California & Quebec Carbon Cap and Trade Report - June 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 panel wants immediate cap-and-trade action. A group of California carbon market experts plans to encourage state regulators to move more rapidly to guarantee that an excess of allowances does not impede efforts to reduce greenhouse gas (GHG) emissions.  The Independent Emissions Market Advisory Committee (IEMAC) on 27 May sketched out potential comments it would submit to the California Air Resources Board (CARB) on its draft scoping plan, with one of the key issues being the timing of any modifications to the state's cap-and-trade program.  Members of the committee expressed worry about language in the draft plan implying that any action to update market rules, including measures to address the oversupply of California Carbon Allowances (CCAs), may not begin until the end of next year.  The committee, which is housed within the state Environmental Protection Agency, has pushed CARB several times in recent years to address oversupply concerns, with its most recent annual report warning that the large number of allowances in private and public accounts "casts uncertainty" over whether the state will meet its goal of reducing greenhouse gas emissions by 40 percent below 1990 levels by 2030.  CARB officials have consistently stated that there is no urgent need to decide whether the supply of allowances is too large, with any potential modifications to the cap-and-trade program to take place until the agency completes the new scoping plan later this year. The plan outlines how the state would satisfy the 2030 goal and achieve carbon neutrality by 2045.  The proposed plan also downplays the issue of oversupply, with CARB estimating that the allowance bank of 310 million metric tons will be depleted by the end of the decade. Furthermore, the agency stated that it anticipates that other policies would drive the great majority of future GHG reductions, with cap-and-trade playing a smaller role.  CARB is collecting public feedback on the plan until June 24.

• The California Senate backs bill revision on carbon market. California lawmakers have proposed new rules for how the state counts carbon offsets and allowances in its cap-and-trade program.  On May 26, the state Senate voted 28-8 in favor of a bill that would prohibit the state from joining any new carbon markets without first establishing new guidelines for the usage of compliance credits.  SB 1391 now goes to the state Assembly.    SB 1391 would require the California Air Resources Board (CARB) to have completed a review of the cap-and-trade program within the last three years before any new market linkages, and the agency would have to automatically reduce the program-wide supply of California Carbon Allowances (CCAs) for every California Carbon Offset (CCO) that is used toward compliance.

• California's carbon auction price has reached a new high on 18 May. The Western Climate Initiative (WCI) market partners sold on 18 May all of the more than 58.3 million current vintage allowances offered at the auction for $30.85/metric ton, setting a new high clearing price. The settlement price is $1.70/t, or 5.8pc, more than the previous record price of $29.15/t achieved at the February auction. It is also roughly $2.60/t higher than the November 2021 auction.  The auction for vintage 2025 allowances sold all of the more than 7.9 million t available for $28.13/t, substantially above the reserve price of $19.70/t set in February. It is the second highest price ever achieved for a forward vintage auction, trailing only the November auction, which cleared at $34.01/t.  Parties required to comply with California and Quebec cap-and-trade programs accounted for 87.7pc of current vintage allowance buyers and 85.7pc of advanced allowance purchases, respectively, compared to 86.5pc and 81.6pc in the February auction.

• California adds few new offsets on 24 May. The California Air Resources Board (CARB) released the fewest carbon offsets in more than two years on May 24, with three projects receiving just over 38,000 credits. In total, the agency issued approximately 38,200 California Carbon Offsets (CCOs), with the credits going to two livestock methane projects and one mine methane project.  The great bulk of the offsets, nearly 32,300, went to Keyrock Environment for a project in Clintwood, Virginia to capture and flare methane from a former Paramont Contura coal mine.  More than 5,900 credits were awarded to renewable energy producer Revolution Energy Solutions for two projects at a swine farm in Magnolia, North Carolina, that capture methane and use the biogas to power on-site generators that serve the local grid. The projects generate around 10,200MWh/year, which is enough to power approximately 740 houses.

• California grants offsets to three projects on 10 May. The California Air Resources Board (CARB) granted more than 129,000 carbon offsets on May 10 in one of the year's smallest issuances.  In total, the agency issued little under 129,500 California Carbon Offsets (CCOs) to three projects.  More than 100,600 offsets were directed to a mining methane capture project. The Keyrock Environment project in Carlisle, Indiana, captures and flares methane from a former Sunrise Coal mine.  CARB also gave over 16,300 CCOs to the Storms Hog Farm near Bladenboro, North Carolina, for a livestock methane project. The project employs a digester system to gather biogas, which is then utilized to power a 600kW generator set, which supplies power to the local grid.  The Edward Miller Trust was also awarded roughly 12,300 CCOs for an enhanced forest management project on 2,000 acres of land in Mendocino County, California.

• California's plan downplays allowance bank concerns. California authorities anticipate that the surplus of carbon allowances in the state's cap-and-trade program will be spent by the end of the decade, as the state ramps up other initiatives to reduce greenhouse gas (GHG) emissions. On May 10, the California Air Resources Board (CARB) released a draft version of its next scoping plan, which outlines how the state would fulfill its climate targets, including carbon neutrality by 2045.  The plan downplays concerns that the state's efforts will be hampered by the bank of allowances in the joint California-Quebec carbon market, which the agency anticipates at 310 million metric tons at the end of 2020. This is because, according to the draft plan, CARB expects other measures to drive the vast majority of future GHG reductions, while the rising stringency of the cap will eventually drain the allowance bank.  According to the agency's modeling, non-cap-and-trade policies could reduce the state's overall emissions to 304 million tons in 2030, leaving the carbon market to provide 44 million tons of reductions to meet that year's mandate to reduce emissions to 40% below 1990 levels, or about 260 million tons.  That is a 27 percent drop in the role of the cap-and-trade program from what CARB anticipated in its 2017 scoping plan, while other measures would offer approximately 16 million tons more in reductions than previously anticipated.  CARB stated that it will utilize the modeling for the final version of the scoping plan, which is expected to be completed this autumn, to decide whether any adjustments to the cap-and-trade program are required.

• Researchers warn that California's offset buffer is insufficient. In a recent article, researchers from the San Francisco-based environmental research group CarbonPlan examined California’s forest buffer, in part by quantifying the carbon losses related with wildfires. According to the analysis, wildfire losses in the first decade of the program depleted 95 percent of the credits set aside for that risk.  The California Air Resources Board (CARB) announced on May 6 that it is still confident in its system for balancing wildfire and other threats to forests used as offsets in the state's cap-and-trade programs.   Researchers suggested that the state required a considerably larger buffer credit balance to counter the increased risk of losing carbon sink trees to threats like as fires, insects, and disease. The agency said it had no immediate plans to change the program and was satisfied with the type of insurance policy it administers to account for that risk.  Forests utilized as carbon offsets must contribute 10-20% of their total credits to a Forest Buffer Account, which is maintained in reserve in case the trees are damaged or removed suddenly. Forest projects have accounted for roughly 85 percent of the nearly 214 million California Carbon Offsets (CCOs) distributed to far.

• California-Quebec market activities increased in the first quarter. According to recent data from the California Air Resources Board, cap-and-trade activities in the Western Climate Initiative (WCI) increased in the first quarter of 2022.     During the first three months of 2022, the linked California and Quebec cap-and-trade systems transferred 97.5 million metric tons of permits and carbon offsets. This amount is up 27.3 million tons, or roughly 39 percent, from the first quarter of last year.  Increased allowance transfers account for the entire increase. The overall transfers for the first quarter of this year include priced transfers for 84.3 million carbon allowances across 321 distinct transactions, which is higher than the 55.2 million priced allowance transfers across 253 distinct transactions during the same period last year.   The weighted average price for these transactions was $28.50/t, representing a price increase of more than 59% over the first quarter of 2021.  While the number of distinct offset transactions remained almost same between the two periods, they totaled approximately 5.7 million fewer this year. The weighted average price of an offset rose $2.17/t to $16.05/t.  Transfers of California Carbon Offsets (CCOs) greatly outpaced those of Quebec-issued offsets, as they had in prior quarters, and forest projects remained the most popular kind of offset transferred.  Market activity in the first quarter of 2022 is approximately 56% lower than in the fourth quarter of 2021, with allowances and offsets trades down by nearly 56%. A similar pattern occurred from the end of 2020 to the beginning of 2021, indicating that demand increased around the annual November compliance deadline.

• Quebec is considering reducing industrial allowance allocations. The Quebec Ministry of Environment and Climate Change is proposing a package of changes to its cap-and-trade program, including reducing the allocation of free allowances to industrial sources from 2024-2030 and allowing covered entities to auction some allowances to pay for greenhouse gas (GHG) emissions-reduction projects.  The shift in no-cost allocations would be 1.3-4.2pc/yr, owing primarily to the program's cap-reduction factor of 2.34pc/yr. Based on the competitive risk level assigned and the share of fixed process emissions from a plant, that change would be adjusted up or down for specific sectors. It would also be changed in accordance with the proposal's "trajectory modulation factor," an updated version of the program's prior carbon pricing ration designed to account for global carbon pricing trends.  Another suggested amendment would allow covered organizations to sell some of their allowances in the program's quarterly auctions, with the proceeds going toward on-site emissions reductions.  The idea also allows voluntary organizations to stay in the program for an extra five years, even if their emissions fall below 10,000 metric tons per year for three years in a row. Currently, such firms must depart the program three years after falling below the emission level.  The Quebec ministry is soliciting public comments on the proposal until June 18th, with the revisions expected to be finalized in September.

• The global carbon pricing movement is gathering pace: World Bank. According to a World Bank study - The World Bank State and Trends of Carbon Pricing 2022 report - interest in establishing an international carbon price floor is increasing, while the share of global emissions covered by pricing mechanisms has increased this year.  Border carbon pricing, border carbon adjustments, climate clubs, and minimum carbon pricing arrangements were provided as examples of potential approaches.  Canada and France have lately joined the push for a global pricing floor, although the French proposal is limited to EU members. The planned climate club in Germany will focus on "universal norms" for carbon pricing, which might include setting a minimum price floor. California and Quebec are exploring connecting their markets with New Zealand, but linkage development elsewhere has been slow, with no news on the possibility of joining the UK ETS with the EU scheme, which is the largest worldwide compliance carbon market.  The EU Carbon Border Adjustment (CBAM) proposal, which would apply a carbon price to the import of certain goods into the EU, is still being reviewed, with the European Parliament's environment committee voting to push for all sectors covered by the EU ETS to be included in the CBAM by 2030, with the last free carbon allowance allocations taking place by 2034 at the latest.  According to the research, carbon pricing mechanisms cover around 23 percent of worldwide emissions, up from 21.5 percent in 2021, as four new schemes began in the previous year. Uruguay implemented a carbon tax in January of this year, while ETS schemes were launched in Oregon, Brunswick, and Ontario, bringing the total number of global carbon tax schemes and ETS schemes to 37 and 34, respectively.

Offsets Update

• ARB has issued an overall 167,496 carbon offsets in May 2022
• 129,258 issued on May 10^th
• 38,238 issued on May 24^th
• 12,276 of the CCOs issued are listed as DEBs
• On May 10^th ARB cut down the invalidation period from eight years to three years on 0 credits, the total being 134.92 mln
• On May 24^th ARB cut down the invalidation period from eight years to three years on 0 credits, the total being 134.92 mln
• 65 mln offsets have been issued since inception by ARB and Quebec
• 1,052,400 Quebec offsets have been issued in total; 0 credits issued in May 2022

California:

Quebec:

Offsets Pricing

Offset Pricing as of June 14^th, 2022:

• California Carbon Offset (CCO3) - (3 years of Buyer Liability) $17.80

• Golden California Carbon Offset (CCOs) – Spot Delivery $19.00

• California Carbon Offset (CCO3 - DEB) - (3 years of Buyer Liability) $19.20

• Golden California Carbon Offset (CCOs- DEB) – Spot Delivery $20.00

ARB Schedule

• 06/22/2022 California Carbon Offset Issued
• 07/13/2022 California Carbon Offset Issued
• 08/17/2022 WCI quarterly allowance auction

California Carbon Allowances (CCA)         

• Allowance pricing as of June 14^th, 2022: $31.00– Vintage 2022, June 2022 Delivery
• The average daily price in May 2022: $30.39 – Vintage 2022

Market Update

• Average daily price in May 2022 was $30.39 which was a 3.7% decrease compared to the average price of $31.57 in April 2022.
• KraneShares Carbon ETFs (both ETFs) increased carbon allowance holdings to 18.02 million as of June 14^th which was a increase 15% from May 17^th which had holdings of 15.64 million as of May 17^th. This is nearing its all times high of ~ 18.5 million California allowances as of February 2022.
• The 2022 floor price is $19.70 and May 2022 inflation was reported at 8.6%. If that remained through October 2022, the 2023 floor price would be $22.38. 
• The market dropped to $26.00 on December 2^nd which was caused by the 45% margin increase on ICE futures. The market recovered back over $31.50 by December 8^th. 
• Open interest on ICE for all vintages CCAs has been relatively flat last few months and struggled to increase over 350 million allowances.

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)

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