Ontario ETS seen marginally long in 2017, undersupplied in 1st phase

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Ontario’s new carbon market will be only marginally oversupplied in its inaugural year, with unseasonably warm weather slicing into the province’s 2017 emissions output, but the first four-year phase will be short overall.

That’s according to analysts at Toronto-based carbon trading and advisory firm ClearBlue Markets, who estimate that allowance supply will exceed demand by 2 million tonnes in 2017 and that Ontario emitters will decline to use any offsets during their first compliance year.

Emitters regulated by the scheme, which launched in January and covers the province’s power, heating and transportation sectors, are expected to emit 133.2 million tonnes in 2017, lower than both the 135.2 million Ontario Carbon Allowances (OCAs) to be handed out and auctioned this year and the 142.3 million overall 2017 emissions cap, which includes 7.1 million permits in a market stability reserve.

ClearBlue forecast that demand is already 1.3 million tonnes below normal this year due to warmer-than-average temperatures, citing data showing the warmest February on record and a January that featured the third-highest temperatures in 37 years.

But a return to normal temperatures through the rest of the year could see Ontario’s ETS emissions rise by nearly 2 million tonnes year-on-year, the analysts said, with gas distributors leading the charge and bringing demand closer in line with supply.

Regardless, the oversupplied situation doesn’t mean that Wednesday’s inaugural OCA auction will be undersubscribed, said Nicolas Girod, one of the report’s authors.  Ontario will offer 25.3 million vintage 2017 OCAs and 3.1 million vintage 2020 allowances in its first quarterly auction.

Girod said the long market will be levelled out by some entities hedging for future years and that over the 2017-2020 first compliance period, the supply/demand balance is projected to see an allowance deficit of 29.4 million as the cap gradually reduces.

This, however, excludes the use of offsets, which ClearBlue predicts will pick up during the period, from zero in 2017 to 10.7 million in 2020.

The analysts forecast that Ontario entities will use offsets to cover 4% of their overall 2017-2020 compliance obligations, half of their 8% limit and reducing the first phase supply shortfall to 7.9 million tonnes, representing around 1.5% of the scheme’s cumulative emissions cap excluding units in the reserve.

“With all the uncertainty around the Ontario offset protocols and the California offsets invalidation risk, this could, however, limit the buying appetite of some Ontario companies,” the report added, highlighting the lack of offset rules established so far by the province.

Girod also predicts flat emissions growth between 2018 and 2020, with higher demand from a population rise being offset by increases in energy efficiency and the use of biogas in place of natural gas.

More than 230 entities are currently registered to participate in Ontario’s ETS, according to the latest release of the provincial government’s participant list.

The largest buyers in the upcoming auctions are expected to be fuel and gas distributors, said ClearBlue.

“Gas distributors are regulated in Ontario by the Ontario Energy Board and are encouraged to exhibit prudent behavior, while fuel distributors have a bigger risk appetite and have more experience as most of them are already active in the California/Quebec market,” the report added.

“The behaviour of fuel distributors, which shied away from the latest California/Quebec auctions, will be key for the first Ontario auction and will determine if the first auction is fully subscribed.”


Meanwhile, California and Quebec’s joint market, to which Ontario is aiming to link next year, is currently oversupplied, with ClearBlue forecasting that glut to rise to nearly 185 million tonnes by the end of 2020.

However, some 143 million of that is tied to that market’s stability reserve, which the analysts said equates to a more tangible surplus of around 41 million.

And this remaining length, they say, could help to compensate for the estimated shortage in Ontario’s market, keeping OCA prices trading close to the scheme’s floor price in the coming year.

As a result, the current small premium for Ontario allowances over those in WCI on the secondary market is expected to continue until the WCI linkage is officially announced, probably later this year.

Ontario and wider WCI carbon prices are also expected to rise once there is more clarity on post-2020 rules to the Ontario scheme and any extension to California’s market, which is currently set to expire at the end of the decade.

By Sophie Yeo and Mike Szabo – sophie@carbon-pulse.com