California Carbon Allowance (CCA) prices rallied in recent months after a mid-year dip before the market expands in 2015 and as the program's second year, and first full compliance period, draws to a close.
Prices of vintage 2014 CCAs for December delivery, the benchmark contract this year, ranged within a relatively narrow band of $11.65/metric tonne to $12.55/t. The contract closed earlier this month at the top end of that range, which it had also reached in January. The program will expand to cover new sectors starting tomorrow, more than doubling the size of the program as measured by emissions.
During the year, California's cap-and-trade program linked with Quebec's program to create a joint auction system with fungible allowances. The linkage, which was agreed to in September 2013 and implemented in January 2014, saw its last provision fully implemented following a delayed but ultimately successful joint auction on 25 November.
A total of 176mn t traded in 2014, double the volume that traded last year. Vintage 2014 allowances accounted for 52.7mn t of that trade, or about a third of the annual California allowance budget of 159.7mn. Quebec's allowance budget this year was 23.2mn t. The most active contract by volume was the 2014 benchmark contract, with more than 30mn t traded, followed closely by vintage 2016 CCAs for December 2015 delivery, for which nearly 23mn t exchanged hands.
Price fluctuations in 2014 were considerably smaller than in prior years, when $7-10 changes were seen over the same time period. Daily price changes were generally limited to 10¢ or less this year, with many days seeing no daily fluctuations.
At California and Quebec's first joint auction in November, both vintage 2014 and vintage 2017 carbon allowances sold out, with more than 23mn t of 2014 allowances and nearly 10.8mn t of 2017 allowances made available. Vintage 2014 allowances cleared at $12.10/metric tonne and vintage 2017 cleared at $11.86/t.
The jurisdictions' cap-and-trade program rules prevent most covered entities from holding more than about 6.4mn of vintage 2013 and vintage 2014 CCAs in their trading accounts.
On 1 January, California's carbon trading program will enter its second compliance period and expand to cover a broader set of entities. Newly covered entities will include suppliers of transportation fuels such as blended motor fuels, distillate fuel oil, natural gas and liquid natural gas suppliers, along with natural gas distribution utilities.
With the expansion in covered sectors, allowance budgets will more than double next year, expanding to 395mn allowances from 159.7mn allowances. The program expansion will likely mean greater trading volume, but an increased allowance supply coupled with greater demand may not bolster prices.
Washington state is also considering adoption of a cap-and-trade program that could link to the California-Quebec program.
Governor Jay Inslee's (D) proposal, if it can pass the state's legislature, includes elements that align the state's compliance periods with those of the existing multi-jurisdictional program, and would use similar trading mechanisms, facilitating a possible link.
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