. Transfers of California Carbon Offsets significantly outpaced transfers of Quebec-issued offsets.

• California plans to reduce incentives for rooftop solar. The California Public Utilities Commission has released its latest plan that will replace existing net metering compensation. However, the plan is being opposed by some who believe that it will undercut the state's climate goals. The new plan will reduce the value of credits generated from small-scale solar projects, from an average of 30c to about 8c. California Solar and Storage Association executive director Bernadette Del Chiaro said, "An immediate 75% reduction of net energy metering credits does not support a growing solar market”.

• CCA auction settles at the lowest level of 2022. The November 16 auction settled at $26.80, a 2.8% discount to the November CCA futures contract. All 58 million allowances offered were sold. This auction settled at the lowest price since the August 2021 auction settlement at $23.20. 115 entities participated in the auction, with compliance entities purchasing 80.4% of the offered allowances.

• 2023 CCA auction reserve price set. The auction floor price for California Carbon Allowances in 2023 has officially been set at $22.21 following the release of October inflation data, which came in at 7.75%. CARB increases the CCA floor price by 5% plus inflation each year, with the October year-over-year inflation number being the one that sets the reserve price.

Offsets Update

• ARB has issued an overall 253,503 carbon offsets in November 2022 
• 142,107 issued on November 8^th
• 111,396 issued on November 22^nd
• None of the CCOs issued are listed as DEBs 
• 6 mln offsets have been issued since inception by ARB and Quebec 
• 3 mln Quebec offsets have been issued in total; 0 credits issued in November 2022 

California:

Quebec:

Offsets Pricing

Offset Pricing as of December 16^th, 2022:

• California Carbon Offset (CCO3) - (3 years of Buyer Liability) $18.15
• Golden California Carbon Offset (CCOs) – Spot Delivery $18.80
• California Carbon Offset (CCO3 - DEB) - (3 years of Buyer Liability) $22.65
• Golden California Carbon Offset (CCOs- DEB) – Spot Delivery $23.30

ARB Schedule

• 12/9/2022 Public summary of Vintage 2023 Allowance Allocation posted
• 12/14/2022 ARB posts compliance offset issuance data
• 12/16/2022 February 2023 auction notice posted
• 12/28/2022 ARB posts compliance offset issuance data

California Carbon Allowances (CCA)         

• Allowance pricing as of Nov 9^th, 2022: $28.28– Vintage 2022, Nov 2022 Delivery    
• The average daily price in Nov 2022: $27.63 – Vintage 2022

Market Update

• The average daily price in November 2022 was $27.63 which was a 1.32% decrease compared to the average price of $28.00 in October 2022. 
• The market has dropped to $25.86 on November 28th after the November auction settle of $26.80. This provided a buying opportunity for compliance entities and the market has now recovered to $28.20 as of December 16th.
• KraneShares Carbon ETFs (both ETFs) held 16.032 million carbon allowance on December 5^th which was a 4.82% decrease from 16.843 million on September 30^th.  Furthermore, it stayed behind the all-time high of 18.5 million California allowances as of February 2022.
• The market is expected to recover in prices in 2023 as Gov Newsom and others continue to pressure ARB to make additional cuts to environmental programs to reach ambitious targets on GHG emissions for the state. While the all-time high $35.20 in November 2021 may take some time to reach, seeing pricing back over $30.00 in 2023 is expected by many.  Therefore, obtaining prices below $28.00 in 2022 may be a good tactic to migrate price exposure to the upside in 2023. 

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

Figure 2. CCA Daily Transactions (Spot Contract - January 2021 to Present)

Questions? Contact our team for more information: environmental@aegis-hedging.com

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