February 8, 2015 by Rahul Rana
CaliforniaCarbon.info, February 9, 2015: Both market participants and California cap-and-trade regulators the Air Resources Board (ARB) are confident that the second joint auction of Western Climate Initiative (WCI) carbon allowances, to involve regulated firms from California as well as the Canadian province of Quebec, will proceed smoothly and without a repeat of developments which created a minor panic in the secondary market last November. “We are confident that the next Joint Auction will go smoothly and on schedule,” stated Dave Clegern, a spokesman for ARB.
The previous auction, on Nov 19, 2014, had been the first joint auction for the two linked jurisdictions, and had to be re-scheduled on the auction day itself due to technical issues. Some market participants were able to access and submit bids in the auction platform while others were not. California and Quebec made a joint decision in consultation with the market monitor to reschedule the auction to ensure all market participants have equal and fair access to the auction.
While the auction for 23.1 million V2014s and 10.8 million V2017s was eventually reconvened within a week (on Nov 25), this was only confirmed to the market two days after the original cancellation. During that time, some participants feared the auction would be held up until after Thanksgiving. With December deliveries seemingly in jeopardy, there was considerable panic on the secondary market, where prices for the V2014 benchmark contract gained 10 cents in those two days whilst open interest surged.
ARB is confident there will be no repeat. “We know that the auction platform will work as designed, and that both California and Quebec have used the system to conduct previous auctions without a glitch. We are sure that will be the case this time and are batting close to thousand on that one,” Clegern continued.
Participants in the market similarly anticipate the coming auction to go as planned. “I don’t think anyone would expect the next auction to have any major issues like the last one. We know the previous issues were ironed-out and should not reappear,” remarked one stakeholder.
With prices now starting to descend after two months of sustained growth, and March and April V2015 ICE contracts fetching healthy volumes in the last three weeks of trading, it appears participants are confident in taking post-auction delivery positions. It perhaps also helps that there are no holiday periods to contend with on this occasion.
The next auction will offer 73,610,528 allowances of the current-year vintage, and could also be the first time that many smaller entities covered under the transport fuels sector elect to participate. Even so, the market is not expecting any dramatic upsurge in interest or bid cover. “It is reasonable to expect that some of the more sophisticated CP2 entities have already begun hedging future obligations in the market, especially as covered emissions in 2015 are expected to increase by nearly 2.5 times,” observed analysts from Alpha Inception, in the last issue of Ask Alpha we ran back in December.
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