California & Quebec Carbon Cap and Trade Report - October 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

• Governor Newsom signed the bill for 2045 GHG target. On September 16^th, California’s governor signed a bill that asks for an 85% emissions reduction and sets out the State’s 2045 carbon neutrality target. However, the governor’s office believes a 91% decrease in oil use is needed to achieve these goals. The other signed climate bills create a carbon removal target for natural and working lands, ease the deployment of carbon capture technologies, and forbid the injection in certain types of wells of CO2 fluids.

• California's climate spending bills have been signed. On September 7^th, Governor Newsom signed AB 179 and AB 209, budget-implementing legislations, which distributed $859 million for his clean energy funding request and $185 million for the ZEV request. The latter includes $40 million for reducing boats’ emissions and $130 million for the State's Clean Cars for All program. Additionally, $235 million will be dedicated to ZEV and its infrastructure from the budget of the clean energy funding request. The remaining funds are planned to be distributed as follows:
  • $100 million for industrial decarbonization
  • $25 million to help reduce GHG emissions and energy consumption in food processing
  • $50 million for carbon removal projects
  • $162 million for building decarbonization
  • $105 million to support low-carbon hydrogen
  • $45 million for offshore wind infrastructure
  • $100 million for the Oroville Pump Storage, a water and energy storage operation

      California’s Governor Gavin Newsom (D) is targeting to spend more than $7.9 billion to enhance grid reliability and clean energy through 2026.

• Clean energy funds further press CCA prices down. Some believe the new federal and State regulations for clean energy incentives will weaken the California Carbon Allowance market. In the last month, CCA was trading in the range of $26-28, a significant drop from the November 2021 peak of $35. California failed to pass the new 2030 reduction target of 55% below the 1990 levels, consequently being the reason for such market tendencies. Furthermore, California prolonged its only nuclear power plant, Diablo Canyon, operations to 2035, which provides carbon free power. The governor’s administration is granting utility PG&E a $1.4 billion forgivable loan. What is more, initiatives in the US Inflation Reduction Act and California Climate Commitment bill for low- and zero-carbon electricity generation will continue reducing emissions from power sector.
  
  
• SB 1137 passes in the Senate. On August 31^st, the State’s Senate passed the bill that increased the minimum distance required between the public and private property and oil extraction operations. Starting with 2023, the new oil wells cannot be drilled closer than 3,200 feet from the households, schools, parks, hospitals, business, etc. The bill also added pollution controls such as leak detection and response plans for the wells which are already established within 3,200 feet from sensitive receptors. Consequently, the new bill might affect the future emissions from the oil and gas sector.

• Next CCA allowance auction. Auction #33 will take place from 10:00 AM until 1:00 PM PT on Wednesday, November 16th, 2022. Current auction will offer 58,020,854 allowances - 14,948 of vintage 2021 and 58,005,906 of vintage 2022. The advance auction will offer 7,942,750 allowances with 2025 future vintage. CA annual Auction Reserve price - $19.70. The auction summary results will be released on Wednesday, November 23rd, 2022.

• A drop in California offset issuance. The ARB distributed more than 2 million CCOs in September – 1,531,474 issued on September 13^th (the highest figure since March) and 556,071 issued on September 27^th. However, only 9.4 million offsets were issued in total during 2022, a 16% drop compared to the same period in 2021. DEBs made up 43% of CCOs issued in September. Total DEBs distributed reached 45.84 million, and 19.1 million are still in circulation. Starting in November, California cap-and-trade entities will have to surrender offsets for compliance, and at least 50% of that quantity will have to be DEBs.

Offsets Update

• ARB has issued an overall 2,087,545 carbon offsets in September 2022
• 1,531,474 issued on September 13^th
• 556,071 issued on September 27^th
• 895,508 of the CCOs issued are listed as DEBs
• 9 mln offsets have been issued since inception by ARB and Quebec
• 3 mln Quebec offsets have been issued in total; 0 credits issued in September 2022

California:

Quebec:

Offsets Pricing

Offset Pricing as of October 5^th, 2022:

• California Carbon Offset (CCO3) - (3 years of Buyer Liability) $17.70
• Golden California Carbon Offset (CCOs) – Spot Delivery $18.45
• California Carbon Offset (CCO3 - DEB) - (3 years of Buyer Liability) $20.30
• Golden California Carbon Offset (CCOs- DEB) – Spot Delivery $21.25

ARB Schedule

• 10/5/2022 Quarterly Compliance Instrument Report posted
• 10/11/2022 California Carbon Offsets issued
• 10/13/2022 CARB Board meeting
• 10/17/2022 Auction application deadline
• 10/25/2022 California Carbon Offsets issued
• 11/01/2022 Annual Compliance Surrender
• 11/16/2022 WCI quarterly allowance auction

California Carbon Allowances (CCA)         

• Allowance pricing as of October 5^th, 2022: $27.00– Vintage 2022, October 2022 Delivery 
• The average daily price in September 2022: $26.82 – Vintage 2022

Market Update

• The last reported CPI data was 8.3% for August, which would imply a 2023 auction floor price of $22.32.
• The average daily price in September 2022 was $26.82 which was a 10.45% decrease compared to the average price of $29.95 in August 2022.
• After the August auction settle of $27.00 and the Federal Reserve raised interest rates again, the market dropped as low as $25.75 which provided an opportunity for compliance entities to pick up allowances at a discounted rate to recent market activity. Both for spot and forward delivery this price drop provided good opportunities to pick up allowances in 2022 compared to 2023 when some market participants expect prices to exceed $30/ton.
• On September 30^th, open interest in the ICE for vintage 2022 CCA was equal to 245,577, a 9.7% decrease compared to the beginning of the month. Average September vintage 2022 CCA open interest was 264,693 contracts.
• KraneShares Carbon ETFs (both ETFs) held 17.83 million carbon allowance on September 30^th which was a 2.4% decrease from 18.26 million on August 31^st. Furthermore, it fell behind the all-time high of 18.5 million California allowances as of February 2022 by 3.6%.
• The market continued closing the gap between the price of the allowances and offsets. On September 30^th, Guaranteed NONDEBs and Guaranteed DEBs were worth ~69% and 79% of the CCA value, respectively. During the last 30 days, the gap narrowed ~4%.

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

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

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