July 6, 2015 by Rahul Rana
CaliforniaCarbon.info, July 6, 2015: Latest inventory data released by the California Air Resources Board (ARB), joint administrators of the Western Climate Initiative (WCI) carbon cap-and-trade program, shows that some 43.37 million compliance instruments were moved from entities’ general use accounts into their compliance accounts. Of this total, 9.91 million are eligible for retirement against obligations in November 2015, leaving a remainder of an estimated 130.48 million in a 100% compliance scenario.
Only California entities faced a 30% annual surrender in November 2014 for the 2013 compliance year, meaning that Quebec entities are liable this year for all their 2013 and 2014 emissions. California entities are therefore liable for 100.89 million tons for 2013 and a projected 144.56 million tons for 2014, while Quebec entities are liable for 18.42 million tons for 2013 and 18.18 million tons for 2014.
Entities may use any California- or Quebec-issued offsets or allowances to meet obligations. However, for allowances, the vintage year cannot be greater than the compliance year. 77.72 million V2013 allowances have already been surrendered into compliance accounts, from which they may no longer be retrieved by the surrendering entities, while a further 62.45 million V2013s are available for transfer from the holding accounts. In an allowances-only scenario, this produces a yearly surplus of 20.86 million for 2013.
There are 110.90 million and 63.40 million V2014 allowances in the holding and compliance accounts respectively. In an allowances-only scenario and using figures from our baseline emissions forecast, there would be an 11.56 million surplus for 2014.
However, the usage of offsets is expected to further lengthen the surplus in the market. Last year’s offset usage was likely subdued by the revocation of credits associated with Clean Harbors ODS destruction projects, producing a usage total of only 1.69 million, some 1.16% of 2013 covered emissions (entities are allowed to meet 8% of their obligations with CCOs). There are presently 17.62 million CCOs which will be available for use in November, with issuances continuing on a twice-monthly basis.
With the number of available instruments comfortably outstripping compliance requirements for this year, there has not been much of a procurement rush. While CCO prices have been inching up amid concerns of tight supply especially from CP2 onwards, activity on the V2013 and V2014 allowances has been subdued, both closing a mere $0.02 up on the V2015, and fetching a combined volume of 1.19 million on the InterContinental Exchange (ICE) over the last eight weeks.
Indeed, much of the activity in the last quarter seems to have concerned the V2015s, which some entities appear to be feeding straight from auction intake into their compliance accounts. Some 110.20 million V2015s (from a total pool of 441.41 million) have already been surrendered in this manner and are now unavailable for future transfer, with 33.46 million of this total transferred in Q2 2015. This exceeds the total ever traded on ICE for the 2015 (92.00 million). With the majority of these allowances only required for compliance in November 2018, it appears many entities are opting for premature surrender.
There are several possible reasons. Firstly, the annual funding rates on the secondary market (just below 4% for the V2015 Dec15/16 spread) may not justify the costs associated with participation. The promised annual 5% floor price increase in real terms supports significant premiums through the forward curve, providing an incentive to move early in covering carbon exposure, and contrarily dis-incentivizing the search for efficiency through carry trading.
Secondly, with the tight holding limits, which on the V2015 work out to just under 13.4 million or 2.9% of the total budget, there are constraints on both speculators’ ability to provide competitive rates, but also the extent to which entities can optimize their strategies around holding allowances outside of their limited exemptions.
Steven Neoh – email@example.com
Rahul Rana – firstname.lastname@example.org
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