Inaugural Ontario CO2 auction sells out at slight premium to price floor

Posted on
Posted under Resources

Story from Carbon Pulse

Ontario sold all 25.3 million spot vintage 2017 carbon allowances on offer in its inaugural Mar. 22 auction, with the price clearing a cent above the sale floor, data published by the provincial government on Monday (Apr 3) showed.

The so-called ‘current auction’ was 16% oversubscribed, settling at C$18.08 compared to the C$18.07 floor.  That meant bids for around 4 million tonnes went unfilled.

In addition, Ontario sold 812,000 or 26% of the 3.1 million vintage 2020 OCAs in its future auction, all for the minimum C$18.07 each.

Some 47 qualified bidders took part, with compliance buyers scooping up virtually every allowance sold and accounting for 99.1% of the buying in the current auction and 100% in the future auction.

Participants included many of the major fuel industries operating in the province including Enbridge Gas Distribution and TransCanada PipeLines, plus the Canadian arms of WCI participants such as Valero, BP, and Shell.

“This could be folks just trying to cover their obligation in Ontario or it could be entities looking for shelter from the legal risk in California,” said Dan McGraw, a strategist at ICIS, referring to an ongoing lawsuit targeting the state’s carbon allowance auctions.

“If California’s program is disrupted by the lawsuit, Ontario credits would not face the same downward pressure that California allowances would until they officially link with the California-Quebec programme. If the program does not face legal issues, those entities would be able to use those Ontario allowances for California-Quebec obligations. So in a sense, Ontario becomes a safe haven for some entities while California sorts out its legal issues.”

A ruling in the latest stage of the lawsuit is expected in the coming weeks, though regardless of the verdict, the case is expected to be sent to California’s Supreme Court by the losing side for a final decision.

REACTION

Vintage 2017 OCA futures for December delivery trading on ICE were bid/offered at C$18.25/18.50 after the auction results were published, compared to Friday’s settlement price of C$18.41, with no trades going through so far today.

Observers tentatively welcomed the results while warning against giving the auction too much significance, with 15 auctions remaining within the current four-year compliance period (2017-2020).

Some had been concerned whether comments made ahead of the auction by Ontario opposition and Progressive Conservative party leader Patrick Brown, who currently leads in the polls ahead of next year’s provincial election, would affect demand.

Just hours before the start of the Mar. 22 sale, Brown said he would scrap the cap-and-trade scheme if elected – comments that some critics called “reckless” and “dumb”.

Meanwhile, other market watchers had been worried that Ontario’s auction might follow in the footsteps of five consecutive undersubscribed auctions in California and Quebec over the past 15 months.  Ontario is due to link its market to the pair under the WCI programme in early 2018.

“This being the first auction for Ontario, compliance entities were more eager to stock up on allowances,” Rachel Jiang, an analyst at Bloomberg New Energy Finance, told Carbon Pulse.

“Moreover, there is still a chance that Ontario fails to link with the oversupplied CA-QC market, in which case Ontario would be a tight market. This may be something that compliance entities, being more cautious, are also taking into account.”

PREDICTIONS

The results met the expectations of most observers, who told Carbon Pulse in advance of the auction that they expected allowances to be almost or completely sold out, with clearing prices around the floor.

“It’s very hard to make predictions about the future, and one thing we know about markets of all kinds is they are highly unpredictable. Still, it is very encouraging that the mean price that was bid was well above the floor price,” Dianne Saxe, Ontario’s Environmental Commissioner, told Carbon Pulse.

Ontario’s current auction featured a mean bidding price of C$23.66 and a median of C$19.00, while the future sale saw a respective mean and median of C$24.75 and C$19.53.

“While the demand was good, it wasn’t particularly aggressive. You can see from the auction results that entities put in bids for 14.7 million allowances in the (USD) $13.57-$14.24 range. The remaining volume was bid in the $14.26-$37.11 range. Market participants didn’t have a tonne of price discovery prior to the auction so this close grouping on the bottom end of the curve isn’t too surprising. This may widen or shrink as entities become more comfortable with the market,“ said ICIS’ McGraw.

The sale raised C$472 million, which will be reinvested in green projects.

“Today’s results demonstrate that our market system here in Ontario is functioning as intended, and that businesses across the province are engaged in the market,” said Glen Murray, Ontario’s minister for environment and climate change, in a statement.

“Patrick Brown and the PC Party would put an immediate end to all of these projects. Brown will introduce his own carbon tax scheme that would cost families and businesses in Ontario four times more than our system. But his scheme does not guarantee to reduce any pollution from our atmosphere, and does not include the necessary investments to help families and businesses reduce their own emissions.”

Ontario’s next quarterly auctions are scheduled for June 6, Sep. 6, and Nov. 29.

By Sophie Yeo – sophie@carbon-pulse.com

SIGN UP TO RECEIVE NEWS