California & Quebec Carbon Cap and Trade Report - September 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 Administration 2022 Climate Proposals.
  • Statewide carbon neutrality: The State has achieved its 2020 climate targets ahead the schedule, proving that emissions reduction and economic growth do not contradict each other. The next step is establishing a clear, legally binding, achievable goal for California to become carbon neutral by 2045. Net zero green gas emissions correspond to the fact that the GHG removals compensate for GHG emissions released into the atmosphere.
  • Tighter targets: According to the California Global Warming Solutions Act of 2006, CARB is required to ensure that target of 40% reduction below the 1990 level would be achieved by 2030. The new proposal would amend the Health and Safety Code Section 38566 and increase the reduction target to 55%.
  • 100% clean electricity: According to the existing law, 100% of all retail sales of electricity should be supplied by renewable energy and zero-carbon resources by 2045. The new proposal would amend Public Utilities Codes Section 454.53 to establish new targets of 90% of retail electricity supply to California end-users received from renewable energy and zero-carbon resources by 2035 and 95% by 2040.
  • More pollution controls on oil wells: As proximity to the oil extraction sites correlates to the negative health impacts, the proposal includes minimum health and safety distance of 3,200 feet between any new oil well and households, schools, parks, etc. The proposal also clarifies who are sensitive receptors and pollution controls in order to protect people living within 3,200 feet distance.
  • Clear frameworks for CO2 removals, capture, utilization, and sequestration: as there are scientific proves carbon neutrality is not possible without carbon removals, the proposal includes a program under ARB that focuses on advancing carbon capture, utilization, and sequestration (CCUS) technologies and deploying geologic carbon sequestration projects. Furthermore, the proposal suggests avoiding projects that negatively impact the climate and prohibiting the use of concentrated carbon fluids for enhancing oil recovery.

• California voting for tougher GHG targets. Two weeks after Governor Gavin Newsom’s proposal, the state’s Assembly amended a bill so that would increase California’s GHG reduction target to 55% below 1990 level instead of a current target of 40%. However, assembly members failed to pass AB-2133 as 41-vote threshold was not reached on August 31^st. The final vote margin was 37-22 as Republicans slammed the regulation, arguing that the bill would have devastating economic consequences for California. As a result, CCA prices dropped significantly. On September 1^st, Dec-22 V22 traded down to $25.60, a 5.7% drop from a previous day of $27.15 price. On the other hand, some other proposed bills have passed:
  • prolonging the life of the Diablo Canyon nuclear power plant
  • setting 2045 carbon neutrality goal in statue
  • setting targets for CO2 sequestration for 2030, 2038 and 2045
  • setting 3,200 feet distance from communities for the new oil well drilling
  • including Climate Action Plan strategies for state’s largest transportation funding sources

• August 17^th Auction clearing at 1-year low. WCI Q3 auction sold all 57 million current vintage allowances and settled at a 1-year low clearing price of $27.00/t, a $7.30 difference from the 2022 auction reserve price of $19.70/t. Furthermore, the settlement price is $3.85/t, or 12.5%, less than the previous record price of $30.85/t achieved at the May auction. The auction for vintage 2025 allowances sold all of the more than 7.9 million tons available for $30.00/t, substantially above the reserve price of $19.70/t. 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 87.6% of current vintage allowance buyers and 82.3% of advanced allowance purchases, compared to 87.7% and 85.7%, respectively, in the May auction.

• WCI allowance surplus due to the fuel sector changes. Some analysts believe that 2030 WCI allowance excess will increase to 84.3 million tons as renewable diesel and ZEV penetration accelerates in California. A 2% - 28Mt - fuel sector emission drop is expected over the 2021-2030 duration due to the changes in emissions modeling approach in 2021 and updates in ZEV scope. On the other hand, the state’s power sector emissions should increase by 6.6 Mt – 4.9%- and oppose the GHG cuts. However, as Governor Gavin Newsom proposes, if the Diablo Canyon Power plant remains operating until 2035, the WCI allowance surplus might grow to 109.5 Mt by 2030. Analysts believe that WCI prices will reach $49.60/ton in 2025 and $77.85 /ton in 2030. If Diablo Canyon is kept in operation, WCI is expected to reach $70.07/ton by 2030. Furthermore, in case of the lower zero-emissions vehicle utilization, CCA would trade at $80.80 by the next decade. CCA prices are anticipated to reach $34.94 by the end of 2022 and $40.54 by the end of next year.

• CCA retirements for imported power. In order to cover the GHG emissions from electricity imported in 2021, California is about to retire ~1.3 mn CCA. CARB announced that the withheld vintage 2023 CCAs will be distributed to the facilities that imported electricity through the Western Energy Imbalance Market (EIM). Regulators state that emission from electricity brought in from EIM is not fully accounted for by the cap-and-trade program. Agency is planning to distribute Vintage 2023 allowances by October 24^th. CARB will retire around 1.28mn CCAs, which is 31% more than it withheld last year for 2020, to cover EIM emissions. Total emission under cap-and-trade was around 278.7 mn in 2021.

• California Carbon Offset (CCO) shortage. Even though the offset usage limit for compliance obligations has halved to 4% since 2021, strong demand for CCO is seen as California's cap-and-trade deadline approaches. However, record low CCO issuance makes it hard to meet the market needs. 6.9 million offsets were generated through early August 2022, a 27% dip compared to the same period in 2021. That is the lowest issuance figure since 2014. Market participants believe that lack of supply, as well as smaller offset usage limits are the reasons for slow CCO purchases. In 2022, prices for all CCO categories have risen. However, DEBs credits have seen the highest growth pace, trading in the range of $18 - $20.

• Quebec reducing the amount of free GHG allowances. Currently, the province allocates no-cost allowances to some facilities that meet international competitiveness risk due to carbon price. In order to reach a 37.5% reduction goal by 2030, Quebec will start steadily cutting the number of allowances it distributes to industrial sources under the cap-and-trade program. The free allocation reduction pace will depend on a year and covered industry, starting with slow decreases in the coming years and accelerating later. Furthermore, The Quebec Ministry of Environment and Climate Change stated that the province is moving to allow covered entities to auction some allowances to pay for greenhouse gas (GHG) emissions-reduction projects.  This change should net entities around $449 million and will have to be used exclusively for climate-related investments. The new regulation regarding the free allocations will come into effect on January 1^st, 2023.

Offsets Update

• ARB has issued an overall 476,620 carbon offsets in August 2022
• 155,319 issued on August 9^th
• 321,301 issued on August 23^rd
• 150,079 of the CCOs issued are listed as DEBs
• 81 mln offsets have been issued since inception by ARB and Quebec
• 3 mln Quebec offsets have been issued in total; 0 credits issued in August 2022

California:

Quebec:

Offsets Pricing

Offset Pricing as of September 6^th, 2022:

• California Carbon Offset (CCO3) - (3 years of Buyer Liability) $17.75
• Golden California Carbon Offset (CCOs) – Spot Delivery $18.50
• California Carbon Offset (CCO3 - DEB) - (3 years of Buyer Liability) $20.25
• Golden California Carbon Offset (CCOs- DEB) – Spot Delivery $21.00

ARB Schedule

• 09/14/2022        California Carbon Offsets issued
• 09/23/2022       CARB Board meeting
• 09/28/2022       California Carbon Offsets issued
• 10/13/2022         CARB Board meeting
• 11/16/2022          WCI quarterly allowance auction

California Carbon Allowances (CCA)         

• Allowance pricing as of September 6^th, 2022: $27.31– Vintage 2022, August 2022 Delivery 
• The average daily price in August 2022: $29.95 – Vintage 2022

Market Update

• On August 31^st, CCA prices plummeted to $26.85 as the bill for the tighter GHG targets fail to pass and traded as low as $25.37 in the two days that followed. Compliance entities entered the market to procure allowances at reduced prices and prices have recovered to $27.31 as of September 6th.   Procuring below $27.50 for an allowance to cover 2022 and 2023 emissions may look attractive as compared to waiting in until 2023 or 2024 to procure the needed allowances.
• The last reported CPI data was 8.5% for July, which would imply a 2023 auction floor price of $22.36.
• Average daily price in August 2022 was $29.95 which was an 4.5% increase compared to the average price of $28.67 in July 2022.
• On August 31^st, open interest in the ICE for vintage 2022 CCA was equal to 275,003, a 6.2% increase compared to the beginning of the month. Average August vintage 2022 CCA open interest was 266,589 contracts.
• KraneShares Carbon ETFs (both ETFs) held 18.26 million carbon allowance on August 31^st which was a 2.7% decrease from 18.76 million on August 4^th. Furthermore, it fell behind the all-time high of 18.5 million California allowances as of February 2022 by 1.3%.
• On September 6^th, the market decreased the spread between offsets and allowances with at ~67% and ~74% of the allowance value for Guaranteed NONDEBs and Guaranteed DEBs, respectively, provides a mechanism to reduce cost of compliance for entities. The gap was closed by ~4% over last 30 days.

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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