Tuesday, May 21, 2013

Auction Results in California Cap and Trade

The California Cap and Trade Program’s third auction was held last Thursday 5/16/13, and the results were released today.  I’ve been watching the auction results to see what clues they offer as to whether California’s program will suffer from the suite of problems associated with overallocation (low allowance prices, delayed emissions reductions, and large allowance banks).

Overallocation, however, really only becomes clear in retrospect.  Indeed, it is precisely the unknowns of the future that make overallocation hard to avoid.  There might be a recession that reduces allowance demand, or there might be solid economic growth.  There might be technological change that reduces allowance demand (fracking, for example), or not.  Economic change and technological change are just a couple of the exogenous factors that have contributed to overallocation in past programs (others include weather fluctuations, the success of legal challenges, etc.). 

Yet there are hints to be gleaned from the results of allowance auctions.  One can look at whether the allowances are selling for more than the reserve price.  They didn’t for several years in the Regional Greenhouse Gas Initiative (RGGI), but a reform in February to tighten the cap have led to slightly higher allowance prices (latest auction results here).  In California, they are, and the third auction looks better by this measure than did the second (see the Settlement Prices below).  One can also look at the extent to which the auction is oversubscribed or not.  RGGI’s auctions have often been undersubscribed.   In this latest Claifornia auction, there were almost double the bids for allowances (1.78 times) than there were allowances. But this is down from California’s February auction, in which there were almost two and a half times (2.47) more bids than available allowances.  Notably, all three of California “advance auctions,” which sell allowances that cannot be used for several years, have been undersubscribed (see below).  These advance auction allowances have always sold at the reserve price ($10 in 2012, $10.71 in 2013).

I do think there is some "early overallocation" in California’s program, meaning that program caps are above business-as-usual (BAU) emissions in the early years.  Indeed, an analysis by Energy GPS (discussed here) finds that the 2011 emissions of the entities regulated by California’s cap and trade program were about 12% lower than the 2013 cap (140.8 mmtCo2eq emitted, as compared to the 2013 cap of 160.4 mmtCo2eq).  The analysis further forecasts that the 2013 cap will be about 8% higher than 2013 emissions.  Whether overallocation becomes a real problem for the California program (as it has not just for RGGI, but also for the EU Emissions Trading Scheme), will depend on many factors, several of which are out of California's control.        

- Lesley McAllister 

Auction

Allowances Offered

Allowances Sold

Settlement Price

11/14/12

Current Auction

(2013 Vintage)

23,126,110

23,126,110

$10.09

11/14/12

Advance Auction

(2015 Vintage)

39,450,000

5,576,000

$10.00

2/19/13

Current Auction

(2013 Vintage)

12,924,822

12,924,822

$13.62

2/19/13

Advance Auction

(2016 Vintage)

 
  9,560,000

 
  4,440,000

 

$10.71

5/16/13

Current Auction

(2013 Vintage)

14,522,048

14,522,048

$14.00

5/16/13

Advance Auction

(2016 Vintage)

 
  9,560,000

 7,515,000

$10.71

http://lawprofessors.typepad.com/environmental_law/2013/05/auction-results-in-california-cap-and-trade-.html

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